The SaaS Superhighway: Telecoms and Software Are Converging
22.02.2008
For years, the telecom industry has been aggressively expanding into IT services to offset declining revenue from traditional voice and data services.
Today telecom's infrastructure-focused IT services such as computer hosting are already commoditized. Telecom companies are trying to figure out how to climb up the IT stack towards application-focused software services where the business value is more direct and the margins higher. As it turns out, the Application Service Provider (ASP) model proved that turning licensed, single-tenant, traditional applications (such as those from Oracle) into a managed service doesn't have the required economies of scale. More importantly, the ASP delivery model is a stretch for the subscription/usage-based telecom providers.
On the other hand, the relatively nascent Software-as-a-Service (SaaS) model provides both the economies of scale and delivery model that's a natural match for the telecom industry. While the SaaS model is an obvious underpinning for telecom and software convergence, what is not so obvious is the makeup of the enabling technologies and the exact role a telecom provider has to assume to promote a value chain that can scale to tens of billions in new annual revenue.
The first-mover telecom provider that correctly identifies a) the key enabling technologies, b) the required value chain and c) its role in the value chain will be among the top beneficiaries of the convergence. Before discussing the enabling technologies and the make up of the value chain, let's see what it takes for the customers of business applications to endorse the pay-as-you-go convergence with their wallets.
Customers Need the Power of IT in the Hands of Business
There are four major problems with traditional business applications that have made it impossible to align IT and business: a) the high total cost of ownership (TCO) diverts well over 60% of IT budgets to application maintenance and upgrades instead of business innovation, b) the difficulty of integrating across application silos hinders business automation and efficiency, c) the lack of flexibility in the often over-provisioned underlying hardware and software infrastructure increases both exposure to risk and project costs, and d) the lack of agility in responding to new business requirements disconnects IT from the real-time realities of business.
The enterprise customer simply needs the power of responsive IT in the hands of its business leaders.
The SaaS model combined with Service Oriented Architecture (SOA) and platform innovations on top of SOA has the potential to address all the shortcomings of the traditional software model. However, so far the SaaS model has proven effective mostly for small and medium-size enterprises (SMBs) and non-core applications such as customer relation management (CRM) and human resources (HR).
There are two barriers that have prevented mainstream adoption of SaaS by large enterprises:
1. Limited ability to customize. The SaaS platform used by existing vendors brings multi-tenancy. While this innovation maximizes the operational efficiency of the SaaS vendor, it currently limits the customer's ability to customize the application business logic; large enterprises require customization to address changing business requirements and gain competitive advantage especially in the area of core business functions.
2. Difficulty in integrating SaaS solutions with ERP systems inside the firewall. The SaaS platforms used by existing vendors, although Web Service-enabled, provide no innovative inside-out integration capability (i.e., from SaaS platform to other ERP applications inside the firewall).
As you'll see next, the technological convergence of SaaS, SOA, and virtualization can overcome the barriers of SaaS adoption for large enterprises and enable telecom providers to target the SaaS market starting from the Global 1000 end of the market spectrum. (Figure 1)
The Enabling Technologies
Network services such as Internet data centers, global network access, hardware, and OS infrastructure are offered as commodities by telecom providers and some specialized and smaller network service providers. On the other hand, managed services such as security, QoS, and billing expertise are among the valuable assets that telecom providers can bring to the SaaS table from a technology perspective.
To accommodate the creation, customization, integration, and distribution of SaaS applications, some key technologies are required. These technologies go beyond the core competency of telecom providers. These technologies need to provide functions similar to middleware functions. However, they need to be much less complex than middleware to accommodate customer requirements for reduced TCO, ease of integration, and increased agility. Besides, middleware technologies aren't built for multi-tenancy and so do not lend themselves to the SaaS model.
The software platform technologies needed to enable agile SaaS solutions for SMBs through large enterprises are addressed under the four categories below:
1. GUI Layer: This is also a commoditized layer. A good example here is Adobe Flex. It is a rich Internet client with the ability to consume Web Services out of the box and does most of its processing on the client machine so it provides a good choice for SaaS solutions.
2. Model-driven Service Composition as a Service. A new model-driven componentization technique called SOP for Service Oriented Programming (http://en.wikipedia.org/wiki/Service_Oriented_Programming) has made it possible to converge SaaS, SOA, and virtualization platforms into a single model-driven platform and so drop the SaaS penetration barriers of large enterprises (http://soa.sys-con.com/read/467329.htm). This model-driven service composition platform is multi-tenant and provides all the functions of SOA middleware without the associated complexity. This is the single most important enabler for the telecom-SaaS technology stack.
3. Service Management & Governance. In the model-driven telecom-SaaS infrastructure, every exposed and reusable component of a SaaS application is a software service. This means that service management and governance functions must be native to the Service Composition platform.
4. Service Exchange Infrastructure. Think of this as being something between the eBay and the Yellow Pages of services where SaaS application component vendors can catalog their offerings as a set of software services and be reviewed and rated by customers and the telecom provider.
The Winning Value Chain
To generate revenue worthy of attention in a trillion-dollar industry, telecom providers will have to replace the "SaaS country road" approach promoted by the single SaaS vendor with a value chain that results in a "SaaS superhighway" capable of generating hundreds of billions in revenue. The successful telecom provider views its major role in the SaaS ecosystem as a conduit to enterprise customers and system integrators (SIs). The goal is to create a value chain that turns the telecom provider into the most scalable channel for SaaS offerings in the shortest time possible. This requires a series of key partnerships as opposed to building everything, or acquiring every one-off SaaS application vendor and ending up with a hodge-podge of underlying platforms that are hard to integrate and consolidate.
On the consumer side of the value chain, most SMB and Fortune 2000 customers prefer to acquire end-to-end solutions through a single vendor whenever possible. From this perspective, telecom providers with their vast enterprise customer base are in a unique position to act as distribution channels for SaaS solutions. Also, up to now, SIs had to rely on vendor-specific application platforms to deliver solutions. SIs have been looking for a vendor-neutral platform to capture their domain knowledge and increase reusability across clients. Because of this, SIs are likely to become a conduit for the telecom-SaaS offerings.
On the platform producer side of the value chain, the successful telecom provider forges partnerships with the most innovative and independent software platform as a service vendor (IPV) to provide real-time service composition and assembly, service management, and governance and a service exchange infrastructure. The partnership should require the platform partners to integrate to the telecom provider's managed services such as security, billing, storage, service assurance, and QoS services. Since the platform-as-service offerings are hosted, the telecom provider can further enhance its business by selling data center and computer hosting services to these partners. Although this sounds like double dipping (and it is), it provides tremendous scalability and performance benefits for everyone due to the proximity of all the platform services. On the application component producer side of the value chain, traditional ISVs and independent new entrants throughout the global economy can use the service exchange infrastructure to catalog their application-specific components as services. The telecom provider can also sell data center and computer hosting service to these independent application component vendors (ICVs).
Finally, telecom-SaaS providers bring the software platform-as-a-service with a catalog of application services to end customers and SIs. The customer chooses some of the application components out-of-the-box and uses model-driven platform services to rapidly assemble highly customized and integrated solutions on-demand using internal IT staff or SIs.
Unlike traditional enterprise software license sales, the telecom provider's sales force won't require any specific domain knowledge for selling telecom-SaaS offerings. Instead, it's focused on exposing the customer to the telecom-SaaS and its new economics through select use-cases. Then, the customer can easily evaluate any of the offerings and use what it needs on a pay-as-you-go basis instead of the elaborate enterprise software acquisition process common today. Each ICV is responsible for providing standardized marketing collateral in the form of recorded presentations and demos to provide domain-specific information. The telecom-SaaS platform enables a pull model where the customer pulls what it needs when it needs it as opposed to the push sales model common today. The pull model is enabled through the service exchange and can utilize social networks to connect customers across verticals and common interests.
The Size of the Opportunity & Revenue Distribution
Extending an estimated CAGR of 7.7% growth in software spending through 2016, as IDC assumes at least until 2010, new software spending will exceed $250 billion in 2016 while total software spending reaches $510 billion. Note that the IDC growth estimate in 2005 didn't consider the additional growth factor of telecom and software convergence through the telecom-SaaS offering. Considering the exponential decay of traditional software's share in new software spending and the new economics of solutions, $218 billion in software spending will flow through the telecom industry as revenue. Out of the $218 billion in revenue, approximately $50 billion of the $76 billion ICV fees paid by the customer will be passed to ICVs assuming the telecom provider will earn a 35% channel fee for sales and distribution. Also, approximately $56 billion of the $142 billion in IPV fees paid by the customer will be passed to IPVs assuming a 60% channel fee for sales, marketing, and distribution.
The convergence of the telecom and software industries through the telecom-SaaS distribution channel will result in a global wave of IT growth. This wave will create major global opportunities for independent software vendors in providing platform, application component, and packaged composite applications as services. In addition, it will fuel the market for SIs by bolstering demand for professional services for on-demand application assembly and reassembly.
SMB and Fortune 2000 enterprise customers are the biggest winners in convergence. The global nature and the large scale of the telecom-SaaS results in the rapid commoditization of application service components. The on-demand composition and assembly of application services also increases the responsiveness of businesses to changing business requirements.
By now, you maybe wondering, who makes the best early adopter for the telecom-SaaS offerings? I'd have to say the telecom provider who wants to be at the forefront of convergence.
source: SysCon Media