As software-as-a-service enters a new era with the help of new technology, there are opportunities and risks for buyers. John Gorrell, an associate partner at Wavestone, explains how to make the most of the next generation of AI empowered solutions and services.
It’s worth a recap on why software-as-a-service (SaaS) has become a central tenet of many organisations’ sourcing agendas. SaaS as a concept makes intuitive sense.
It enables platform providers to maintain a single version of their product (single line of code) without the legacy of previous releases to attend to. Software deployment ceases to be replicated across the platform’s clients.
One shared service team and hosting environment can achieve significant economies in infrastructure and support. And by delivering both software and support, we pivot to a single point of accountability for the deployed solution (platform + infrastructure + service).
At the same time, the ‘no customisation principle’ in true SaaS solutions avoids accumulating technical debt and associated overheads. As a result, platform led best practice and continuous improvement supplants expensive major upgrade and development projects.
SaaS 1.0: The Look-outs
We have yet to reach a position where we can rely on market forces to regulate what are arguably becoming commodity service offers (one size fits all). The switch costs both in IT terms and in the impact on business processes means that SaaS choices need to be well considered and some pitfalls anticipated.
SaaS is still new. There are some very successful Cloud native solutions in the market but many others have their heritage in software vendors for whom Services beyond 3rd line technical support is new territory. Before handing over the reins of supporting any key business processes do your due diligence as you may well find limited track record in service delivery and/or a limited resource pool from which they will be supporting many clients.
Another legacy consideration is platform vendors’ traditional resistance to take on solution accountability (we’ll sell you great software but dear client it’s up to you to make it work). The one-stop shop of SaaS might seemingly solve this in one fell swoop, but don’t assume that to be the case and check what commitments you are receiving on functionality and service before hitting that flashing ‘Buy Now’ button.
Simple SaaS solutions may do exactly what you need (especially in small to medium size enterprises). For more complex solutions/organisations, do not fall into the trap of assuming the ‘our platform is all you need’ sales pitch really means it can do anything. Apply rigour to functional evaluation and make considered choices about whether gaps are manageable or will need additional investment to circumvent.
In the era of the hyperscaler, we should be able to dial up / dial down consumption with demand. In practice, traditional software vendor behaviours persist with non-elastic price models typical. Care is needed to calibrate your subscription commitment especially as module and subscription units complicate the buying options.
Arguably market forces can explain the high price premiums from leading SaaS vendors (with perceived product advantage). Unfortunately, this means clients aren’t fully seeing the scale economies that should logically flow from SaaS delivery models. However, the market is constantly evolving and platform strategies should be revisited on a regular basis.
SaaS 2.0: Destabilising an already dynamic picture
All software vendors and SaaS providers in particular are grappling with how AI will be applied to their platforms. The services they will be able to offer with AI may be game changing in terms of product differentiation, but will they be sufficiently fleet of foot to bring these to market before new entrants bring innovative point solutions with ‘no brainer’ ROIs that challenge the dominance of existing solutions?
SaaS 2.0 will hinge on the success of vendors in deploying Agentic AI capability and, thereby, transitioning to ‘Service as a Software’. Customers locked into solutions without these innovations will get increasingly frustrated as they see their competition reap service rewards with other platforms. The potential for vendor churn seems high.
SaaS 2.0: The value proposition just got better
Saas 1.0 was arguably about delivering software solutions in a smarter more cost-effective way. There were some business advantages in staying current on the latest release, but most tangible benefits sat in IT run-cost reduction. SaaS 2.0 will extend the value proposition considerably.
Agentic AI promises to do ‘real work’ currently undertaken by customer resources. Once proven to be safe and repeatable, these virtual agents have the potential to handle high volumes of throughput and extend their reach over time through machine learning.
This is a huge leap forward from the AI labelled (at best generative AI) solution features touted to date within SaaS 1.0 platforms which might provide users with useful hints, but offer nothing truly transformative.
As well as direct cost savings in customer operations, the effects of Agentic AI may extend to other parts of the supply chain. For example, Service as a Software solution that can self-diagnose and self-heal will reduce ticket volumes for your ITSM provider to manage.
SaaS 1.0 solutions push a vision of business user independence. It is the case that some first-generation solutions offer passable low code capabilities, but more often than not a level of expertise is needed to handle business changes and support data analytics. SaaS 2.0 holds more promise of genuine user centric solutions that will reduce dependence on specialist support teams (e.g. reporting, configuration etc).
And the cherry on the top? As we move away from software being the ‘Service’, SaaS 2.0 offerings that sell business outcomes may start to address the age-old problem of platform vendors denying solution accountability.
SaaS 2.0: Some growing Sourcing challenges
As SaaS 2.0 asserts itself as a business more than IT service proposition, there will be a number of new or growing Sourcing Challenges to address:
- Pricing models will become more linked to business outcomes (e.g. document counts in SAP S/4Hana). For individual use cases, this can threaten to inflate subscription costs and become a bar to process improvement.
- Niche SaaS solutions (with tangible business value) may have an irresistible ROI leading to redundancy in and/or fragmentation of existing enterprise solutions.
- SaaS 2.0 may lead to operational savings that are realised by other service providers without the mechanisms in place to remit them back to the customer.
- When selecting next generation SaaS 2.0 solutions, proving the efficacy of Agentic AI capability in shortlisted platforms increases the need for thorough due diligence during procurement exercises.
- SaaS 2.0 solutions should be expected to evolve, so securing ‘in the price’ innovation commitments need to be unequivocal.
Conclusion
SaaS 2.0 raises the stakes of what clients should expect from their next generation platform solutions. Incumbency may not be enough for vendors to hold onto their existing client base if the competition is proving use cases with substantially more business value. New entrants with compelling point solutions that aren’t burdened by a wider platform functionality with which to integrate may also fragment the supply chain.
One way or another, it feels like it’s going to be a busy few years in Sourcing while SaaS 2.0 establishes itself as the new normal. Sourcing professional expertise and robust due diligence processes are going to be key, when it comes to making the right bets for the next generation of business platforms.