SaaS and the Servitization of the Software Industry – Part 1

The software industry is going through a period of great change. The long established model of the software products business – you buy a software product by way of an upfront perpetual license and then install and maintain it on your PC or server – is moving to a model where you pay to use the software but no longer have to install and maintain it. The software vendor has taken the product functionality and features you want and radically changed how they are delivered. In the process they have taken away a large number of requirements and responsibilities that you once had and replaced them with services that you pay them to perform instead. This is a great example of servitization in action and it will fundamentally change the software industry.

The irony in this process is that the software industry is actually returning to its original form, rather than creating a brand new one. But in doing so it will shake up the entire IT industry structure and the fortunes of those involved in it. This is due to the fact that servitization, by its very nature,  brings the product vendor and the product user ever closer together through the use of services. While this is typically of benefit to both the vendor and the user it often changes the role of the distribution channel (distributors, resellers, retailers, integrators and support staff) in a very disruptive manner (both positively and negatively).

It’s worth looking backwards here for a moment to understand how we might go forward. In the early days of the commercial computing industry the number of participants involved in the value chain and their responsibilities were pretty well defined. The ‘computer company’ supplied and maintained all of the hardware/software and performed most of the operational functions while the customer focused on actually using the computing resources. So there was a fairly high service element involved (the vendors staff taking care of almost all operation and maintenance) and there was very little separating the vendor from the customer in terms of 3rd parties.

Over time and particularly with the advent of the PC and distributed computing during the mid 1980s the landscape changed dramatically. The software industry split from the hardware industry and the number of vendors in both exploded. The decentralisation of computing resources via the PC created huge variety in terms of hardware, software and applications. While this led to incredible innovation and industry growth it placed an increasing burden of support and maintenance on the customer. To cope with this burden, enterprises recruited ever larger teams of IT staff to install, operate and support their computing infrastructure. The infrastructure itself also ballooned, with vast enterprise data-centres built in multiple locations to support the computing needs of the organisation. The software industry meanwhile was quite distant from the end user. They focused on developing new software and relied on a growing distribution channel of partners and retailers to actually sell the products and perform much of the support, they didn’t see much of the end users themselves.

As the complexity and variety of enterprise computing environments increased,  ’system integrators’ grew to fill the gap between the software vendors and the end users. The integrators, many of whom were large global organisations, began to take on ever more responsibilities on behalf of the enterprise. During the past decade in particular, there has been a large transference of responsibilities, data-centre facilities and equipment and IT support staff from the enterprise to the integrator through a large scale process of outsourcing. During this period the software vendors also became interested in selling more than licenses and many expanded their own paid for service offerings, first with tiered levels of premium support and later with professional services and consultancy.

And that is pretty much where we are today. Well not quite – there are some large (computing) clouds on the horizon and the stucture of the IT and software industries are going to change dramatically over the next decade. I will take a close look at Software-as-a-Service, the structural impact of servitization on the software industry and all that SaaS in the second part of this post.

Steve