Study and Analysis of SaaS Business Model

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UNIVERSITEIT GENT 
 
FACULTEIT ECONOMIE EN BEDRIJFSKUNDE 
 
ACADEMIEJAAR 2009  2010 
 
Software as a Service: 
Study and Analysis of SaaS Business 
Model and Innovation Ecosystems 
 
Masterproef voorgedragen tot het bekomen van de graad van 
 
Master in de Toegepaste Economische Wetenschappen: Handelsingenieur 
 
Inna Churakova 
Ramilja Mikhramova 
 
onder leiding van 
 
Prof. Dr. Ir. F. Gielen  
Prof. Dr. B.Clarysse 
 
 
 
 
 
 
UNIVERSITEIT GENT 
 
FACULTEIT ECONOMIE EN BEDRIJFSKUNDE 
 
ACADEMIEJAAR 2009  2010 
 
Software as a Service: 
Study and Analysis of SaaS Business 
Model and Innovation Ecosystems 
 
Masterproef voorgedragen tot het bekomen van de graad van 
 
Master in de Toegepaste Economische Wetenschappen: Handelsingenieur 
 
Inna Churakova 
Ramilja Mikhramova 
 
onder leiding van 
 
Prof. Dr. Ir. F. Gielen  
Prof. Dr. B.Clarysse 
 
 
i 
 
Permission  
 
The authors hereby grant Ghent University the right to make this master thesis available for 
consultation. The reader is granted the right to copy parts of this master thesis for personal use 
only, explicitly mentioning the source when referring to the contents of this master thesis. 
Redistribution or publication of this document, partly or entirely, in any form, with or without 
modification, without prior written approval of both authors, is forbidden. Neither the name of 
the SinYate project nor the names of its contributors may be used to endorse or promote 
products, unless explicitly approved by both authors in writing.  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Inna Churakova 
 
 
 
 
 
 
       Ramilja Mikhramova 
   June 2010 
 
 
 
 
 
 
 
              June 2010 
 
 
ii 
 
Acknowledgments  
 
Inna Churakova 
I would like to thank the initiator and the most fervent supporter of this work, our thesis 
promoter Prof. PhD. Eng. Frank Gielen, who gave us this opportunity and possibility not 
only to discover the business potential of software, but also to taste the entrepreneurial 
challenge through the iBoot contest.   
This work was only possible thank to the input of multiple business and academic 
professionals: Filip Tersago, Dirk Schaele, Joren De Wachter, David Geens, Angelo 
Vella, Will Baccich, Simon Small, Rich Walker, Jeff Bell, Rudi Geiger, Mike Warren, 
Chris Sterbenck and Mansour Salame. All of them provided us with insights on 
dissimilarities between theoretical and operational practices, which constitute the 
fundamentals of our work. 
In addition, special thank goes to my thesis partner for her straightforward and honest 
opinion, critical view, infinite patience and eternal friendship. 
  
Ramilja Mikhramova 
 First of all I would like to thank our thesis supervisor Prof. PhD. Eng. Frank Gielen for 
the given opportunity to dive into the fascinated world of cloud computing in general and 
SaaS in particular and to experience the entrepreneurial spirit during the iBoot 
challenging event.    
The person, whom I am undeniably grateful to for her willingness to work on this master 
thesis together, is my thesis partner Inna.  Without her critical view, open mind, great 
patience, continuous support and invaluable friendship, it would not be possible to realize 
such a great job.  
In addition, I would like to thank everyone who contributed to this thesis with valuable 
information, feedback and support.  
Finally, a special thank goes to my family who gave me the opportunity to accomplish 
the studies and to achieve one of the postulated goals.  
 
iii 
 
Samenvatting (Dutch Summary) 
Uit talrijk aantal bestaande omschrijvingen van Software 
aangeboden als een Service (SaaS), wordt volgende 
definitie geformuleerd waarin alle SaaS kenmerkende 
elementen geconcentreerd zijn: SaaS is een business 
model, dat in combinatie met concepten als IaaS 
(Infrastructuur aangeboden als een Service) en PaaS 
(Platform aangeboden als een Service) het aanbod van een 
applicatie via een intern (Intranet) of een extern (Internet) 
netwerk toelaat, waarbij klanten per gebruik, of op basis 
van een andere subscriptie mechanismen, gefactureerd 
worden, en waar n-op-meer principe geldt. 
Het oorspronkelijke idee van het concept, waarbij software 
als een dienst via een netwerk aangeboden wordt, is van 
Dhr. John McCarthy en dateert van 1960. Echter, 
werkelijke 
realisatie was 
slecht mogelijk mits 
ontwikkeling van de ondersteunende technologien, dat 
slechts in de jaren negentig doorbraken. Niettemin werd 
het succes ervan belemmerd doordat verspreiding ervan op 
n-op-n principe gebaseerd was. Namelijk, voor elke 
gebruiker werd een unieke en/of een aparte toepassing 
ontwikkeld, dat het realiseren van schaal effecten en 
andere voordelen van SaaS, verhinderde. Wat SaaS uniek 
maakt, is vervat in de mogelijkheid om meerdere 
gebruikers aan n platform te kunnen koppelen. 
SaaS business model wordt beschreven gebruik makend 
van het raamwerk van Dr. Osterwalder, dat uit volgende 
samenstellende en inter-agerende delen bestaat: (1) offer, 
dat een meerwaarde voor een klant creert; (2) klant, dat 
klanten relatie, -segmentatie en distributie kanalen 
inhoudt; (3) infrastructuur gedeelte, dat het verschaffen 
van service toelaat mits collaboraties, strategische activa 
en -bedrijvigheid; en (4) financile zijde, waarbij 
opbrengsten en kosten tegen elkaar worden afgewogen. 
Meerwaarde dat SaaS diensten voor de klant creren, 
verschillen in functie van het type klant. KMO's worden 
getypeerd als bedrijven met kleine IT budgetten, waarbij 
men zoveel mogelijk op hoofdactiviteiten focust, en niet 
gerelateerde activiteiten uitbesteedt. In dit geval bestaat de 
waarde propositie uit lagere totale kosten, voorspelbare IT 
uitgaven, snellere implementatie en gebruik van expertise 
van de dienstverlenende partij. In tegenstelling tot KMO 
waarbij men interne IT afdeling volledig probeert te 
vervangen, worden SaaS diensten binnen grotere 
ondernemingen complementair aan bestaande services. Dit 
laat grote bedrijven toe om te focussen op strategische 
uitdagingen binnen IT afdeling, terwijl ondersteunende 
functies (bv. e-mail) op een kostefficinte manier worden 
uitbesteed. 
Aangezien binnen SaaS, diensten via een netwerk of 
online aangeboden worden, is de aanpak bij het benaderen, 
segmenteren en verschaffen van de klanten anders dan in 
het traditionele opzet, waarbij volledige software pakket 
en daaraan gebonden licentie verkocht worden. 
Daarnaast is de klantenstrategie in functie van de grootte, 
gewicht of belang van de klant. De meest gebruikte 
aanpak is waarbij kleinere klanten telefonisch of via online 
kanalen worden onderhouden; terwijl grotere klanten 
direct met verkoopspersoon communiceren. 
Het eerder vermeld voordeel, met name n-op-veel 
distributiemogelijkheid van SaaS, is grotendeels te wijten 
aan 
onderliggende meerlagige 
infrastructuur 
en 
volgroeidheid van de onderliggende applicatie. 
Onder 
financieel 
luik 
vallen kostenstructuur 
en 
opbrengstgenererende activiteiten. Eerste element omvat 
alle kosten (initile investeringen in infrastructuur en 
hardware, onderzoek en ontwikkeling, verkoop en 
marketing kosten, etc.) om SaaS diensten te kunnen 
leveren aan de eindgebruiker. Tweede element, is niet 
enkel beperkt tot inkomsten uit intekening gebaseerde 
mechanismen, maar bevat ook inkomstmogelijkheden uit 
ondersteunende diensten, onderzoek en ontwikkeling, 
marktstudie 
rapporten en 
reclame. Terwijl SaaS 
leveranciers met hoge initile kosten geconfronteerd 
worden, zijn de opbrengsten verspreid over langere 
periode en zijn ze relatief lager (vergeleken met 
traditioneel model), wat veroorzaakt dat SaaS bedrijven 
tijdens startende periode hoge nood aan liquide middelen 
ervaren. 
Het ecosysteem rond SaaS business model wordt 
gedefinieerd als een complexe set relaties tussen alle inter-
agerende 
partijen 
(dienstverleners, 
gebruikers, 
ontwikkelaars, etc.) dat als n systeem functioneert met 
virtuele en fysische omgeving. Analyse ervan wordt 
uitgevoerd aan de hand van de Porter's vijf krachten 
model. De bedreiging van substituten, met name van 
traditionele licentie verkopers, ASP-, Software+Services 
dienstverleners, kan als aanzienlijk groot worden 
beschouwd, afhankelijk van het type substituut. Macht van 
de leveranciers (bv. PaaS of IaaS leveranciers) is beperkt 
omwille van sterke groei binnen de industrie. Klanten 
krijgen bevoorrechte positie binnen SaaS omgeving (door 
lage omschakelingskosten zijn klanten niet gebonden aan 
n leverancier, in tegenstelling tot de traditionele licentie 
opzet), waardoor sterke afnemersmacht wordt gecreerd. 
De interne bedrijfstak concurrentie varieert 
tussen 
middelmatig en hoog, sterk afhankelijk van welk 
subsegment binnen SaaS aanbod men in beschouwing 
neemt. Bedreiging van nieuwe markttoetreders wordt 
afgezwakt door hoge toetredingsbarrires (voornamelijk 
hoge initile investeringen, operationele en structurele 
uitdagingen). 
Voor de analyse van voor- en nadelen wordt een 
vergelijkende studie van de meest 
recente SaaS 
industrierapporten opgesteld, waarbij zowel standpunt van 
de klant als van de leverancier wordt toegelicht. Voordelen 
die ten gunste van de klant komen, zijn: ontbreken van of 
lagere 
investeringskosten 
en 
snelle 
implementatie 
procedure, 
met 
vervolgens 
continue 
(software) 
vernieuwing. Als nadeel lopen de klanten nog steeds het 
risico van verlies van informatie doordat data buiten het 
bedrijf opgeslagen wordt. Voor de SaaS leverancier zijn 
schaaleffecten en groter bereik van potentile klanten de 
grootste troeven. Echter, grote initile investeringen, trage 
opbrengsten groei en grotere behoefte aan liquide 
middelen maken dit model minder aantrekkelijk. 
In dit werk voorgestelde theoretische raamwerk wordt 
toegepast op SinYate initiatief, dat testing diensten voor 
mobiele applicaties op SaaS basis aanbiedt.  
iv 
 
Table of Contents 
Samenvatting (Dutch Summary) ................................................................................................. iii 
Utilized Abbreviations.................................................................................................................vi 
List of Figures .......................................................................................................................... viii 
List of Tables ............................................................................................................................... x 
0. 
Introduction .......................................................................................................................... 1 
1. Origin of SaaS business model.............................................................................................. 4 
 
1.1.      Evolution .............................................................................................................. 4 
 
1.2.      Definition .............................................................................................................. 5 
2. 
SaaS: Analysis of Business Model components .................................................................... 8 
 
2.1.      Value proposition ................................................................................................ 10 
 
     2.1.1.      Value proposition for small- and medium sized enterprises (SME) .............. 10 
 
     2.1.2.      Value proposition for Large Enterprises (LEs) ............................................. 11 
 
     2.1.3.      Offering element of the value proposition .................................................... 13 
 
2.2.      Customer ............................................................................................................. 16 
 
     2.2.1.      Customer relationship .................................................................................. 16 
 
     2.2.2.      Channel strategy .......................................................................................... 19 
 
     2.2.3.      Target customer ........................................................................................... 20 
 
2.3.      Infrastructure ....................................................................................................... 24 
 
     2.3.1.      Key activities ............................................................................................... 24 
 
     2.3.2.      Key resources .............................................................................................. 24 
 
     2.3.3.      Key partnerships .......................................................................................... 32 
 
2.4.      Finance ............................................................................................................... 34 
 
     2.4.1.      Cost structure .............................................................................................. 34 
 
     2.4.2.      Revenue streams .......................................................................................... 40 
 
     2.4.3.      Conclusion .................................................................................................. 43 
3. 
SaaS ecosystem .................................................................................................................. 44 
 
3.1.      Porter's five forces analysis of SaaS innovation ecosystem.................................. 44 
 
     3.1.1.      The threat of substitute products or services ................................................. 45 
 
     3.1.2.      The bargaining power of suppliers ............................................................... 52 
 
     3.1.3.      The bargaining power of customers ............................................................. 53 
 
     3.1.4.      The intensity of competitive rivalry ............................................................. 54 
 
     3.1.5.      The threat of new entrants............................................................................ 56 
 
3.2.      Advantages and disadvantages of SaaS business model ....................................... 57 
4. The implementation of SaaS business model....................................................................... 64 
 
4.1.      How to make it a success story? .......................................................................... 64 
v 
 
 
4.2.      What can go wrong? ............................................................................................ 69 
5. 
Future Trend ....................................................................................................................... 77 
6. 
SinYate: real world example ............................................................................................... 82 
 
6.1.      SinYate Offer ...................................................................................................... 82 
 
     6.1.1.      Core Strategy ............................................................................................... 84 
 
     6.1.2.      Strategic Resources ..................................................................................... 87 
 
     6.1.3.      Customer Interface ...................................................................................... 88 
 
     6.1.4.      Value Network ............................................................................................ 90 
 
6.2.      SinYate Architecture ........................................................................................... 93 
 
     6.2.1.      Logical architecture ..................................................................................... 93 
 
     6.2.2.      Maturity model ............................................................................................ 96 
 
     6.2.3.      Data-architecture ......................................................................................... 97 
 
     6.2.4.      Authentication System ................................................................................. 98 
 
6.3.      Finance ............................................................................................................... 99 
 
     6.3.1.      Cost Structure .............................................................................................. 99 
 
     6.3.2.      Revenue Streams ....................................................................................... 101 
7. Conclusion ....................................................................................................................... 103 
Bibliography ................................................................................................................................ x 
Appendices................................................................................................................................. xx 
 
vi 
 
Utilized Abbreviations 
 
ARR  
 
Annual Recurring Revenue 
ASP 
 
 
Application Software Provider 
ASP 
 
 
Average Selling Price 
AIP 
 
 
Application Infrastructure Provider 
API 
 
 
Application Programming Interface 
ARPU  
 
Average Revenue per User 
BSP 
 
 
Business Service Provider 
CAC  
 
Customer Acquisition Cost 
CCC  
 
Content, Communications and Collaboration 
CEO  
 
Chief Executive Officer 
CIO 
 
 
Chief Information Officer 
CLTV  
 
Customer Life Time Value 
CMRR 
 
Committed/Contracted Monthly Recurring Revenue 
CPU  
 
Computing Processing Unit 
CRM  
 
Customer Relationship Management  
CtA 
 
 
Cost to Acquire 
CtM 
 
 
Cost to Maintain 
DCC  
 
Digital Content Creation 
EBITDA 
 
Earnings Before Interest, Taxes, Depreciations and Amortizations 
ERP 
 
 
Enterprise Resource Planning 
EU 
 
 
European Union 
G&A  
 
General & Administrative expenses 
GAAP  
 
Generally Accepted Accounting Principles 
GTM  
 
Go-To-Market 
HIPAA  
 
Health Insurance Portability and Accountability Act 
HR 
 
 
Human Resources 
IaaS 
 
 
Infrastructure as a Service 
IBS 
 
 
Internet Business Services 
IP 
 
 
Internet Protocol 
ISP 
 
 
Internet Service Provider 
ISV 
 
 
Independent Software Vendor 
IT 
 
 
Information and Technology 
vii 
 
LAN  
 
Local Area Network 
LE 
 
 
Large Enterprise 
PaaS  
 
Platform as a Service 
PCI 
 
 
Payment Card Industry 
R&D  
 
Research & Development 
SG&A  
 
Sales, General & Administrative expenses 
S&M  
 
Sales & Marketing 
SaaS   
 
Software as a Service 
SCM  
 
Supply Chain Management 
SI 
 
 
System Integrator 
SIIA 
 
 
Software and Information Industry Association 
SLC 
 
 
Sales Learning Curve 
SOA  
 
Service Oriented Architecture 
SSO 
 
 
Single Sign-On 
 
 
 
SLA 
 
 
Service Level Agreement 
SME  
 
Small and Medium sized Enterprises 
SSP 
 
 
Solution Service Provider 
TCO  
 
Total Cost of Ownership 
VAR  
 
Value Added Reseller 
VPN  
 
Virtual Private Network 
WAN  
 
Wide Area Network 
 
 
 
viii 
 
List of Figures 
 
 
FIGURE 1: HISTORICAL EVOLUTION OF SAAS.......................................................................................4 
FIGURE 2: COMMODITIZATION PROCESS (GEENS, 2009) ......................................................................5 
FIGURE 3: SAAS MULTILAYER MODEL  (HUGHES, 2009) .....................................................................6 
FIGURE 4: BUSINESS MODEL CANVAS (OSTERWALDER & PIGNEUR, 2009) ..........................................8 
FIGURE 5: POSSIBLE SAAS SERVICES (SYKES, 2006) .......................................................................... 15 
FIGURE 6: SAAS VALUE CHAIN ......................................................................................................... 19 
FIGURE 7: WELL BALANCED BUSINESS MODEL (SKOK, 2009) ............................................................. 21 
FIGURE 8: OUT OF BALANCE BUSINESS MODEL (SKOK, 2009) ............................................................ 21 
FIGURE 9: BALANCING BETWEEN CAC AND CLV VALUES (SKOK, 2009) ........................................... 23 
FIGURE 10: SAAS ARCHITECTURE COMPONENTS (ZHEN, 2008) ......................................................... 25 
FIGURE 11: FOUR LEVEL SAAS MATURITY MODEL (CHONG & CARRARO, 2006A) ............................ 26 
FIGURE 12: VARIOUS DATA ARCHITECTURES OF SAAS (CHUNG, 2008) .............................................. 28 
FIGURE 13: COST OVER TIME FOR A PAIR OF SAAS APPLICATIONS (CHONG ET AL., 2006) .................. 29 
FIGURE 14: TENANT-RELATED FACTORS AND HOW THEY AFFECT ...................................................... 29 
FIGURE 15: CENTRALIZED AUTHENTICATION SYSTEM (CHONG & CARRARO, 2006A) ......................... 30 
FIGURE 16: DECENTRALIZED AUTHENTICATION SYSTEM (CHONG & CARRARO, 2006A)..................... 31 
FIGURE 17: VERTICALLY INTEGRATED SAAS-VENDOR (CHUNG, 2008) .............................................. 32 
FIGURE 18: OUTSOURCING OF IAAS AND PAAS (CHUNG, 2008) ......................................................... 33 
FIGURE 19: ISV AS SAAS-INTEGRATOR (CHUNG, 2008) ..................................................................... 33 
FIGURE 20: TOTAL RECOGNIZED REVENUE GROWTH (2006 VS. 2005) (NAIR, 2008) ............................ 35 
FIGURE 21: NET INCOME BEFORE TAXES AS A PERCENTAGE OF RECOGNIZED REVENUE (NAIR, 2008) . 36 
FIGURE 22: MEDIAN S&M AS % OF REVENUE (YIM, 2009) ................................................................ 37 
FIGURE 23: MEDIAN R&D AS % OF REVENUE (YIM J, 2009) .............................................................. 39 
FIGURE 24: SAAS POTENTIAL REVENUE STREAMS (SAAS REVENUE MODELLING, 2010) .................... 41 
FIGURE 25: CASH BURN: SAAS VS. PERPETUAL MODEL (GARDNER, 2008) ......................................... 43 
FIGURE 26: PORTER'S FIVE FORCES (PORTER FIVE FORCES ANALYSIS, 2010).................................... 45 
FIGURE 27: ON-PREMISES SOFTWARE MODEL (CLOUD COMPUTING, SAAS AND SOA, 2009) .............. 46 
FIGURE 28: ASP DELIVERY MODEL (CLOUD COMPUTING,SAAS AND SOA, 2009) ............................... 47 
FIGURE 29: THE INGREDIENTS OF ASP (TAO, 2000) ........................................................................... 47 
FIGURE 30: ASP CHANNEL STRATIFICATION (TAO, 2001) .................................................................. 49 
FIGURE 31: SOFTWARE DELIVERY CONTINUUM (SANGWELL, 2007) ................................................... 50 
FIGURE 32: CUSTOMER PRIORITIES IN DEALING WITH SAAS BASED SERVICES (GENS, 2009) ............... 72 
FIGURE 33: CUSTOMER'S SATISFACTION ON RECOVERY PLANS IN CASE OF DISRUPTIONS OR OUTAGES 
(SMB DISASTER PREPAREDNESS, 2009) .................................................................................... 73 
ix 
 
FIGURE 34: MIGRATION OF APPLICATIONS FROM TRADITIONAL DELIVERY TO SOFTWARE AS A SERVICE
 ................................................................................................................................................. 76 
FIGURE 35: BEYOND SOFTWARE AS A SERVICE: CLOUD COMPUTING (MCNEE, 2008) ........................ 78 
FIGURE 36: WORLDWIDE SOFTWARE REVENUE FOR SAAS DELIVERY WITHIN THE ENTERPRISE 
APPLICATION SOFTWARE MARKETS (BILLIONS OF DOLLARS) ................................................... 79 
FIGURE 37: EXPECTED IMPACT OF MACRO TRENDS ON CLOUD COMPUTING ADOPTION GROWTH 
(BLATMAN, ROBINSON, CALLEWAERT, 2009) ........................................................................... 80 
FIGURE 38: HAMEL FRAMEWORK (HAMEL, 2000) ............................................................................. 83 
FIGURE 39: SINYATE VALUE NETWORK ............................................................................................ 91 
FIGURE 40: SINYATE ARCHITECTURE (MONS & YUAN XU, 2009) ...................................................... 94 
FIGURE 42: SINYATE COST STRUCTURE .......................................................................................... 101 
FIGURE 43: SAAS POSSIBLE REVENUE STREAMS (SAAS REVENUE MODELLING, 2010) ..................... 101 
 
 
x 
 
List of Tables 
 
TABLE 1: SOFTWARE DELIVERY MODELS ........................................................................................... 45 
TABLE 2: THE COMPARISON OF VARIOUS SOFTWARE DELIVERY BUSINESS MODELS............................ 52 
TABLE 3: REPRESENTATIVE PROVIDERS OF THE MAIN  SAAS MARKET SEGMENTS .............................. 55 
TABLE 4: WORLDWIDE SOFTWARE REVENUE FOR SAAS DELIVERY WITHIN THE ENTERPRISE 
APPLICATION SOFTWARE (PETTEY & STEVENS, 2009B) ............................................................ 55 
TABLE 5: LIST OF BENEFITS FOR THE SAAS CUCTOMER ACCORDING TO VARIOUS RESEARCHES .......... 60 
TABLE 6: LIST OF BENEFITS FOR THE SAAS VENDOR ACCORDING TO VARIOUS RESEARCHES .............. 61 
TABLE 7: LIST OF RISKS FOR THE SAAS CUSTOMER ACCORDING TO VARIOUS RESEARCHES ................ 62 
TABLE 8: LIST OF RISKS FOR THE SAAS VENDOR ACCORDING TO VARIOUS RESEARCHES .................... 63 
TABLE 9: SAAS RELATED METRICS .................................................................................................... 65 
TABLE 10: WORLDWIDE SOFTWARE REVENUE FOR SAAS DELIVERY WITHIN .................................... 79 
TABLE 11: SINYATE MOBILE TESTING SERVICE PACKS ..................................................................... 85 
TABLE 12: EXISTING PLAYERS ON MOBILE APPLICATIONS TESTING MARKET ...................................... 86 
TABLE 13: SINYATE PRICING STRATEGY ........................................................................................... 89 
TABLE 14: THE OVERVIEW OF HAMEL FRAMEWORK APPLIED FOR SINYATE ...................................... 92 
TABLE 15: PRICING COMPARISON AMONG IAAS PROVIDERS (WALRAVENS, 2009).............................. 95 
TABLE 16: FUNCTIONAL REQUIREMENTS OF SINYATE PLATFORM...................................................... 96 
TABLE 17: COMPARISON BETWEEN VARIOUS DATA-ARCHITECTURES ................................................ 98 
TABLE 18: MAJOR SINYATE INVESTMENTS (IN ) ............................................................................ 100 
 
1 
 
0. Introduction 
It would not sound surprisingly to anyone that the IT industry is characterized by a high speed of 
evolution and innovativeness. Since the introduction of the first desktop computer, followed by 
the World Wide Web availability in each house, it seems rather impossible to track and to 
identify all new launches in IT world, influencing and, very often even radically, changing the 
way of doing business.  
One of these decisive reveals, which did modify the way of thinking, developing and 
collaborating in IT and business domains, was the appearance of the concept Cloud Computing, 
which in turn gave birth to a new business model, known today as Software as a Service (SaaS). 
Before we deeply dive into the world of SaaS, let us first try to define and to explain what is 
actually meant by the SaaS business model.  During the analysis it became clear for us that 
giving one explanation is unfeasible. What's more, Google finds more than 60 different possible 
definitions of what SaaS is or could be.  
Software as a service is a model of software deployment whereby a provider 
licenses an application to customers for use as a service on demand 
(Software as a Service, 2010) 
Software as a Service (SaaS) is a software distribution model in which 
applications are hosted by a vendor or service provider and made available to 
customers over a network, typically the Internet. (Software as a Service, 
2006) 
Software as a Service, SaaS is a software delivery method that provides 
access to software and its functions remotely as a Web-based service. (SaaS, 
2009) 
In the Software as a Service model, the application, or service, is deployed 
from a centralized data center across a network  Internet, Intranet, LAN, or 
VPN  providing access and use on a recurring fee basis. (Software & 
Informationa Industry Association (SIIA), 2001) 
Here above, just few definitions, taken from the top 10 ranking in Google search. A rough 
analysis of the various SaaS definitions shows that all of them have following aspects in 
common, as for example, Web-based service model  provided over a network  fee based.  
2 
 
To illustrate the general concept behind this business model, let us consider the pioneer in this 
field, namely Saleforce.com, ... the leader in customer relationship management & cloud 
computing (Salesforce.com, 2010). Saleforce.com considers Software as a Service as ... a 
way of delivering applications over the Internet - as a service. Instead of installing and 
maintaining software, you simply access it via the Internet, freeing yourself from complex 
software and hardware management (Salesforce.com, 2010). As stated by Lindsey Armstrong, 
president, Europe, Middle East and Africa, of Salesforce.com: Our platform [] enables 
clients to act very quickly, whereas on-site development projects can take years. With SaaS, it 
could take only months or even weeks, so the system is operational sooner and the return on 
investment starts earlier. There is certainly a growing sense that SaaS is a better way to bring 
applications into a company (Salesforce.com: SaaS Appeal - Salesforce.com, 2010). 
Evidently, from the words of Lindsey Armstrong and from our own analysis, customers and 
providers of SaaS benefit from a lot of advantages of the SaaS business model. However, despite 
all the obvious benefits, offered and prospected by the SaaS business model, not all companies 
succeed in its effective and beneficial implementation.  
As consequence, in our thesis we try to provide an answer, as objective as possible, to the 
following questions, considering both the supply and demand side of the SaaS business model: 
WHAT ARE THE DETERMINANT FACTORS OF THE SUCCESSFUL IMPLEMENTATION OF SAAS 
BUSINESS MODEL?  
WHERE DO THE FAILURES IN THE SAAS BUSINESS MODEL REALIZATION ORIGINATE FROM? 
In the first part of our work, we try to clarify the origin of SaaS Business Model. Furthermore, 
we attempt to formulate our own definition of SaaS, based on different studies of the well-known 
research agencies as Gartner, Accenture, McKinsey and the industry rivals as Microsoft 
Corporation.   
Part two lightens the SaaS Business Model through Dr. A. Osterwalder's Business Model 
Canvas, which is composed of four main business areas, namely infrastructure, offer, finance and 
customer.  
In the third part the readers are presented with the Porter's Five Forces model, applied for the 
analysis of the SaaS ecosystem. By identifying the existing substitute products or services, the 
bargaining power of the suppliers and customers, the intensity of the competition and the 
possible entry barriers, we try to assess the attractiveness and competitiveness of the SaaS 
3 
 
industry. In addition, we provide the reader with the major advantages and disadvantages of 
SaaS for the customers as well as the vendors of the on-demand solutions.  
In the fourth part we attempt to give the answers to the key research questions, firstly providing 
the reader with the detailed analysis of the factors which are determinant for the successful 
implementation of SaaS. Secondly, we try to find out what can go wrong during the introduction 
and realization of the SaaS project in a company.  
In addition, to make it more transparent, we illustrate the SaaS implementation by the real world 
example, namely SinYate  a small start-up company, which provides its services, specifically 
testing the applications for mobile devices, on Software as a Service basis. 
Furthermore, we try to forecast whether there is a future for SaaS business model and what the 
potentials and possible scenarios are.  
Finally, we end up with a conclusion, summarizing main results: firstly, the underlying 
difficulties and hidden benefits of SaaS business model for the involved parties, namely 
providers of the services and the customers and secondly the success and failure factors which 
are determinant during the implementation of SaaS.  
4 
 
1. Origin of SaaS business model 
1.1. Evolution 
In order to find out where the Software as a Service originates from, we had to dig very deeply in 
the chronicles of the computer science. We went back in time till 1961, when John McCarthy
1
 
postulated during a speech at Massachusetts Institute of Technology, for the first time the idea of 
utility computing. The idea was based on the commoditization of the electrical grid in order to 
distribute the services publicly in a more efficient and cost effective way. The parallel was made 
for the computer time-sharing technology where computing power or even specific applications 
are provided as a service through the platform, invoicing the customer. Despite the popularity of 
the forwarded idea, the concept did not get the opportunity to prosper, because the required 
enabling technologies were scarcely out of the egg.  
 
FIGURE 1: HISTORICAL EVOLUTION OF SAAS 
i 
Thereupon, in late 1990's the development of computer technologies reached the appropriate 
levels of commercialization, giving the revival to the McCarthy's idea in the form of application 
service providers and cloud computing.   
Finally, in the beginning of the 21
st
 century, Software as a Service was officially introduced by 
the Software and Information Industry Association (SIIA). In the published paper Software as a 
Service: Strategic Backgrounder, SIIA stipulates the architecture of SaaS and required 
adjustments to the business logic, compared to the previous selling strategy and tactics. 
(Software & Informationa Industry Association (SIIA), 2001) The historical evolution, described 
above, is reflected in FIGURE 1.  
As a result of the innovation in information technology hardware, infrastructure and the 
expansion of the World Wide Web became as such the victims of the commoditization process, 
resulting in the loss of competitive advantage.  Consequently, internal IT development and the 
                                               
1 John McCarthy (born September 4, 1927, in Boston, Massachusetts), is an American computer scientist and 
cognitive scientist who received the Turing Award in 1971 for his major contributions to the field of Artificial 
Intelligence (AI).  
Utility 
computing
1961
 ASP
 Cloud  
computing
Late 
1990's
SaaS
2001
5 
 
use of on-premise software shifted to the non-core activities, becoming subject of outsourcing 
decisions in order to save operating costs. Living example is the noticeable switch from the on-
premises software for database management, HR, accounting and CRM policies to a one-click 
integrated solution as offered by Salesforce.com (see FIGURE 2). 
 
 
 
 
 
 
 
 
1.2. Definition 
Like already mentioned in the introduction, searching for an exact definition of Software as a 
Service is like looking for a needle in a haystack. Facing this problem, we decided to consult the 
titans of the industry in order to formulate our own understanding on the SaaS business model.  
The very first definition of Software as a Service, provided by Software and Information 
Industry Association (SIIA) states: ... In the software as a service model, the application or 
service, is deployed from a centralized data centre accross a network  internet, intranet, LAN, 
or VPN  providing access and use on a recurring fee basis. Users "rent", "subscribe to", "are 
assigned" or "are granted access to" the applications from the central provider (Software & 
Informationa Industry Association (SIIA), 2001). 
A much broader definition is forumated by the Microsoft Corporation: ... Software deployed 
as a hosted service and accessed over the Internet (Chong & Carraro, 2006a). However, this 
description also incorporates such terms as application service provider (ASP), application 
infrastructure providers (AIPs),  internet business services (IBS), business service provider 
(BSP), solution service provider (SSP) and more, which approach the business challenges from 
different angles.  
FIGURE 2: COMMODITIZATION PROCESS (Geens, 2009) 
6 
 
Complementary, Gartner interprets software as a service in the following way: ... software 
thats owned delivered and managed remotely by one or more providers. [...] The provider 
delivers an application based on a single set of common code and data definitions, which are 
consumed in a one-to-many model by all contracted customers anytime on a pay-for-use basis, 
or as a subscription based on use metrics (Clark, et al., 2006, p. 4). 
Finally, in a more specific resource, namely the IT dictionary, Software as a Service is defined 
as: ... a software distribution model in which applications are hosted by a vendor or service 
provider and made available to customers over a network, typically the Internet.  
Analysing the previous statements, we can conclude that they are rather similar, but at the same 
time none of them provide the full picture of the concept. Aiming at completeness and clarity, 
we worked out our own synthesis.  
 
Firstly, Software as a Service is a multilayer model, existing of an infrastructure as a service 
(IaaS) and platform as a service (PaaS), complemented by the applications developed and owned 
by the service provider (see FIGURE 3). The former component exists of networks, servers, 
storage and application programming interface, which are responsible for enabling convenient, 
on-demand access to computing resources. Enriching IaaS with middleware, that connects the 
application code with run-time infrastructure, one creates the PaaS. The latter allows 
interoperability between the infrastructure, various operating systems and hosted applications.  
 
FIGURE 3: SAAS MULTILAYER MODEL  
(Hughes, 2009) 
7 
 
Software as a Service is a multilayer business model, enabled by IaaS and PaaS, 
which allows the provision of the application to the customers over the network on a 
subscription base, following the one-to-many principle. 
Secondly, the customers use the software on the subscription base, on conditions negotiated in 
the contract and receive in return service promised in the Service Level Agreement. Furthermore, 
the users take the advantage of the interconnectivity with the server in order to utilize the 
applications independently of their location.  
Next important issue in SaaS is one-to-many concept, which implies that a standard package of 
applications is provided to as many customers as possible minimizing the customization.   
As conclusion to the synthesis we made here above, we have formulated our own comprehensive 
definition of Software as a Service business model, which sounds as follows: 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
8 
 
2. SaaS: Analysis of Business Model components 
At the end of the previous part we formulated our own definition of Software as a Service, 
categorizing it as a Business Model. And before we start the analysis of SaaS Business Model as 
such, let us first create a shared understanding of what a business model actually is. In order to 
accomplish this task, we make a use of a Business Model Canvas, developed at the University of 
Lausanne by Dr. Alexander Osterwalder
2
 and successfully applied in such companies as IBM, 
Deloitte, PriceWaterHouseCoopers and more.   
In his recent book Business Model Generation, Dr. Osterwalder together with the co-author 
Dr. Yves Pigneur, points out that ... A business model describes the rationale of how an 
organization creates, delivers and captures value" (Osterwalder & Pigneur, 2009, p. 14). 
Furthermore, the authors believe that a business model can best be evaluated through nine 
building blocks, covering four main business areas (see FIGURE 4):  
 
 
 
 
 
 
 
 
 
 
 
 
 
 Infrastructure: 
o Key resources are the crucial tangible or intangible assets, which allow an 
enterprise to create and offer a Value Proposition, reach markets, maintain 
relationships with Customer Segments, and earn revenues. 
                                               
2 Dr. Alexander Osterwalder holds a Ph.D degree from the University of Lausanne and is a freelance author, speaker 
and workshop facilitator on the topic of business model innovation. He coaches executives, entrepreneurs and 
consultants around the globe to help them better understand how they can transform their business models. 
 
KEY  
PARTNERS 
REVENUE 
STREAMS 
 
CUSTOMER 
SEGMENTS 
KEY 
RESOURCES 
VALUE 
PROPOSITION 
 
CHANNELS 
CUSTOMER 
RELATIONSHIPS  
 
KEY  
ACTIVITIES 
COST 
STRUCTURE 
 
INFRASTRUCTURE 
OFFER 
CUSTOMER 
FINANCE 
 
FIGURE 4: BUSINESS MODEL CANVAS (Osterwalder & Pigneur, 2009) 
9 
 
o Key activities are the most important actions a company must take to operate 
successfully, and which are necessary to create and offer the Value Proposition, 
reach markets, maintain Customer Relationships, and earn revenues. 
o Key partnerships are the network of suppliers and partners, meant to optimize the 
postulated business model, achieve economies of scale, reduce risk and/or acquire 
particular resources and activities.  
 Offer 
o Value proposition building block incorporates the bundle of products and services 
that create value for a specific Customer Segment, solving particular customer 
problem or satisfying a particular customer need.  
 Customer 
o Customer segments building block describes the audience, being different groups 
of people or organizations, which enterprise is targeting and aiming to reach.  
o Channels include the company's marketing and distribution strategy, required to 
communicate with and to reach the Customer Segments in order to deliver the 
intended Value Proposition.  
o Customer relationships comprise the links a company tries to establish between 
itself and its different Customer Segments. 
 Finance 
o Cost structure includes all the costs incurred to operate a business model. 
o Revenue streams are the revenue flows or cash, generated from each Customer 
Segment. 
Following the example of business giants like Deloitte and IBM, it seems for us very useful to 
use Dr. Osterwald's Business Model Canvas concept as a framework for the analysis of SaaS 
Business Model, which follows here below.  
 
 
10 
 
2.1. Value proposition 
Before starting the analysis of the value proposition proffered by the SaaS business model, it 
seems important to us to provide a neutral and exhaustive definition of the term value 
proposition' as such. From the research on business models, The Business Model Ontology - a 
proposition in a design science approach at the University of Lausanne, Switzerland, follows a 
satiated description:  
"A value proposition represents value for one or several target customer(s) and is 
based on one or several capability(ies). It can be further decomposed into its set of 
elementary offering(s). A value proposition is characterized by its attributes 
description, reasoning, value level and price level and an optional life cycle." 
(Osterwalder, 2004, p.50) 
To stay in line with definition, we describe the value proposition in function of target segments 
of a SaaS solution provider. Therefore working further on the statistical study from the New 
York University (Xin & Levina, 2008), our own qualitative research confirms that the need for 
SaaS solutions and the circumstances under which potential clients will seize for it, differs in 
function of firm's size (expressed in number of users employing certain application). In the 
majority of the cases, SME will be using SaaS solution as a substitute product to the available 
on-premise solutions; while large enterprises do consider it as a complement to the on-premise 
software.     
2.1.1. Value proposition for small- and medium sized enterprises (SME) 
Very often SMEs do not have a lot of freedom of choice, what leads to a situation as "SaaS or 
nothing. Being limited by budget constraints, SMEs do not have enough resources to develop 
and deploy the (licensed) software and supporting infrastructure, required for the operations. 
Based on this customer pain, SaaS providers constitute their value proposition on the following 
pillars (The SaaS Value Proposition, 2010): 
 (On average) reduced Total Cost of Ownership (TCO) 
SaaS business model provides a superior offering for a relatively small, but constant 
fraction of the investment, eliminating conventional on-premise costs such as 
implementation, training, hardware, staffing, customization and/or integration and post-
software procurement costs. For the latter factor, also known as hidden costs,  
11 
 
most analysts indicate that the ratio or the relationship between hidden costs and 
software investment is at least 2 to 1 (e.g. for every dollar spent on software license, two 
dollars will be spent on hidden costs) and often 4 to 1 or higher (SaaS Value 
Proposition, 2010). When describing this phenomenon, the iceberg analogy can be made 
(SaaS Value Proposition, 2010). 
 Predictable IT expenditures and reduced risks 
Variable and unpredictable maintenance costs are substituted by the constant monthly 
payments, prohibiting this way the budget overrun for IT projects. In case of unsatisfying 
services customers still have the option to terminate the agreement. 
 Faster time to benefits 
The implementation of the SaaS solution takes on average 45% to 55% of the time 
required to install traditional (licensed) on-premise software.   
 Outsourced expertise 
SaaS-based solution allows the customer to focus on their core capabilities and make 
extensive use of the vendor's expertise.  
 Scalability options in function of business needs 
SaaS-based solutions allow the SMEs to chase the internal demand for a certain 
application, extending the subscription base if necessary or decreasing it in case of 
surplus capacity. 
2.1.2. Value proposition for Large Enterprises (LEs) 
The rationale behind the reasons why LEs would source solution from the cloud instead of 
developing and implementing it in-house is quite different from the logic followed by the SMEs. 
Therefore SaaS-vendor must focus on other pain-points than those mentioned above.  From the 
market research following value elements appeared: 
 Opportunity to focus on core activities (The SaaS Architecture Consultation Service, 
2007) 
Outsourcing simple and supporting applications (that do not constitute any competitive 
advantage, but are necessary for daily operations, such as e-mail applications) to the 
SaaS-based vendors, creates a double value. Primarily, ... by transferring the 
12 
 
responsibility for these "overhead" activities to a third party, the IT department can 
focus more on high-value activities that align with and support the business goals of the 
enterprise (The SaaS Architecture Consultation Service, 2007, p.1). 
 Cost efficiency and cost effectiveness of service delivery 
Simultaneously, the required functionalities are delivered in a less expensive way, 
because  SaaS projects in very large enterprises will require relatively smaller build 
teams as well as reduced project management and business analyst requirements 
(Speyer, 2007). 
Our description of the potential value proposition is also in line with the qualitative study 
Evaluating the software as a service business model: from CPU time-sharing to online 
innovation sharing performed by the Department of Business Technology at the Helsinki 
School of Economics (2005). What is more, described value propositions are comparable to 
those associated with traditional IT outsourcing: ... better focus on core competencies, easier 
to get access to technical expertise, and predictable and/or lower costs (Sksjrvi, Lassila, 
Nordstrm, 2005, p.6). 
However, to have a successful and sustainable business model, with the long term value 
generation, four independent dimensions must be equally represented in the value proposition or 
supported by the value proposition, namely: efficiency, complementarities, lock-in and novelty 
(Amit & Zott, 2001). As we see from the above stated benefits, only efficiency dimension is 
reinforced. The other three dimensions (complementarities, lock-in and novelty) are somehow 
neglected or worse: value elements contribute to the anti-pod of the required dimensions. Instead 
of locking-in the customer, vendor grants the freedom to move to other solution providers in case 
of dissatisfaction. Or the novelty aspect is ruined from the beginning, taking into account that the 
provided application does not create any competitive advantage for the customer, because it is 
also evenly available to its competitors. 
Conclusively, these results propose that the value creation potential within SaaS environment 
cannot be explained by a single entrepreneurship or strategic management theory, used as a 
framework in our analysis of business model sustainability.   
13 
 
2.1.3. Offering element of the value proposition 
It would be unwise to describe a single offering as provided by the Salesforce.com or Google 
Inc, or at the same time an endless task if we described all possible and available offerings on the 
market. Therefore, we will just present a pleotra of the possible offerings within SaaS-
environment, based on the research performed by the Leading Edge Journal, at the same time 
taking into account elementary offering definition:  
"An elementary offering is a part of an overall value proposition. It is 
characterized by its attributes description, reasoning, life cycle, value level and 
price level" (Osterwalder, 2004, p. 50). 
Following paragraphs concentrate on the specific attributes of the SaaS offering (e.g. reasoning, 
life cycle, value level and price level), reconciling the theoretical discourse and the current 
market habits for the value proposition. 
Reasoning element in the offering definition captures the why [] a provider thinks that its 
value proposition or a specific elementary offering could be valuable to the customer 
(Osterwalder, 2004, p.51). This is hidden in several essentials as diminution of the customer risk, 
facilitation of the transactions through reduction of efforts or value creation through usage of 
employment of the product/service as such.  For SaaS solutions all the three drivers constitute 
the reasoning element':  
 Customer risk covers various kinds of risks. For example the obsolescence risk is 
reduced to the bare minimum compared to the off-line solutions through the on-line 
delivery model. The customer does not need to acquire the complete (licensed) package 
with redundant functions (e.g. SAP packages). On the contrary, clients are subscribed 
only to the software particles that are required and only during the period of need (e.g. 
SalesForce.com). 
 Under customer efforts, we understand all the efforts needed to search, evaluate, 
acquire, maintain, and operate the specific software application. Under specific 
conditions customers experience lower efforts and partly lower lifecycle costs that are 
embodied in the lower total cost of ownership (TCO).   
 For the third element, positive value creation is conditional. It is only true when 
assumed customer value matches perceived customer value after the consumption of an 
elementary offering (Osterwalder, 2004, p.51).  With other words, it is true when the 
14 
 
product or service attributes correspond to customer needs. This statement can be 
validated by the inherent characteristic of SaaS: SaaS solutions are purpose-built 
(France, Haywood, Gilroy, 2009) and enjoy the 90% renewal rates (Kaplan, 2009).  
However, in corroboration of these facts no scientific consensus has been found between various 
studies on SaaS functional satisfaction levels. For example Forrester's and Gartner's researches 
state that [] satisfaction levels among SaaS users are little more than lukewarm where [] 
33 percent (among users and prospects of SaaS solutions in 333 enterprises in the U.S. and the 
U.K) said the solution didnt meet technical requirements. (Pettey & Stevens, 2009). While 
preliminary findings from Saugatuck's 2008 SaaS research agenda show that [] SaaS 
customer satisfaction is very strong  especially around SaaS Wave I requirements such as 
solution functionality, response time, availability and pricing (McNee, 2008, p.1).  However an 
important remark here is that in this research a distinction is made between three phases (waves) 
in SaaS development (infra, p. 77). [] Satisfaction around SaaS Wave II and III requirements 
 especially around support for customized, personalized workflows, integration with on-premise 
data and process, and greater inter-company collaboration is much lower (McNee, 2008, p.1). 
Next element is the value level or also called customer utility, that is measured on the qualitative 
scale and ranges between me-too values to innovation. A large variety of customer utility 
offers, proffered within the SaaS ecosystem, is represented on FIGURE 5, distinguishing between 
commodity solutions and the specialized or more sophisticated offers.  
15 
 
 
FIGURE 5: POSSIBLE SAAS SERVICES (Sykes, 2006) 
The former type is characterized by absence of any differentiation, and the only completive 
trump is the price (e.g. commodity - technical value add quadrant on FIGURE 5). In this case 
services are offered for free (e.g. Google's applications as e-mail services, scheduling, etc.). 
In reverse, for the latter type [] firm introduces either a completely new product or service or 
revolutionary combination of products and services (Osterwalder, 2004, p.51), such as 
(relatively) customized solutions (e.g. specialty - professional value add quadrant on FIGURE 5 
with SaaS Supply Chain Management solutions and services as offered by QLogitec
3
). 
With the above discussion on the diverse offer types, we also touched upon the subject of the 
evolution the SaaS value proposition made during this decade shifting from the cost-effective 
delivery of stand-alone application services (wave I) to workflow-and collaboration-enabled 
business transformation (wave III) (infra, p. 77). 
As a matter of course, price level element is insurmountably tied to the customer utility 
element. The pricing strategy within SaaS ecosystem depends largely on the competition and the 
particularity of a certain solution, respecting the traditional market' rationale. But what is worth 
mentioning is the SaaS business model innovation compared to the on-premise (licensed) 
                                               
3QLogitek is a leader in Supply Chain Business Process Automation, Integration, and Collaboration serving Retail 
and Consumer Packaged Goods (CPG) markets worldwide. QLogitec provides Software-as-a-Service (SaaS) and 
Integration-as-a-Service (IaaS) solutions to optimize supply chain operations for improved visibility and cost 
savings.  URL: < http://www.qlogitek.com/en/saas-supply-chain-solutions.aspx> (11/03/2010)  
16 
 
software value delivery. SaaS-based solutions [] have shifted the value frontier: providing the 
same level of value at a lower price, or more value at the same price or even better, more value 
at a lower price than the rest of the industry (Osterwalder, 2004, p.53).  
2.2. Customer 
2.2.1. Customer relationship 
 
With the emergence of SaaS, the business rationale shifted from the push-based model, where 
vendor has to [] interrupt, tell and sell" (Heinz, 2009), to pull-based, where solutions are 
found through interchange of informative and thought leadership content. In effect, this 
transition is reflected in the customer relationship (management) within SaaS ecosystem. The 
uniqueness lies in the different approach compared to the on-premise setting. Issues related to the 
software license rights grant the customer the freedom-to-change/exit, in case of unsatisfying 
solution. SaaS vendor became a supplier of a service, what implies that SaaS-providers must 
commit a considerable investment in order to provide this service and to follow the innovation 
pace (Bertuzzi, 2009). Finally, the SaaS vendors have to reassure customers that system back-up, 
contingency- and disaster recovery plans will be performed efficiently and in accordance with 
the Service Level Agreements.       
Logically, these differences in settings would have to lead to the disappearance of the distinction 
between the so called sales hunters and farmers (Bertuzzi, 2009), who are explicitly present 
in the on-premise setting (e.g. New Business Development Executive versus Account Manager 
(Gilroy 2010)). However, no industry consensus is found, given the Bessemer's explicit advice 
to separate farmers and hunters, due to the different approach.  
Our qualitative research suggests that amalgamation and divergence of sales representatives 
depends on the SaaS vendor's CMRR
4
 growth (in line with Bessemer's argumentation) (infra, 
p. 64). However, during the initial start-up period (new business acquisition until $300,000 
CMRR), given the large upfront investment and resource scarcity, sales force is constrained and 
it is possible that customers often deal with the same contact person before, during and after the 
contract closure (amalgamation phase). As the sales process climbs the Sales Learning Curve 
(SLC) and [] starts to hit the sales inflection point" (Botteri et al., 2010, p.6), sales force can 
                                               
4 CMRR stands for Contracted Monthly Recurring Revenue (infra p.64) 
17 
 
be expanded and specialized (divergence phase: new business acquisition and business 
retention). Finally in the last stage, SaaS firm may supplement its sales force with renewal-
oriented account managers.      
Customer relationship management within the SaaS business model depends not only on the 
progress of the sales process on the Sales Learning Curve, but also on the maturity of the 
relationship between SaaS vendor and its (potential) customer (ranging between customer 
acquisition and customer development stage in function of the sales cycle).  Each maturity stage 
is characterized by the specific relationship mechanisms and approach.   
Importance of the acquisition phase cannot be overemphasized. The SaaS vendors cannot 
capitalize on the one-time (large) payments as their on-premise counterparts do. Therefore the 
former party has to ensure a long term sustainable stream of smaller subscriptions, what 
implicitly signifies that the customer base must be numerous and even with the small churn rate 
(lower than 10% for salesForce.com), customers are lost, and thus new customers must be 
continuously acquired in order to stay in business (viability condition where renewal revenue 
plus up sell should be greater than 100% (Shamia, 2008)).   
The acquisition phase is decomposed into the leads qualification, promotion of the opportunity to 
the leads, solution development, roadblocks removal and sales negotiation and deal closure. 
Assumption that all leads are equal, which follows from mono-channel character of the SaaS 
service distribution (namely the Internet as the only medium), is incorrect at the origin. Leads are 
different at the level of perspectives (in function of the firm's structure and the purchasing 
process) and the needs (potential business pain). In addition, the customers approach SaaS 
vendor at [] the different levels of readiness to directly engage and buy the SaaS-based 
solution
 
(Chase, Alliance, Heinz, 2009, p.2). Ignoring this fact and pushing leads into the sales 
cycle, without preparing them for transition from on-premise to SaaS, deteriorates the lead's 
potential, ([] harms the relationship and significantly decreases the likelihood of converting 
lead into sustainable business
 
(Chase et al., 2009, p.2)) and may even contribute to SaaS 
vendor's failure (infra, p. 69). 
During the retention phase it is important to take Bessemer's 7
th
 Cloud Computing Law in to 
account, which states that [] the most important part of Software-as-a-Service isn't 
"Software" it's "Service"! Support, support, support! (Botteri et al., 2010, p.10). 
 
18 
 
In addition to Bessemer's Laws for cloud computing, Altimeter Group
5
 postulated Customer 
Bill of Rights for SaaS companies, including input from 57 ecosystem contributors. The purpose 
of this document is [] to serve as a reference, checklist, and point of discussion with SaaS 
Vendors for prospects and clients who have made the decision to begin a SaaS deployment 
(Wang & Owyang, 2009, p.4). But at the same time, we are convinced that these practices are 
important issues to consider for SaaS providers in particular, in order to excel in service delivery 
and to retain the customer. Altimeter Croup applies the SaaS Ownership Life Cycle, where 
ownership is shifted from perpetual license to perpetual usage. The retention phase consists of 
adoption, optimization and renewal of SaaS based solution. Each subdivision is characterized by 
several CRM properties. We highlight the most important and relevant properties for the SaaS 
vendor. 
During the adoption phase, where customer utilizes the solution across the organization, it is 
important for SaaS vendor to address [] sourcing and day-to-day processing perspective 
(Wang & Owyang, 2009, p.11). The short and long term efficient processing is convoyed by 
downtime and disaster recovery/mitigation plans. 
Optimization phase, is the point where customer changes the way it expands and/or maintains 
in the usage of the solution (for instance in case of merger or acquisition, owned affiliates, etc). 
The most important relationship triggers are multiple support options and price protection 
options. The former element must ensure that the proposed solution corresponds the actual 
usage, which can be (and should be) tracked as the vendor has complete overview and can 
survey the customer's handlings. The latter element should clearly disclose the pricing bands for 
each bulk increment and the discount rationale.            
To ensure great retention/renewal rates and referrals to new business, the effective account 
management program is based on trusted advisory, including [] Account Reviews, getting 
integrated into the customer's business processes, executive to executive relations and customer 
advisory councils.
 
(Chase et al., 2009, p.2). 
In addition to the relationship supporting necessities own to phased approach, there is also one 
which is applicable to all stages of ownership life cycle and/or customer life cycle. SaaS vendor 
should always provide on-going performance metrics. Transparency in the quality and service 
                                               
5 Altimeter Group is a strategy consulting firm that provides companies with a pragmatic approach to disruptive 
technologies in four areas of focus: Leadership and Management, Customer Strategy, Enterprise Strategy, and 
Innovation and Design.URL: <http://www.altimetergroup.com/>  
19 
 
level assessment enables the customer to monitor the quality stated in the SLA, contributing to 
trust establishment.       
2.2.2. Channel strategy 
Discussion on channel strategies within the SaaS environment is again divided between two 
camps. On the one hand we find very optimistic parties believing in the power of the internet 
and considering it as the panacea solution for the SaaS based businesses. The new 1:1 
relationship with customers (through freemium models, limited trials, etc.), as discussed in the 
fourth Bessemer's Cloud Computing Law, promotes to forget
  
the traditional software channels 
from the on-premise setting (e.g. value added reseller or software and integration companies as 
IBM, Oracle, HP, Accenture, etc. (Johnson, 2008; Botteri et al., 2010)). 
The more pragmatic SaaS analysts react on the above statement, motivating with the antitheses 
that it is impossible to have a product that sells itself (assuming that customers have to find 
product themselves, serve themselves and adapt the product themselves). Therefore 
segmentation model is promoted, where traditional partners receive an important role 
depending on their position in the value chain and the customer type.  
For instance Salesforce.com approaches SME through small partners, telephone representatives 
and online channels. While larger or corporate clients are served through direct sales model and 
SI/VAR (SaaS Channels and the VAR Market, 2007). 
For our discussion FIGURE 6 includes the entire range of xSP, including application, 
infrastructure providers and application service providers.   
 
FIGURE 6: SAAS VALUE CHAIN 
Our position supports the more pragmatic view; where the role of the intermediaries must be 
changed. In line with the book Channel Excellence by Axel Shultze (2007), we believe that 
traditional VAR must make a transition to SaaS catalysts, accompanied with the shift from the 
technology expertise focus to the business process expertise (Shultz, 2007).  Shultz defines SaaS 
catalyst as [] company or even individual that helps users or customers to select the best 
possible SaaS application for their company; SaaS catalyst does not produce the SaaS software, 
Hardware 
provider
Software 
infrastructure 
provider
Network 
service 
provider 
Independent 
software 
vendor
Business 
process 
outsourcer
Application 
service 
provider 
Customer
20 
 
but helps customers to implement such systems or helps customers to adjust business processes 
with new software (Shultz, 2007, p.270). 
2.2.3. Target customer 
The answer to the question Which customers to target within the SaaS ecosystem? is difficult 
to find. Simultaneously, industry is full of contradictories: Gartner claims that SaaS based 
solutions are meant for SME's (Bitterer et al., 2008), while companies as Toyota Motor Europe, 
BARCO International, the Haagen-Dazs Shoppe Company, O2 and many other international 
firms do use the services provided by the Salesforce.com
6
. In our quest for this paradox we 
found out that generally related terms as SMEs or large enterprises are not applicable as a 
description for SaaS' target customer. It is the amount of potential users of a certain application 
(and the associated TCO and annual costs per employee) that prescribes whether a customer is 
going to adapt a SaaS-based solution or not. A general profile of SaaS vendor's customer 
constitutes of the following elements: 
 As Bessemer's Cloud Computing Law number six states [] by definition, your sales 
prospects are online (Botteri et al., 2010, p.9). Selling a solution that requires an internet 
connection and a web browser for access, means that prospects are online. (Botteri et al., 
2010) 
 Firms that do not have strong internal IT support (as SME) or firms where IT 
department is concentrated on core capabilities, while peripheral functions can be  
outsourced to SaaS providers (The Target Customers for SaaS, 2009). 
 Firms that do not have the resources for internal IT support (as SME) and cannot 
afford commercial licensed package, MS Windows Server, MS SQL Server or Oracle, 
etc. 
 The user base (for example for Google Applications it is constrained to 3000 users 
(Savings Calculator, 2010)) is relatively small (The Target Customers for SaaS, 2009). It 
seems logically, that is it economically irresponsible to invest and elaborate complete 
internal IT unit in order to support only few collaborators.    
                                               
6 For the whole list of Salesforce.com's customers visit URL: <http://www.salesforce.com/customers/>  
21 
 
In line with "Bessemer's Top 10 Laws for Cloud Computing and SaaS" the members of 
SandHill.com
7
 elaborated Ten Laws for SaaS Sales & Marketing Success. The major 
conclusions ensuing from SandHill.com's article are the conditions that determine which 
customers should be selected and which should be abandoned (Chase et al., 2009). It boils down 
to the stipulations here below. 
 If (1/3 of the) Customer Lifetime Value (CLV) accedes Customer Acquisition Cost 
(CAC), then prospect should be considered as a potential valuable customer (see FIGURE 
7). (Shamia, 2008) 
 If (1/3 of the) CLV does not cover the CAC, this type of prospects should be neglected 
(see FIGURE 8). (Skok, 2009) 
 And if the customer is selected, following CAC ratio calculations, the investment (made 
on customer in function of sales and marketing) should be recovered in less than twelve 
months. (Skok, 2009) 
 
 
FIGURE 7: WELL BALANCED BUSINESS MODEL (Skok, 2009) 
 
 
FIGURE 8: OUT OF BALANCE BUSINESS MODEL (Skok, 2009) 
                                               
7 SandHill.com is the only online resource developed exclusively for enterprise software executives. The site 
delivers strategic news, opinion, research and networking opportunities to more than 10,000 CEOs, COOs, CFOs, 
CTOs, CMOs, VPs of Engineering, R&D, Services & Support, Venture Capitalists and members of the software 
industry eco-system. URL: <http://www.sandhill.com/>  
22 
 
 
In the following paragraphs we specify how average Customer Lifetime Value and the SaaS 
Customer Acquisition Costs are established.   
 Calculation of Lifetime Value of a Customer (Dunham, 2009; Botteri, 2007) 
 =     ( + ) 
Customer's Lifetime Value is the ability to monetize on a customer, and consequently is 
the difference between Net Present Value (NPV) of Annual Recurring Revenue (ARR), or 
recurring profit streams, and Costs to Acquire (CtA) and Maintain (CtM) a customer. 
Depending on the firm's maturity, lifetime' period is assumed to be 3 to 5 years, if SaaS 
vendor has no customer history; and is depicted from churn rates, if SaaS vendor can 
statistically determine it.   
Annual Recurring Revenue (ARR) is the expected future (annual) earnings streams 
associated with a customer. (Cowan, 2009) 
Costs to Acquire (CtA) include all expenses during a certain period that origin from sales 
and marketing activities. The period is in function of Time to Close, matching this way 
the acquisition expenses and the customer gaining. 
Costs to Maintain (CtM) is self explicatory, and covers all expenses necessary to 
maintain a customer. It includes hosting charges, hardware and software renewal, 
support, staff operations and outside services required to maintain customer instances 
outside of sales, marketing, R&D, and product development.  
 Calculation of the average Customer Acquisition Cost 
 
 =  
   
   
 
 
Average Customer Acquisition Cost (CAC) over a given period is a ratio between costs 
of sales and marketing, including salaries and other headcount related expenses, and the 
number of customers that a SaaS vendor acquired in that period. (Skok, 2009) 
Important metric associated with the average Customer Acquisition Cost is the CAC 
ratio, which serves as an objective benchmark of future value creation.  
 
23 
 
  (+1) =  
    (+1) 
    ()
 
 
[] The CAC ratio determines the payback time on sales and marketing investment. 
(Botteri, 2009, p.2) For example CAC ratio of 0.5, requires two years in order to pay the 
investment back.  
From our subsequent analysis on profitability and viability of firms within SaaS 
ecosystem we discovered the paradox between high revenue and low or negative 
profitability (supra, p.34). Surprisingly, what appeared from the market research is that 
predictor for the firm's profitability is not the revenue, but the (gross) margin that can be 
realized on customers, well represented in the CAC ratio.  
This leads us to the conclusion that the answer to profitability lies in the margin that a 
firm can realize on its customers and whether it is able to find the right balance between 
CAC and CLV values (see FIGURE 9).  
  
 
 
 
 
 
 
 
 
FIGURE 9: BALANCING BETWEEN CAC AND CLV VALUES (Skok, 2009) 
 
24 
 
2.3. 
Infrastructure 
2.3.1. Key activities 
One of the important issues to consider when regarding the possibility of offering the application 
in the form of a service instead of traditional on-premise software is what kind of infrastructure 
is required in order to successfully deliver the software to the customers.  There are three major 
key considerations that have to be taken into account by the software vendor during the 
infrastructure set-up process (The Infrastructure Behind SaaS, 2009).  
Seen the fact that the delivery of the service is accomplished through a network, the first key 
activity is the provision of the continuous connectivity between the provider, the software and the 
customer. 
Secondly, the software provider must guarantee the business continuity by setting up the required 
network, server and storage infrastructure.  
Finally, the SaaS supplier is responsible for the assurance of the security during the service 
delivery and data storage, which implies that the measures like backup, disaster recovery and 
appropriate authentication policies are undertaken.  
2.3.2. Key resources 
As explained in the beginning of this chapter (supra, p. 8), key resources imply the crucial 
tangible or intangible assets, which are necessary for an enterprise to create and offer a value 
proposition, reach markets, maintain relationships with customers, and  generate revenues.  
Keeping in mind the three key issues, mentioned here above and taking into account the virtual 
delivery aspect of the SaaS business model, the key resources are actually represented by the 
appropriate composition of the logical architecture, the choice of the most suitable maturity 
level, the arrangement of the proper data-architecture and authentication system. 
a. Logical architecture 
Coming back to the definition of Software as a Service, given in the previous chapter (supra, 
p.5), one may already know that SaaS is build up of three major layers (see FIGURE 10), namely 
infrastructure layer (IaaS), application platform layer (PaaS) and application layer. Let us take a 
closer look at each layer apart.  
25 
 
 
FIGURE 10: SAAS ARCHITECTURE COMPONENTS (Zhen, 2008) 
 Infrastructure Layer or hardware layer consists of traditional computing and networking 
resources, including data center, hardware, servers, network equipment and application 
programming interface (API), which are all required to support operations. 
 For the efficient and effective deployment of the recourses in the infrastructure layer, the 
latter must be enriched with some additional middleware, which composes the Application 
Platform Layer. This second layer incorporates specific tools (e.g. Operating System, 
Application Server, programming language, etc.) that are responsible for the integration of 
and interaction between the infrastructure components and that support the delivery and 
development of the postulated software application as well. Furthermore, the middleware 
(e.g. MySQL) is crucial for the successful data integration in the management of the database 
systems.  
 Finally, there is an Application Layer, covering the actual development, commercialization 
and delivery of the software application.  
b. Maturity model 
Next to the three key basic considerations, namely connectivity  business continuity  security, 
which have to be kept in mind by the SaaS architect during the development of the required SaaS 
infrastructure, the SaaS architect must also decide on the design of the SaaS application, 
determining the most appropriate maturity level (see FIGURE 11). The choice of the suitable 
maturity level depends on how scalable, multi-tenant-efficient and configurable the SaaS 
application must be in order to meet all the functional requirements, defined by the developers 
and requested by the customers.  
26 
 
FIGURE 11: FOUR LEVEL SAAS MATURITY MODEL 
(Chong & Carraro, 2006a) 
 Scalable application is able to handle and to support the required quality of service as the 
system load increases. In other words, it is meant to use application resources in a more 
efficient and effective way.  
 In a multi-tenancy environment, multiple customers share the same application, running 
on the same operating system, on the same hardware, with the same data storage 
mechanism. The distinction between the customers is achieved during application design, 
so that customers do not share or see each other's data. (Multitenancy, 2010) 
 Configurable application allows a certain level of customization via metadata services, 
which are "[] responsible for managing application configuration for individual 
tenants" (Chong & Carraro, 2006a, p.12). 
In the paper Building Distributed Applications: Architecture Strategies for Catching the Long 
Tail, Frederick Chong and Gianpaolo Carraro worked out a SaaS maturity model, pointing out 
that "[] maturity isnt an all-or-nothing proposition" (Chong & Carraro, 2006a, p.9). It means 
that a SaaS application can meet all the necessary functional requirements, without possessing all 
the three attributes, stipulated above. Dependent on technical and business preferences and 
requirements of the SaaS developers and customers, the SaaS architect must decide which of the 
three attributes must characterize the application and consequently choose between four distinct 
maturity levels (see FIGURE 11). 
 
 
 
 
 
 
 
 
 
 
 
 Level I: Ad Hoc/Custom 
This maturity level is comparable to the traditional Application Service Provider (ASP) 
business model, in that "[] each customer has its own customized version of the hosted 
27 
 
application and runs its own instance of the application on the host's servers" (Chong & 
Carraro, 2006a, p.10). 
 Level II: Configurable 
The second maturity-level provides greater program flexibility through configurable 
metadata, so that many customers can use separate instances of the same application 
code. This allows the vendor to meet the different needs of each customer through 
detailed configuration options, while simplifying maintenance and updating of a common 
code base. (Software as a Service, 2010) 
 Level III: Configurable, Multi-Tenant-Efficient 
By adding the multi-tenancy attribute to the previous level, SaaS architect increases the 
efficiency of the resources exploitation by hosting a single instance, which serves all the 
customers. In order to ensure that the data of each customer are kept apart from other 
customers' data, SaaS provider must elaborate appropriate authorization and security 
policies. A major disadvantage of this approach is the limited scalability of the 
application. This poor scalability can eventually be improved by scaling up or, with other 
words, by switching to a more powerful server.  
 Level IV: Scalable, Configurable, Multi-Tenant-Efficient 
If scaling up measures, undertaken on the previous level in order to positively influence 
the application's scalability, cannot be accomplished in a cost-effective way, the SaaS 
architect must consider the implementation of the highest maturity level. At this level, the 
scalability is added through a multitier architecture supporting a load-balanced farm of 
identical application instances, running on a variable number of servers. The provider can 
increase or decrease the system's capacity to match demand by adding or removing 
servers, without the need for any further alteration of applications software architecture 
(Software as a Service, 2010). 
c. Data-architecture 
One of the major differences of SaaS with on-premises software is the fact that all customers' 
data, used and processed during the exploitation of the application, is saved at the database 
system of the software provider.  
28 
 
 
FIGURE 12: VARIOUS DATA ARCHITECTURES OF SAAS (Chung, 2008) 
As can be seen in FIGURE 12, the latter has a choice between three possible data architectures 
(Chung, 2008): 
 The software vendor provides each customer with isolated database, which is not 
accessible by other customers.  
 Each customer is attributed to a personal isolated scheme, stored in the common 
database.  
 Each customer has a personal customer-ID, attributed to the shared schemes and stored 
in the common database. 
The choice of the appropriate data-architecture depends on several business and technical 
considerations, listed below (Chong, Carraro, Walter, 2006): 
 Economic Considerations 
In order to make a right decision on the appropriate data-architecture, a trade-off must be 
made between time-to-market on the short term and economies of scale on the long run 
(see FIGURE 13). If it is critical to bring the application to the market as soon as possible, 
the isolated approach would be the best solution, in addition requiring fewer funds than 
the shared alternative. Otherwise, the shared database solution entails larger development 
effort due to the complexity of the system, resulting in higher initial cost. However, on 
the long term the SaaS provider benefits from the economies of scale by supporting a 
large amount of tenants per server, which entails lower operational costs.  
29 
 
 
                                            FIGURE 13: COST OVER TIME FOR A PAIR OF SAAS APPLICATIONS (Chong et al., 2006) 
 Security Considerations 
Seen the fact that all the customers' data is stored externally from the enterprises, the 
customers will have high expectations about the security. Consequently, strong data 
safety must be insured by the system and guaranteed in the Service Level Agreements 
(SLAs).  From the architectural point of view, both approaches can provide a suitable 
level of security, although the shared data-architecture requires the employment of more 
sophisticated design patters. 
 Tenant Considerations 
As presented in FIGURE 14 the data architecture decision is affected by the number, 
nature and needs of the tenants in various ways.  
 
FIGURE 14: TENANT-RELATED FACTORS AND HOW THEY AFFECT  
"ISOLATED VERSUS SHARED" DATA ARCHITECTURE DECISIONS (Chong et al., 2006) 
o It is very important to make a sound estimation of the number of tenants the SaaS 
provider is expecting to target. Given the fact that forecasts are always wrong, F. 
few 
many 
many 
few 
30 
 
Chong et al. advise to "[] think in terms of orders of magnitude:  are you 
building an application for hundreds of tenants? Thousands? Tens of thousands? 
More?" (Chong et al., 2006, p.6). The larger the expected customer base, the 
more likely it is to consider a more shared approach.  
o Furthermore, if the SaaS provider expects that the majority of the customers will 
store very large amounts of data, the isolated database option would be the best 
solution.   
o As in the case of the number of tenants, the larger the estimated amount of end 
users per tenant, the more suitable an isolated approach seems to be in order to 
meet the needs and requirements of those end-users. 
o Finally, if the SaaS-vendor considers offering some per-tenant value-added 
services as for example per-tenant back-up and restore capabilities, the more 
isolated option provides easier and less sophisticated implementation procedures.  
d. Authentication system 
As already mentioned in the beginning of this chapter (supra, p.24), it is very important to 
develop a decent authentication system, required for the secure provision and authentication of 
the user accounts. Dependent on the purpose of application and the customers' and end-users' 
needs, the SaaS designer may opt either for centralized or decentralized authentication system 
(Chong & Carraro, 2006a).    
 As can be seen on FIGURE 15, a centralized authentication system requires a relatively 
simple authentication infrastructure, which does not involve any changes to the 
customers' infrastructure.  
 
FIGURE 15: CENTRALIZED AUTHENTICATION SYSTEM (Chong & Carraro, 2006a) 
31 
 
With this approach, a central user account database, which serves all application clients, 
is managed by the software provider. The actual authentication is executed by the 
application through the verification of the provided credentials on the validity issue 
against the central directory.  
 In a decentralized authentication system, a federation server8 is installed within the 
customer's network that interfaces with the customer's own enterprise user-directory 
service. This federation server has a trust relationship with a corresponding federation 
server located within the SaaS provider's network (see FIGURE 16). As described in the 
paper Software as a Service (SaaS): An Enterprise Perspective "[]When an end user 
attempts to access the application, the enterprise federation server authenticates the user 
locally and negotiates with the SaaS federation server to provide the user with a signed 
security token, which the SaaS provider's authentication system accepts and uses to grant 
the user access" (Chong & Carraro, 2006b, p.14). 
This decentralized approach is ideal in case single sign-on
9
 (SSO) is important, because 
authentication is handled behind the scenes, and it does not require the user to remember 
and enter a special set of credentials. 
 
FIGURE 16: DECENTRALIZED AUTHENTICATION SYSTEM (Chong & Carraro, 2006a) 
                                               
8 By creating a federation server, one provides a means by which the organization can engage in web single-sign-
based communication with another organization (that also has at least one federation server) and, when necessary, 
with the employees in own organization (who need access over the Internet). 
9 Single sign-on (SSO) is a property of access control of multiple, related, but independent software systems. With 
this property a user logs in once and gains access to all systems without being prompted to log in again at each of 
them. (Wikipedia) 
32 
 
However, the decentralized authentication system requires individual trust relationship 
with each customer, having his/her own federation service, leading to greater complexity 
and as a consequence higher operating costs compared to the centralized approach.  
There also exists the possibility to combine both approaches by using the centralized 
authentication system for smaller tenants, while granting the decentralized system to the larger 
companies, who are ready to pay extra fee for the single sign-on experience.  
2.3.3. Key partnerships 
In addition to the three key considerations (economic, tenant and security), the choice of the 
most appropriate maturity level and data-architecture, the final very important issue to be 
considered by the independent software vendor is whether to build and maintain each layer on 
its own or to outsource some or all layers in order to focus on the core capabilities.  
In the former case, the Independent Software Vendor opts for the vertical integration (see 
FIGURE 17), resulting in considerable initial investment and ongoing maintenance and personnel 
costs. 
 
If software vendor opts for outsourcing option, the choice between two options exists. Firstly, it 
is possible to go in partnership with the providers of IaaS (e.g. Cisco) and PaaS (e.g. 
Amazon.com) such that only the third application layer is developed internally (see FIGURE 18).  
 FIGURE 17: VERTICALLY INTEGRATED SAAS-VENDOR 
(Chung, 2008) 
33 
 
 
FIGURE 18: OUTSOURCING OF IAAS AND PAAS (Chung, 2008) 
Secondly, there also exists an opportunity to act as a SaaS-integrator, outsourcing all the three 
layers and ultimately focusing on the final delivery of the service to the customers (see FIGURE 
19). The choice of the appropriate architecture model depends on the goal and available 
resources and capabilities of the software provider.  
 
FIGURE 19: ISV AS SAAS-INTEGRATOR (Chung, 2008) 
34 
 
2.4. Finance 
In the business literature many authors
10
 condense a business model to [] commercial 
relationship between a business enterprise and the products and/or services it provides in the 
market (Hawkins, 2001, p.3). Simplification as these allows focusing on the core elements of 
the firm's profitability: the cost aspect and the revenue generation potential. The former 
element must be mastered in the most efficient and effective way, while the potential of the latter 
must be utterly exploited, without leaving any value on the table. Those two factors are 
extremely important in the SaaS context primarily due to the novelty aspect of SaaS business 
model and its innovation ecosystem; and consequently the lack of experience of doing business 
under these new circumstances. Cost and revenues must be structured in such a way that a 
business model is able to sustain itself in the long term.       
2.4.1. Cost structure 
Cost elements play a two-fold role in the SaaS provider survivorship. On the one hand they 
determine the initial investments and the costs associated with services' marketing and delivery. 
On the other, cost structure stipulates the (minimum) price of the offered services, this way 
creating or ruining firm's competitive advantage and profitability. Recent interviews in 
InformationWeek
11
, with industry leaders (e.g. SAP
12
 CEO Bill McDermott, SAP co-CEO Leo 
Apotheker), unveil that [] it is difficult to make money on SaaS
 
(Weier, 2009).  At the same 
time success stories of NetSuite
13
, Workday
14
 or Salesforce.com
15
 report double-digit revenue 
increases (see FIGURE 20) corroborated with recent Reuter's update: 
[] Fourth-quarter revenue at the software maker (Salesforce.com) - which 
competes with SAP AG, Microsoft Corp, Oracle Corp and NetSuite In - rose 22 
percent to $354 million, compared with the average analyst estimate of $342 
million. (Finkle, 2010) 
                                               
10 As for example Afuah, A. and C. Tucci (2003) in Internet Business Models and Strategies, Boston, McGraw 
Hill Rappa, M. (2001) in Managing the digital enterprise - Business models on the Web, North Carolina State 
University. 
11 InformationWeek.com delivers breaking news, blogs, high-impact image galleries, proprietary research as well as 
analysis on IT trends, a whitepaper library, video reports and interactive tools, all in a 24/7 environment. URL: 
<http://www.informationweek.com> 
12  SAP currently focusing on SME-businesses with Business ByDesign software product offered on SaaS-bases 
13 More on the company is to find on <http://www.netsuite.com/portal/home.shtml> 
14More on the company is to find on  <http://www.workday.com/> 
15 More on the company is to find on <http://www.salesforce.com/eu/> 
35 
 
 
FIGURE 20: TOTAL RECOGNIZED REVENUE GROWTH (2006 VS. 2005) (Nair, 2008) 
 
However, revenue (-growth) is a necessary, but not a sufficient condition for the sustainability 
and viability of a firm. Profit is the key to success. Surprisingly, but even listed and best-of-breed 
vendors in the SaaS industry (e.g. NetSuite, Rightnow Technologies Inc, China.com Inc, Epicor 
Software Corporation, etc.) are still suffering from negative profit numbers (see FIGURE 21), and, 
in some cases, even negative EBITD (see APPENDIX 2.1: Financial position of quoted SaaS 
companies). 
16,5%
11,8%
9,8%
23,1%
7,6%
5,0%
70,8%
71,0%
13,9%
66,1%
All 
Respondents
Profit 
Leaders
Recognized 
Revenue 
$20M -
$80M
Recognized 
Revenue 
$81M -
$120M
Perpetual 
License > 
50%
Perpetual 
License 
100%
SaaS > 50% SaaS 100%
Public 
Companies
Private 
Companies
36 
 
 
FIGURE 21: NET INCOME BEFORE TAXES AS A PERCENTAGE OF RECOGNIZED REVENUE (Nair, 2008) 
To understand this paradox (of high revenues but negative profitability), (pure) SaaS vendor's 
(Salesforce.com) cost structure is compared to the one of the traditional (licensed) software 
vendor (SAP) (Why Do SaaS Companies..., 2009). In general, the business model ontology 
distinguishes following elements (Matre & Dunod, 1999):  
 Cost of goods sold and operating costs, which are further decomposed in research and 
development (R&D)  
 Sales and marketing (S&M)  
 General and administrative (G&A) expenses 
In addition, SaaS providers will have [] additional operational costs of hosting, disaster 
recovery, system management and so forth, much of which is amortized as the number of users 
grow (Desisto & Paquet, 2007, p.3). 
 Sales and Marketing costs 
A widespread assumption in the industry is that SaaS vendors enjoy lower operational 
costs (as a percentage of sales) in particular sales and marketing and R&D.  
However, our observation shows the opposite. Salesforce.com spends almost 54 cents to 
generate 1 dollar in revenue (expected yearly growth 44%), while SAP only 29 cents 
(expected yearly growth 17.5%). Our finding is also supported by KippsDeSanto&Co 
4,6%
8,3%
-2,4%
6,3%
6,3%
5,5%
0,6%
-2,4%
4,7%
-9,4%
All 
Respondents
Profit 
Leaders
Recognized 
Revenue 
$20M -
$80M
Recognized 
Revenue 
$81M 
- $120M
Perpetual 
License > 
50%
Perpetual 
License 
100%
SaaS > 50% SaaS 100%
Public 
Companies
Private 
Companies
37 
 
study (Yim, 2009) where 20 publicly-traded SaaS companies and over 110 publicly-
traded on-premise software companies were compared (see FIGURE 22). 
 
FIGURE 22: MEDIAN S&M AS % OF REVENUE (Yim, 2009) 
Another interesting study by River Cities Capital Funds states that [] sales and 
marketing is typically the largest and most widely variable expense component of a SaaS 
companys cost structure, ranging from approximately 19%-500% of revenue below $30 
MM in revenue (2009 Software as a Service Valuation.., 2009, p.15). However refining, 
that concrete percentage allocation depends on factors as: 
o Stage of a company's development (S&M percentages decline as the business 
matures) 
o Average selling price, which is correlated with the number of customers. The 
higher the average selling price, the smaller the customers' pool, the lower S&M 
percentages for given revenue level.  
o Accepted GAAP standards and practices ([] sales and marketing costs 
remain persistently high as Generally Acceptable Accounting Principles (GAAP) 
force recognition of expenses in advance of subscription revenue, as well as the 
continual requirement to replace churning customers (Bolick, Gilbert, Sood, 
2006).  
 
 
 
36,1%
35,2%
36,5%
36,2%
28,2%
27,2%
28,1%
26,9%
0%
5%
10%
15%
20%
25%
30%
35%
40%
2006
2007
2008
LTM
SaaS
On-Premise
38 
 
 General and Administrative costs 
Following nowadays philosophy of elimination of non-production related costs and 
efficiency frontier approximation, both set-ups (SaaS and on-premise) have comparable 
general and administrative expenses. Salesforce.com spends 16 cents for 1 dollar of 
revenue and SAP 17 cents. However, the industry's amount spent (between 19% and 
13%) is in function of the firm's revenue (Comparing Software Operating Ratios..., 
2009) (the greater a firm's revenue, the lower G&A expenses), where G&A expenses 
represent [] expenses to manage the business (e.g. officer salaries, legal and 
professional fees, utilities, insurance, depreciation of office building and equipment, etc.) 
(Income Statement, 2010)). 
The above statement may sound contradictory, but taking into account that the younger 
SaaS vendors are confronted [] with high, upfront overhead costs and complexity of 
managing SaaS accounting and planning (A Closer Look at G&A, 2008, p.1), while 
generating only modest revenues, what leads to comparable conclusion.  
 Research and Development costs  
Simplicity, introduced by the SaaS delivery model, reduces the R&D expenditures 
compared to the off-line software providers for several reasons. 
o While on-premise provider's [] heterogeneous costs including hardware, 
operating systems, databases and middleware requirements, as well as the 
multiple versions of each possibility, must be supported. (Desisto & Paquet, 
2007, p.2); SaaS providers incur lower expenses as they have to develop, test and 
support fewer combinations of requirements.  
o SaaS vendors [] obtain better visibility into customers usage patterns and 
feedback, which enables the rapid development cycles (River Cities Capital 
Funds, 2009).  
With result that Salesforce.com spent 10% of revenue, opposite to 21% expended by 
SAP. The median industry values (see FIGURE 23) validate the rationale, but with less 
remarkable differences.   
39 
 
 
 
                    FIGURE 23: MEDIAN R&D AS % OF REVENUE (Yim J, 2009) 
However, again median results must be taken with a grain of salt, as industry's 
percentages range (between 0% and 57%) in function of: 
o Development stage (the more mature a solution, the lower R&D expenses) 
o Offering's level of technical complexity (the higher the inherent solution 
complexity, the higher the required R&D investments).  
 Cost of revenue16 
Less obvious and less known expense is the cost of revenue. Generally related to the 
service delivery to the end-customers, including bandwidth, hardware (amortized) 
& hardware related expenses, operations staff (if applicable), storage, backup & recovery, 
licenses, co-location (real estate, electricity, cooling, etc.), product support. In order to 
provide a reliable, stable, customizable and robust business application, SaaS vendor 
must make a considerable investment. 13% of revenue as yearly expense for 
Salesforce.com, while 22% for SAP. However, percentages for Saleceforce.com are more 
an exception, than an industry rule where percentages fluctuate between 24% (Taleo
17
) 
and 41% (DealerTrack
18
) of the revenue, biasing the total representation (Schuller, 2007).    
                                               
16 Taking into account that software is provided on service bases, the traditional (associated) accounting name 
COGS (cost of goods sold) is inappropriate.   
17 Taleo offers on demand talent management solutions to assess, acquire, develop, and align the workforce for 
improved business performance.URL: <http://new.taleo.com/> 
18 DealerTrack offers intuitive and high-value software solutions, which enhance efficiency and profitability for all 
major segments of the automotive retail industry, including dealers, lenders, OEMs, agents and aftermarket 
providers.URL: <https://www.dealertrack.com/>   
16,0%
15,2%
13,6%
13,1%
16,5%
15,6%
15,7%
15,7%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
2006
2007
2008
LTM
SaaS
On-Premise
40 
 
 
 Capital expenditures 
In addition, SaaS vendors' capital expenditure (investments in infrastructure in order to 
host customer's data) varies between 2% to 15% of revenues. (2009 Software as a 
Service Valuation, 2009)   
2.4.2. Revenue streams 
Before proceeding with the discussion on the possible revenue streams within SaaS business 
model, we follow fostered approach. We will first provide the theoretical background on the 
revenue model in general and its constituent units, subsequently focusing on the practical realm 
of the SaaS day-to-day practices.  
In the business model ontology, following definition has been outlined: [] revenue model 
measures the ability of a firm to translate the value, it offers to its customers, into money and 
incoming revenue streams. The revenue model can be composed of different revenue streams, 
which can all have different pricing mechanism. The revenue streams and pricing elements 
define what mechanism is used to determine the price of the value offered (Sixteen Ventures, 
2009).  
Within SaaS context it is important to underline elements as firm's ability to translate the 
customer's value into revenue and mechanism used to determine the price. Given the large 
variety of substitute products under on-premise (licensed) software- and hosted solutions, SaaS 
providers are under constant pressure of superior value delivery to its customers.  
Nevertheless, it is erroneous to think that SaaS providers have (monthly) subscription fees as 
the only revenue source. In the presentation SaaS Revenue Modelling: Details of the 7 Revenue 
Streams, 16 Ventures discerns 7 different revenue streams that a SaaS provider can generate 
(SaaS Revenue Modelling, 2010). The explanation, behind this revenue potential, lies in the 
different (compared to legacy software) approach between producers, consumers and ecosystem; 
and different relationship between marketing, technology, revenue model, intellectual property 
and network centricity. 
Potential revenue streams are reflected in FIGURE 24.  
41 
 
 
FIGURE 24: SAAS POTENTIAL REVENUE STREAMS (SaaS Revenue Modelling, 2010) 
Revenue streams are divided in three groups in function of the revenue stream scalability index, 
distinguishing scalable (ecosystem, recurring, ancillary, network effect), less-scalable (products, 
advertising, services) and not scalable in the most cases (advertising). [] Scalability refers to 
margins per revenue stream: the more a revenue stream can benefit from economies of scale and 
improve margins with growth, the more "scalable" the revenue stream (SaaS Revenue 
Modelling, 2010, slide 25). 
Recurring revenue stream represents the most traditional revenue source which is represented 
for example under subscription-based
19
, usage-based
20 
or transaction-based
21
 payments for the 
services. It is predictable in terms of receipt and time, suited for up-selling and [] flexible in 
pricing for different markets (SaaS Revenue Modelling, 2010). Yet, the downsides are lower 
collected amount (compared to up-front payment from licensed software model), sustainability 
highly dependent on churn and customer retention rate (constantly focusing on the growth of 
CLTV
22
 / ARPU
23
) and high initial CAC
24
 ratio, eroding vendor's creditworthiness.  
Revenues coming from SaaS ecosystem itself, derivate from the relationships between [] the 
users, developers and stakeholders [] functioning together with all of the non-physical factors 
of the internet (Lehmann, 2008, slide 7) such as affiliate sales, channels, APIs (application 
programming interface), etc. The ecosystem improves the value for the partners, and at the same 
time exposures firm's services to ancillary and adjacent markets, however forewarning for 
unwanted interdependencies and customer's value chains non-transparency. 
                                               
19 As for example HRM solutions offered by Workday; URL: <http://www.workday.com/solutions.php>  
20 As for example, solutions offered by Savvis, Inc;  
URL: <http://www.savvis.net/en-US/Solutions/Software_Service/Pages/Home.aspx>  
21 As for example, solutions offered by Paynet Secure; URL: <http://www.paynetsecure.net/saas-billing.php>  
22 CLTV (Customer Life Time Value) = the net present value of the recurring profit streams of a given customer 
less the acquisition cost (Johnson, 2008)  
23 ARPU (Average Revenue per User) = a measure of the revenue generated per user or unit. Average revenue per 
unit allows for the analysis of a company's revenue generation and growth at the per-unit level, which can help 
investors to identify which products are high or low revenue-generators. (Johnson, 2008) 
24 CAC (Customer Acquisition Cost) = determines the payback time on sales and marketing investment. (Botter, 
2009)  
42 
 
Ancillary revenues can be defined as direct derivative from the core offer. Within SaaS setup 
customers are not required to invest in own hardware and infrastructure, but they are still obliged 
to make initial system set-up or installation efforts in order to run the system. For these services, 
SaaS vendor can charge an additional (processing-, setup-, etc.) fee or provide a discount, on a 
service with no or limited underlying cost, in order to attract potential new customers. Ancillary 
revenues can be considered autonomous, as long as the set-up costs are detached from the 
charged monthly payment.  
Revenues originating from the network effect are the virtue of the knowledge generation and 
information trading between consumers, customers and ecosystem. The abstract description of 
this kind of revenues is materialized in the aggregate data reports, industry benchmarks or API's. 
In other words network effect benefits originate from the SaaS installed base and are bigger as 
the consumers' pool grows. Collection of the information and standardization of the business 
practices adds value to the ecosystem in general and leverages ecosystem's partners to develop 
reports that [] increase exponentially in value as usage of the system grows (SaaS Revenue 
Modelling, 2010). Yet, the risk of vendor's intentions disclosure must be taken into account as 
potential opportunity cost. Disregarding the fact that published information might be (mis-)used 
by the competitors, might invade vendor's competitive advantage. 
Under products revenue category fall all the supporting (physical) services the vendor offers in 
order to make customer's system operational. It is unusual for SaaS providers to sell/install 
equipment, devices, appliances or hardware (partially due to additional overhead and support 
costs; and single-tenant set-up), but exceptions do exist
25
. The advantage in this case is that 
vendor ties the customer, assuring this way sustainability and long term revenue generation with 
higher margins. 
Notwithstanding that early (Phase I) SaaS-based solutions as Salesforce.com are obvious in use 
and self-explicable user interface; new generation (Phase III)
26
 requires much more (individual) 
counselling and support. This lays the foundation for additional revenue stream, including 
content creation, training, etc. However, one-to-one or one-to-few approach might financially 
penalize the SaaS-vendor due to the scalability and efficiency loss. 
Finally, the seventh potential revenue stream within SaaS business model is based on 
advertising. According to Sixteen Ventures, revenues from ads are preferably to consider only 
                                               
25 As for example products/services offered by Pemrose, URL: <http://pemrose.com/default.aspx>  or Single Point 
of Contact, URL: <http://www.singlepointoc.com/index.asp> 
26 An example of Phase III representative is Kinaxis with SCM SaaS solution,  
URL: <http://www.kinaxis.com/supply-chain-customer-services/>  
43 
 
in the case when advertisement is the core business of the firm that provides SaaS-based 
solutions. For instance, Google Inc. provides free of charge (standard) Google applications
27
 
(e.g. Google Mail and Google Calendar, Google Docs and Google Sites), but sustains the 
viability through extensive advertisement incomes.   
2.4.3. Conclusion  
Financial structure of a SaaS business model offers a lot of opportunities (prosperous revenue 
streams), but at the same time contains underwater rocks (high operational costs, limited cash 
flow availability due to subscription mechanisms), this way slowing down or prohibiting positive 
profit generation.  
Most industry estimates suggest that SaaS companies require: 
 approximately 50% to 70% more capital (see FIGURE 25) to achieve cash flow breakeven 
(2009 Software as a Service: Valuation.., 2009)  
 1.75 times more revenue to hit profitability (Nair, 2008) 
 annual churn rates below 15% 
 margins in the 70%+ range  
 1.6 times more time to get liquid compared to on-premise software company counterparts 
(Nair, 2008) 
 
FIGURE 25: CASH BURN: SAAS VS. PERPETUAL MODEL (Gardner, 2008) 
 
                                               
27 More on Google Apps is to find on  <http://www.google.com/apps/intl/en-GB/business/index.html>  
44 
 
3. SaaS ecosystem 
For a potential or already existing ISV, who is considering the provision of SaaS, is of great 
importance to understand the principles of the SaaS business model, which we have pointed out 
in the previous part. Though, this understanding is not sufficient to enter and to succeed on the 
SaaS market and it must be enriched with the exhaustive analysis of SaaS ecosystem.  
As we have not found any definition for SaaS ecosystem, therefore we decided firstly to take a 
look at what is actually meant by the term ecosystem as such. As one can still remember from 
the courses of biology, the ecosystem is defined as "a complex set of relationships of living 
organisms functioning as a unit and interacting with their physical environment" (Basic terms 
of disaster risk reduction, 2003).  Starting from the world of biology and applying this definition 
to the world of Software as a Service, we have made an attempt to formulate our own descript ion 
of SaaS ecosystem, defining it as "a complex set of relationships of all SaaS enablers, users, 
developers and stakeholders functioning as a system and interacting in the physical and virtual 
SaaS environment".   
Analysing this definition, it becomes clear that the SaaS vendor or even maybe the potential 
venture capitalist, who considers investing in Software as a Service industry, must open up the 
internal borders of SaaS and take into account the role and the power of all parties and the 
influence of all the factors in the SaaS environment.  
From our point of view, Porter's Five Forces model, developed by Michael E. Porter
28
, would 
be the most appropriate one to accomplish the analysis of SaaS ecosystem and to assess the 
competitive intensity and therefore the attractiveness of a SaaS market.  
3.1. Porter's five forces analysis of SaaS innovation ecosystem 
In his model, Porter makes a distinction between five competitive forces, which may influence 
the attractiveness of a certain industry. These forces include three forces from 'horizontal' 
competition: threat of substitute products, threat of established rivals, and the threat of new 
                                               
28 Michael Eugene Porter (born 1947) is the Bishop William Lawrence University Professor at Harvard Business 
School. A leading authority on company strategy and the competitiveness of nations and regions, Michael Porter's 
work is widely recognized in governments, corporations, non-profits, and academic circles across the globe. His 
main academic objectives focus on how a firm or a region can build a competitive advantage and develop 
competitive strategy. One of his most significant contributions is the five forces analysis. 
45 
 
entrants; and two forces from 'vertical' competition: the bargaining power of suppliers and the 
bargaining power of customers (see FIGURE 26). (Porter Five Forces Analysis, 2010)  
Hereafter follows a comprehensive analysis of each of the five forces applied to the SaaS 
ecosystem.  
 
FIGURE 26: PORTER'S FIVE FORCES (Porter Five Forces Analysis, 2010) 
3.1.1. The threat of substitute products or services 
The first important issue to analyze, before entering the SaaS market, is the existence of the 
alternatives to the offering that the ISV is planning to provide to their prospective customers. 
During the exploration of the software delivery market, we have identified three major software 
delivery models as alternative to the SaaS offering. As can be seen from the TABLE 1 below, the 
customer can either prefer the traditional on-premise software, or switch to the alternative on-
demand solutions, as for example more outdated and less successful services offered by ASPs, or 
choose a hybrid solution in the form of Software plus Services, recently introduced by Microsoft 
Corporation.  
On-premises software 
ASP 
SaaS 
Software + Services 
TABLE 1: SOFTWARE DELIVERY MODELS 
46 
 
Furthermore, the SaaS vendor must keep in mind that the customers' choice is influenced by 
such factors as functionality, performance, price/quality considerations, switching costs, the ease 
of use and value of the software solution as perceived by the customer.  
a) On-premises software 
In the time that the internet craze has not yet entered the business and the public world in the late 
1990's, there existed only one way of delivering the software to the customers, namely selling 
the CD-ROMs with software under the software license agreement. In this case, the application 
is installed and run on the computers on the premises" of the person or organisation (On-
premise software, 2010). Dependent on the software's sophistication, the installation and the 
maintenance of the application is executed either by the independent software provider (e.g. 
MRP) or the customer him/herself (e.g. Microsoft Office). Consequently, the customer must 
possess the minimum knowledge of the information technologies or make the use of the IT 
professionals in order to install and to maintain the software. This means that the companies, 
which extensively use various applications as enablers or supporters of their business activities, 
need specialized personnel, who are responsible for the appropriate execution and support of IT 
infrastructure and activities.  
From the moment World Wide Web (WWW) became the integral part of our lives, there 
appeared the alternative for writing the software on the CD-ROMs. In particular, the providers of 
less sophisticated software (e.g. antivirus software) made the application available for download 
from the internet in the form of an executable file, which must then obviously be run and 
installed on the user's computer.  
 
FIGURE 27: ON-PREMISES SOFTWARE MODEL (Cloud computing, SaaS and SOA, 2009) 
Even though, many IT professionals and obviously the admirers of the on-demand software, 
characterize the traditional on-premises software as being old-style and out-of-date, it is still 
47 
 
widely preferred in banking, finance and defense sectors, where the ability to supervise and 
secure the data, which are owned and controlled locally, is required (On-premise software, 
2010).  
b) Application Service Providers 
At the end of the 1990's, the developments in the IT world and the popularization of the internet 
gave the birth to the new form of software delivery, called Application Service Provider (APS) 
Model. The core idea behind this model is to provide the application services via the Wide Area 
Networks (WANs) on a rental basis. Particularly, the ASP company hosts the application in 
secure centrally located servers and licenses it to multiple customers, using the principle of 
single-instant, single-tenant architecture (see FIGURE 28), resulting in some similarities with the 
first level of the SaaS maturity model (supra, p.25).  
 
FIGURE 28: ASP DELIVERY MODEL (Cloud computing,SaaS and SOA, 2009) 
As Lixin Tao
29
 argues in his paper Application Service Provider Model: Perspectives and 
Challenges, ASPs are driven by three separate trends, being selective outsourcing, application 
hosting and browser-based computing (Tao, 2000). (see FIGURE 29).  
 
FIGURE 29: THE INGREDIENTS OF ASP (Tao, 2000) 
                                               
29 Lixin Tao is a tenured computer science professor at Pace University in New York, a member of IEEE (Institute 
of Electrical and Electronics Engineers) and ACM (Association for Computing Machinery) 
48 
 
 Selective outsourcing  
In order to save the costs and to focus on the core activities, many companies tend to 
selectively outsource specific non-core and non-critical IT functions, ranging from data 
networking to application management. In parallel, this development [...] combined with 
a trend toward fixed and per-user pricing, often levied in the form of a monthly 
subscription" (Tao, 2001, p.3). Consequently, there appeared various forms of ASP 
offerings, as for example application outsourcing, systems management outsourcing, 
infrastructure outsourcing, whole-environment outsourcing and subscription outsourcing 
(Tao, 2001).  
 Application hosting 
Going back into the history of Internet, one would discover that initially access and 
connectivity services and hosting services as well were offered by the same Internet 
Service Provider. After some time, the ISP market was divided into several segments, 
resulting in various ISPs targeting particular services. Those ISPs, who focused on the 
provision of hosting services and who saw the potential in switching to more 
sophisticated Web hosting services as for example e-commerce or messaging effectively 
became the ASPs. In addition, the ASPs market was extended by other application 
software vendors, who provided the Internet-based applications and services using the 
hosting model as well. As a result, the market of hosting services was broken up in 
several categories: Internet Web server hosting, application server hosting, e-business 
services, and Internet infrastructure services (Tao, 2001). 
 Browser-based computing 
If in the beginning, the web sites were characterized as being static and providing only 
the content in the form of words and images, during the internet craze at the end of 
1990's the technology has already reached the appropriate maturity level , enabling the 
switch to more dynamic and interactive web sites. At the same time, "[...] a new 
generation of software vendors markets their applications as Web-based services, 
accessed directly over the Internet (Tao, 2000, p.3). Those two developments resulted 
in the appearance of new "browser-based computing" development, which in addition to 
the relevant content provides complex online applications, satisfying the needs of 
targeted web-site audience. L. Tao makes in his paper a distinction between the following 
browser-based computing categories: network-based application vendors, Internet 
49 
 
business services, vertical industry Web sites, Internet marketplaces, and enterprise 
extranets (Tao, 2001). 
As in the case of Software as a Service delivery model, ASP model is characterized by the multi-
layered channel that enables the delivery of the software to the customer (see FIGURE 30). 
 
 
FIGURE 30: ASP CHANNEL STRATIFICATION (Tao, 2001) 
At the first Network Services layer one can find the providers of basic communications (e.g. 
physical connections, routers and security applications), server centre resources (e.g. physical-
security and maintenance services) and value-added Internet Protocol (IP) services (e.g. VPN, 
firewalls, directory services, etc).  
Secondly, the operational and managing side of the APS model is situated at the next layer, 
containing the providers of the infrastructure, required to coordinate the network and to manage 
the systems (hardware and software), supply, operations and commercial aspects of the 
application delivery (e.g. billing, accounts management, customer support).  
Next stratum contains the vital ingredient of the ASP model, being the actual application service, 
specifically developed for the purpose or a ready-made packaged application, adapted for ASP 
delivery.  
Finally, the true ASPs are situated at the top of the chain. They create a complete service solution 
by packaging the software and infrastructure ingredients with business and professional services.  
Dependent on the goal, available resources and developed capabilities, some application 
providers opt for a vertically integrated model, owning and controlling every layer themselves, 
while others focus only on the final delivery and outsource the non-core activities. The choice of 
the appropriate level of integration depends on the trade off between the desired level of control, 
which is higher for the former model, and greater economies of scale, characterizing the latter 
alternative. (Tao, 2001) 
 
50 
 
c) Software plus Services 
Few years ago a new concept, called Software plus Services, was introduced into the software 
world by Microsoft Corporation. With its Software plus Services-principle, Microsoft tries to 
combine the flexibility of the hosted services with the power of client- and server software 
(Microsoft Cloud Strategy, 2010). In contrast to Software as a Service concept, which focuses 
on the software solutions delivered over the internet, Software plus Services address the 
internet services, combined with software, installed at the customer's location. As stated by Tim 
O'Brien, a Director Platform Strategy responsible for the development and the stating of the 
platform strategy at Microsoft: "You have to consider the Software plus Services as a hybrid 
approach, where the best of the software world is combined with the best of the service world" 
(Gandasoebrata, 2008, p.54).  
 
FIGURE 31: SOFTWARE DELIVERY CONTINUUM (Sangwell, 2007) 
The hybrid nature of Software plus Services principle is clearly represented on FIGURE 31, 
where Kevin Sangwell
30
 (2007) makes a distinction between: 
                                               
30 Kevin Sangwell is an infrastructure architect in the Microsoft Developer and Platform Group. He has held a 
number of technical and leadership roles in the IT industry for more than 16 years, including five years as a 
principal consultant in Microsoft Consulting Services. 
51 
 
 Traditional software, which refers to the applications installed on premises of the 
customer, such that only internal users have an access to the applications. 
 Building block services which are put in the cloud and provide low-level capabilities that 
can be consumed by developers when building a composite application.  
 Attached services that provide a higher level of functionality compared with building 
block services. Applications leverage attached services to add functionality.  
 Finished services which are analogous to full-blown applications, delivered over the 
Internet using the SaaS model.  
The new approach seems to be suitable when considering such advantages of on-premise 
software, as security, adaptability and control issues.  
d) Conclusion 
Although it may seem that there exist many software delivery alternatives, the greatest threat 
comes especially from the traditional on-premises software and this due to several reasons. 
Firstly, the potential customers are already familiar with the traditional software delivery model 
and most of the companies take a suspicious position against the on-demand solutions, especially 
when considering the security and data ownership issues. Secondly, the ASP model, which 
became popular in the late 90s, has almost left the software market due to the multi-tenancy 
possibility offered by SaaS. Finally, seen the recent nature of the Software plus Services concept, 
the companies are either not aware of its existence or do not see any benefits compared to the on-
premise software or SaaS.  
TABLE 2 below provides the reader with the comparison of SaaS to the alternative software 
delivery models, discussed in this part of our master dissertation. The business models were 
assessed on the following criteria: 
 The major costs, which accompany the implementation (investment in the required 
infrastructure) and the use of the application (up-front license cost and maintenance cost). 
The - symbol indicates that the cost is eliminated from the business model.  
 The channel, through which the application is available for use (private network, 
internet).  
 The control issues and data security concern, where + sign refers to the full internal 
control and data ownership.   
52 
 
 Customization capabilities indicate whether the application can be customized, 
dependent on the customer needs, and adapted to the changing business processes of the 
company (with the + symbol in case of the possible customization). 
 Scalability factor refers to the ability of the application to grow together with the 
organization, such that the increasing amount of data is processed appropriately without 
any negative effect on the processing time.  
 
On-premise 
ASP 
SaaS 
Software+Services 
COSTS Infrastructure 
investment 
+ 
- 
- 
+ 
Up-front license 
cost 
+ 
+ 
- 
+ 
Maintenance cost  
+ 
- 
- 
+ 
Availability 
Private 
network 
Internet 
Internet 
SW*: Private network 
SR**: Internet 
Control issues & data 
security 
+ 
- 
- 
+ 
Customization capabilities 
+ 
+ 
- 
SW:    + 
SR:     - 
Scalability 
- 
+ 
+ 
SW:    - 
SR:     + 
*SW = Software; **SR = Services 
TABLE 2: THE COMPARISON OF VARIOUS SOFTWARE DELIVERY BUSINESS MODELS 
 
3.1.2. The bargaining power of suppliers 
As stated previously (supra, p.32), the ISV has a choice between vertical integration and 
outsourcing of some or all architecture layers, dependent on the intended goals and available 
resources and capabilities. Consequently, more activities and/or layers to be outsourced, more 
suppliers or, more appropriately, enablers of the service there would be, what in turn results in 
higher dependence of the SaaS provider on the suppliers.    
As the reader may already know, there are three major enablers active in the cloud, that 
substantially influence the quality and reliability of the SaaS provision. Firstly, there are IaaS 
providers, who offer the computing and networking resources. Seen the emerging nature of the 
cloud services in general and IaaS market in particular, the latter one is characterized by the 
intense price competition, obliging the IaaS vendors to differentiate on type of service (Conry-
Murray, 2009). As a result, the SaaS provider benefits from the freedom of choice and dependent 
on the postulated objectives and functional, qualitative and quantitative requirements may either 
53 
 
go in partnership with famous IaaS rivals as Amazon.com, IBM, IT&T or less-known but at the 
same time less expensive IaaS providers like Rackspase, Savvis, Unisys and more (see APPENDIX 
3.1: 12 IaaS providers).  
Secondly, the ISVs can outsource the platform application layer to the PaaS providers, who 
offer the large-scale development platform for application developers. As in the case of the IaaS, 
the PaaS market is characterized by the growing trend as well.  The recent survey, conducted by 
the WinterGreen Research, showed that in 2009 the PaaS market was dominated by such players 
as IBM, controlling the 73% of the market share, followed by Oracle/BEA/Sun with 6% and 
Microsoft with 5% market share respectively (Curtiss, 2010). The other 16% is divided between 
various smaller players like Bungee Labs, sevenP, WaveMaker and more.  
Finally, if the ISV decides to limit the core activities to the final delivery and implementation, 
consequently becoming a SaaS-integrator, he must consider the partnership(s) with the SaaS 
developers/vendors. The services of SaaS-integrators are valued by the companies, which lack 
the necessary IT expertise, required to find and to implement the sophisticated SaaS solutions 
(Herbert, Ross, Karcher, 2010) as for example those offered by Salesforce.com. Consequently, 
the potential SaaS-integrators or already existing System Integrators (SIs), which consider the 
expansion into SaaS (e.g. Accenture, IBM, Deloitte, etc.), have to target the vendors of the more 
sophisticated SaaS solutions, like those offered by Salesforce.com, Amazon.com and Google 
Apps (see APPENDIX 3.2: SaaS-Integrators). 
To conclude, we can say that in general the potential IaaS and/or PaaS providers do not possess 
much power and this due to the rapid growth of the cloud services industry, which is in addition, 
is characterized by the tough competition. In case of the SaaS-integrators, it may seem that the 
latter highly depend on the SaaS vendors/providers due to the relatively small market of the 
sophisticated SaaS solutions. Otherwise, SaaS-integrators can become very important partners, 
providing the extra delivery channel and in such a way increasing the customer base. 
Furthermore, it is beneficial for both suppliers and SaaS vendors to create the win-win situation 
in the form of the partnership, which would result in a trust relationship.  
3.1.3. The bargaining power of customers 
As already pointed out previously (supra, p.16), the SaaS business model implies fundamentally 
different vendor/customer relationship, putting the customer in a more powerful position 
compared to the traditional on-premise delivery model and this due to several reasons. 
54 
 
Firstly, the positive evolution of the SaaS market (infra, p. 54) attracts increasing number of 
SaaS providers in all segments, what results in growing competition and consequently, a 
broader choice for the customer.   
Secondly, in order to attract and to retain the customers, the SaaS provider must meet all the 
customer's needs concerning the insurance of the continuous availability, reliability, security and 
scalability of the software solution. In addition, the customers expect that the SaaS vendors work 
out the reliable security policies and procedures, which protect the customers' often confidential 
corporate data. If the customer's expectations are not met, the SaaS provider risks to pay a 
penalty, which is pre-determined in a SLA or even, lose the customer either directly or after the 
expiration of the subscription period. Consequently, the customer can benefit from the relatively 
low switching costs, which are also positively influenced by the eliminated installation and 
maintenance costs due to the services nature of the on-demand solution.  
Taking into account the increasing competition on the SaaS market and the criticality of meeting 
the customer's needs, the SaaS vendor may try to loosen the customer's powerful position by 
continuously improving the quality of the services and composing the SLA, which will be 
beneficial for both parties.  
3.1.4. The intensity of competitive rivalry 
Even though many IT gurus were, and some of them are still, sceptical about the success of 
SaaS, mostly due to the failure of initial ASP model in the end of 90s, the SaaS market 
continues to grow thanks to the boosting demand for SaaS solutions in the business environment. 
As expected by Gartner, the SaaS enterprise application market will amount $16 billion in 2013 
(Pettey & Stevens, 2009). Consequently, the promising SaaS market attracts increasing number 
of ISVs, causing greater competition and resulting "[...] in a shake-out in the SaaS industry and 
consolidation of the players" (Enabling SaaS, 2008). Furthermore, the competition on the SaaS 
market is enforced by the relatively low switching costs, loosening the power of the SaaS 
providers against their customers (supra, p. 53). Therefore, in order to attract and to retain the 
customers, the SaaS providers must differentiate themselves from the competitors and deliver 
their solutions in the most cost-effective way, ensuring at the same time the availability, 
reliability, security and scalability of the software solution. In addition, the potential entrants and 
young SaaS providers face the tough competition with the industry rivals, as Saleforce.com, 
Oracle and many others dependent on the targeted market segment (see TABLE 3). 
55 
 
SAAS MARKET SEGMENT 
KEY PLAYERS 
Content, Communications and Collaboration (CCC) Cisco WebEx  SumTotal  IBM Lotus 
Customer Relationship Management (CRM) 
Salesfore.com  Oracle  RightNow 
Enterprise Resource Planning (ERP) 
SAP  NetSuite  Workday 
Supply Chain Management (SCM) 
Descartes  Ariba  Ketera 
Office Suites 
Google  Zoho 
Digital Content Creation (DCC) 
YouTube  Adobe 
TABLE 3: REPRESENTATIVE PROVIDERS OF THE MAIN  SAAS MARKET SEGMENTS  
(Callewaert, Robinson, Blatman, 2009) 
It is obvious that various segments in the SaaS industry are characterized by different revenue 
opportunities and saturation degree due to the difference in customers' adoption rate. According 
to Gartner's research (Ping & Da Rold, 2009), SaaS is most mature worldwide in applications in 
such areas as collaboration, CRM, e-mail, HR and procurement. 
Furthermore, in an earlier report Market Trends: Software as a Service, Worldwide, 2009-2013 
Gartner published the revenue growth per SaaS segment over years 2008-2009 (Pettey & 
Stevens, 2009), summarized in TABLE 4 below. 
As can be seen in the TABLE 4, the Office Suites and Digital Content Creation (DCC) are the 
fastest-growing SaaS markets, while Content, Communications and Collaboration (web-
conferencing, e-learning, e-mail and team collaboration), Customer Relationship Management 
(sales, marketing and servicing) and Enterprise Resource Planning (mainly Human Capital 
Management and to a lesser extend Enterprise Asset Management, Manufacturing/ Operations 
and Financial Management Systems) span the biggest market shares.  
 
 
2009 
2008 
Revenue 
growth 
$ mio 
% of total 
market  
$ mio 
% of total 
market 
Content, Communications and 
Collaboration (CCC) 
16% 
2,507 
31% 
2,155 
33% 
Customer Relationship Management 
(CRM) 
18% 
2,169 
27% 
1,838 
28% 
Enterprise Resource Planning (ERP) 
10% 
1,376 
17% 
1,256 
19% 
Supply Chain Management (SCM) 
15% 
861 
11% 
748 
11% 
Office Suites 
276% 
512 
6% 
136 
2% 
Digital Content Creation (DCC) 
80% 
126 
2% 
70 
1% 
Other Application Software 
25% 
483 
6% 
387 
6% 
Total Enterprise Software 
22% 
8,035 
100% 
6,591 
100% 
TABLE 4: WORLDWIDE SOFTWARE REVENUE FOR SAAS DELIVERY WITHIN THE ENTERPRISE APPLICATION SOFTWARE (Pettey 
& Stevens, 2009b) 
56 
 
3.1.5. The threat of new entrants 
The rapid growth of the Software as a Service market as a result of the increasing surge in 
customer adoption of SaaS solutions among enterprises in various industries (e.g. adoption rate 
of 63% in 2008 compared to 32% in 2007 (Kaplan, 2008a)) and the success of such SaaS 
providers like Salesforce.com, Google, Oracle and NetSuite, make the SaaS industry very 
attractive to the potential SaaS players.   
The new entrants to the SaaS market can arise from two sources. Firstly, there are existing ISVs, 
who intend to add the SaaS offering to their product portfolios, initially containing the traditional 
on-premise software. Those ISVs have to overcome various operational and organizational 
challenges (Kaplan, 2008b) in order to accomplish this task, which may seem to be easy 
theoretically, but very sophisticated and expensive in practice. Particularly, on the operational 
side, the SaaS involves completely different development, delivery, packaging and pricing 
approaches and in addition requires entirely new sales, support and revenue recognition 
processes. Moreover, there exists a risk of cannibalizing the existing customer base due to the 
internal competition and channel conflicts. (Kaplan, 2008b)  
Next to the operational challenges, the switch to or extension with the SaaS option often requires 
the radical change in the organizational culture. This mainly caused by the shift from product-
centric to service-driven principle. As stated by Jeffrey M. Kaplan (2008b, p.2): "Rather than 
simply react to customer problems, as theyve done in the past, software vendors are now 
responsible for proactively managing their SaaS solutions to ensure their uptime and 
availability.". 
Secondly, the rapidly evolving SaaS market can be challenged by the new startups, opting to 
compete with incumbents as Saleforce.com or targeting some profitable niches. The major 
obstacle to succeed as a startup comes from the considerable initial investment, required to set up 
the infrastructure and/or to find the appropriate partners (e.g. for IaaS, PaaS, etc). Furthermore, 
the potential SaaS vendor must possess enough funds to survive the long cash burn period before 
the breakeven is achieved (supra, p. 43).  
As a conclusion, it is obvious that the SaaS market is characterized by relatively high entry 
barriers due to the operational and organizational challenges, faced by the existing ISVs and the 
considerable funds, required by the new startups.  
57 
 
3.2. Advantages and disadvantages of SaaS business model 
Since the introduction of internet and the emergence of e-commerce, IT has become an integral 
part of all businesses. That is why it is crucial for all companies to make a right decision 
regarding the purchase and implementation of the required software applications. If taking such a 
decision seemed to be rather simple a decade ago, when only on-premise software was available, 
nowadays the management has a choice between various alternatives, described in previous part 
(supra, p.45). As a consequence, in this part of our dissertation we are trying to analyse possible 
advantages and disadvantages of the SaaS delivery model.  
During the last decade a lot have been written, especially in the business environment, on SaaS 
advantages or disadvantages. Each white paper or industry research, sponsored by industry 
leaders, was still coloured in favour or disfavour of SaaS adoption, in function of author's 
position in SaaS ecosystem (customer or vendor) and/or role in the software industry (novel 
emerging SaaS provider or dominant (on-premise) player (e.g. SAP, Microsoft)).  
In our dissertation we opted for an unbiased view on SaaS benefits and risks, and followed the 
same approach described in the paper published by Helsinki School of Economics (Sksjrvi, 
Lassila, Bordstrm, 2005). This approach allows not only objectively represent various positive 
or negative aspects of SaaS business model, but also (taking the time lag of 5 years into account) 
compare whether additional elements emerged or disappeared as SaaS adoption popularized. 
 
The methodology is as followed: 
 The selected articles must be recently (between January 2007 and September 2009) 
written. 
 The two perspectives on the SaaS vendor and SaaS customer must be simultaneously 
present. 
 The majority of viewpoints on SaaS business model and ecosystem must be equally 
represented:  
o Academic research (The Paul Merage School of Business, University of 
California)  
o Information technology research ( Gartner Inc and Kelton Research) 
o White papers from industry participants (IDS Scheer and Synverse)  
58 
 
As each paper described common terms by different expressions and on the opposite, caused 
confusion on similar requisites, due to merger of various elements; the challenge was to identify 
universal elements applicable in the industry, at the same time without ignoring distinguishing 
elements. We also summarized our findings in four tables (see TABLE 5, TABLE 6, TABLE 7, TABLE 
8), representing value and risk issues for customers and vendors respectively.  
Reviewing the results from the conducted analysis, major benefit for the SaaS customer comes 
under the lower Total Cost of Ownership. In our discussion we split up TCO in two different 
cost drivers, with the consequence that SaaS offering eliminates the initial investment costs 
(sometimes referred as sunk cost, because time renders technology obsolete) and lowers support 
and maintenance costs as all the responsibility comes to lie on the shoulders of the SaaS 
provider. Other cost aspect is related to the payment model, under which customer can easily up- 
or down scale the latitude of the application and is charged for the "consumed" services (pay-
per-use, subscription based, etc.).    
Next group of advantages is associated with shorter time-to-market as the causal element. The 
majority of the articles identify continuous upgrades possibilities, without conflicts with the 
previous versions as direct benefits. 
At the same time SaaS customer has the opportunity to focus on core capabilities (as the 
supporting activities are outsourced to the SaaS provider) and concurrently enable better capital 
allocation.    
Less frequently mentioned, and therefore new, benefits are the increasing bargaining power of 
SaaS customers and subsequent freedom to change or to switch, though the latter position is 
highly dubious.   
However, risks associated with SaaS-based delivery may not be underestimated. The security 
issues accompanied with data privacy and data reliability outside the firm's firewall continue to 
dominate the statistics on SaaS disadvantages. Even after ten years of experience, growing 
adoption trend and reassurances by the major players (e.g. IBM, Kelton research), customers still 
distrust this aspect of remote data management and -storage. Limited customization 
possibilities form next disadvantage, whereby the lack of customization forms hindrance for the 
successful and complete integration of the SaaS application within in-house activities. 
Novel risk, which was not determined in the previous analysis, is the additional vendor's 
management cost that increases as the number of SaaS vendors augment.  
The growing emergence of new companies that provide SaaS based services can be explained by 
the advantages that SaaS business model promises. The major elements are the (expected) 
59 
 
revenue growth and cost aspect. Primarily, the multi-tenant architecture allows forcing down the 
software development, test and maintenance costs.  Thanks to economies of scale, SaaS 
vendor has more resources to invest in future development, ensuring in this way more frequent 
upgrade, faster time-to-market, shorter sales cycle and consequently earlier revenue 
recognition.  
Surprisingly, what does not appear from our analysis is the advantage associated with long-tail 
effect, which was originally considered as the driving revenue force behind SaaS growth. 
However, this effect may be disguised in the "global market" access benefit, where SaaS 
vendor can offer the SaaS application independent of the vendor's location, but also independent 
of the customer's size. 
Nevertheless, for the same token the mentioned benefits can quickly turn into risks. Ponderous 
risk is the huge initial investment and at the same time low and slow revenue generations, 
what leads to the cash flow problems in the first years. As the delivery responsibility is 
completely transferred to the SaaS vendor, additional operational costs (hosting, disaster 
recovery, system management, etc) comes into play. 
What is different from previous analysis is that analyzed resources do not claim that revenue 
streams become predictable. Very recently quite the reverse appeared where the revenue 
predictability element was completely vanished because of the high churn rate and lack of 
customer lock-in. 
Conclusion made from the performed analysis is that benefits and risks for vendor and customer 
are mutually interrelated. The major amendment, compared to the on-premise setting, is the 
transfer of the responsibility for development, delivery, support and maintenance of the software, 
from customer/user to the provider.        
Description of the benefits for the SaaS customer  
 
The Paul Merage 
School of Business, 
University of 
California, Irvine 
Gartner Inc. 
Acumen Solutions, 
Inc. 
SYNVERSE 
IDS Scheer  
Occurrence 
of the benefit 
Software as a 
Service: Implications 
for Investment in 
Software 
Development 
Learn the economic 
advantage of pure 
SaaS provider  
Acumen Solutions 
research report: On 
demand is In 
demand: SaaS 
Adoption accelerates 
among large 
enterprises 
Enabling enterprise 
to SaaS: from 
conceptualization to 
implementation 
A cloud computing 
eBook: SaaS on the 
rise, but does it 
deliver 
29/01/2007 
26/11/2007 
4/05/2008 
28/07/2009 
18/09/2009 
 
SaaS 
initial 
investment 
is 
relatively 
lower 
compared to on-premise software 
x 
x 
x 
x 
x 
5 
SaaS allows eliminating sunk costs 
(license, 
infrastructure, etc.) 
x 
x 
x 
x 
x 
5 
SaaS application has significantly shorter time to 
deployment/ramp up 
x 
 
x 
x 
x 
4 
SaaS applications are relatively fast to adapt 
x 
 
x 
x 
x 
4 
SaaS allows more frequent updates without large 
disruptions 
x 
 
x 
x 
x 
4 
SaaS payments principle allows customers to pay 
only for consumed services 
 
x 
x 
 
 
2 
SaaS allows customers to allocate foreseen IT 
capital to enterprise critical functions 
 
 
x 
 
x 
2 
SaaS allows customers to focus on firm's core 
capabilities 
 
 
x 
 
x 
2 
SaaS enables to access the application independent 
of the user's location (web based access) 
x 
 
 
x 
 
2 
SaaS customer manages the scalability of the 
application usage 
 
 
 
x 
 
1 
SaaS customer enjoys the predictability of the IT 
costs 
x 
 
 
 
 
1 
SaaS customer enjoys increased bargaining power 
x 
 
 
 
 
1 
SaaS customer has the freedom to switch across the 
providers 
x 
 
 
 
 
1 
TABLE 5: LIST OF BENEFITS FOR THE SAAS CUCTOMER ACCORDING TO VARIOUS RESEARCHES 
61 
 
Description of the benefits for the SaaS 
vendor 
 
The Paul Merage 
School of Business, 
University of 
California, Irvine 
Gartner Inc. 
Acumen Solutions, 
Inc. 
SYNVERSE 
IDS Scheer 
Occurrence 
of the benefit 
Software as a 
Service: Implications 
for Investment in 
Software 
Development 
Learn the economic 
advantage of pure 
SaaS provider 
Acumen Solutions 
research report: On 
demand is In 
demand: SaaS 
Adoption accelerates 
among large 
enterprises 
Enabling enterprise 
to SaaS: from 
conceptualization to 
implementation 
A cloud computing 
eBook: SaaS on the 
rise, but does it 
deliver 
29/01/2007 
26/11/2007 
4/05/2008 
28/07/2009 
18/09/2009 
SaaS business model enables vendor to 
reduce the software development, test and 
maintenance costs 
x 
x 
 
x 
x 
4 
SaaS vendor enjoys the economies of scale 
due to multitenant character of the delivery 
model 
 
x 
x 
x 
x 
4 
SaaS vendor keeps up with the completion 
and market pace because of faster release 
cycles 
 
x 
 
x 
x 
3 
SaaS business model enables to achieve 
"higher average" software quality 
x 
 
 
x 
 
2 
SaaS vendor enjoys faster revenues due to 
shorter time-to-market 
 
x 
 
x 
 
2 
SaaS vendor does not cause any competition 
between present and future versions of the 
software (no cannibalization of the existing 
software) 
x 
 
 
 
 
1 
SaaS vendor provides consistent maintenance 
and upgrades for all customers (uniformity in 
service delivery) 
 
 
x 
 
 
1 
SaaS vendor has access to a global market 
 
 
 
x 
 
1 
SaaS vendor better understands the end 
customers' needs 
 
 
 
x 
 
1 
TABLE 6: LIST OF BENEFITS FOR THE SAAS VENDOR ACCORDING TO VARIOUS RESEARCHES 
62 
 
Description of the risks for the SaaS 
customer 
 
The Paul Merage 
School of Business, 
University of 
California, Irvine 
Gartner Inc. 
Acumen Solutions, 
Inc. 
SYNVERSE 
IDS Scheer  
Occurrence 
of the risk 
Software as a 
Service: Implications 
for Investment in 
Software 
Development 
Learn the economic 
advantage of pure 
SaaS provider  
Acumen Solutions 
research report: On 
demand is In 
demand: SaaS 
Adoption accelerates 
among large 
enterprises 
Enabling enterprise 
to SaaS: from 
conceptualization to 
implementation 
A cloud computing 
eBook: SaaS on the 
rise, but does it 
deliver 
29/01/2007 
26/11/2007 
4/05/2008 
28/07/2009 
18/09/2009 
SaaS customers have security concerns 
including authentication, backup and 
recovery, high-availability and employment 
of standards 
x 
 
x 
x 
x 
4 
SaaS customers have concerns on the data 
reliability outside the firm's firewall 
x 
 
x 
 
x 
3 
SaaS customers have concerns on the data 
privacy outside the firm's firewall 
x 
 
x 
 
x 
3 
SaaS customer question the integration issue 
between SaaS application and in-house 
applications  
 
 
x 
x 
x 
3 
SaaS applications suffer from limited 
customization possibilities 
 
x 
 
 
x 
2 
SaaS customer have additional vendor 
management costs as SaaS vendors tend to 
offer smaller functional footprints and 
companies have to deal with multiple SaaS 
vendors 
 
 
 
 
x 
1 
TABLE 7: LIST OF RISKS FOR THE SAAS CUSTOMER ACCORDING TO VARIOUS RESEARCHES 
 
 
 
 
63 
 
Description of the risks for the SaaS 
vendor 
 
The Paul Merage 
School of Business, 
University of 
California, Irvine 
Gartner Inc. 
Acumen Solutions, 
Inc. 
SYNVERSE 
IDS Scheer  
Occurrence 
of the risk 
Software as a 
Service: Implications 
for Investment in 
Software 
Development 
Learn the economic 
advantage of pure 
SaaS provider  
Acumen Solutions 
research report: On 
demand is In 
demand: SaaS 
Adoption accelerates 
among large 
enterprises 
Enabling enterprise 
to SaaS: from 
conceptualization to 
implementation 
A cloud computing 
eBook: SaaS on the 
rise, but does it 
deliver 
29/01/2007 
26/11/2007 
4/05/2008 
28/07/2009 
18/09/2009 
SaaS vendor experience negative impact on 
the cash flow statement with smaller 
payments rather than large periodic payments 
x 
x 
 
x 
x 
4 
Requires higher (initial) investment in order 
to deliver service (infrastructure, servers, etc) 
x 
x 
 
 
x 
3 
SaaS vendor experience lack of customer 
lock-in 
 
x 
x 
 
 
2 
SaaS vendor does not enjoy the predictable 
revenue stream due to high churn and high 
competition 
 
x 
 
 
 
1 
Require additional operational costs of 
hosting, disaster recovery, system 
management, etc 
 
x 
 
 
 
1 
TABLE 8: LIST OF RISKS FOR THE SAAS VENDOR ACCORDING TO VARIOUS RESEARCHES 
 
 
 
 
64 
 
4. The implementation of SaaS business model 
4.1. 
 How to make it a success story? 
Finalizing our thesis, we would like to provide a list of best practices to current or future SaaS 
vendors. We do not pretend that this checklist is exhaustive and can be considered as a panacea 
for the regardless which SaaS solution providers. But still, we believe that the criteria mentioned 
in this part may play an important decisive role. We extracted the best practices from Bessemer 
Venture Partners and Saugatuck Technology reports.     
1. Use the appropriate metrics 
During the progress of our discussion, we already have emphasized the importance of the correct 
usage of SaaS related metrics. In this section we would like to discuss only the utility and 
employability of the most important metrics. Bessemer Venture Partners in the recently released 
report, identified 6C's of Cloud Finance that must be present on the dashboard of each SaaS 
CEO.  (Botteri et al., 2010) 
 CMRR  Committed Monthly Recurring Revenue 
Annual Contract Value negatively corrected for the churn, or customers that the firm 
expects to loose; and positively adjusted for the potential of the future customers (new 
customers + up sell). CMRR values are used in operational planning and financing, 
valuation of the company and sales force assessment.  
 Cash flow 
Taking into account that a SaaS based company needs 50 to 70 % more capital to achieve 
cash break-even than the on-premise counterpart, it is thoughtful to have CEO's hand on 
the cash flow pulse. Key drivers of cash consumption are: Customer Acquisition Cost, 
churn and renewal rate (Byron & Botteri, 2010). Bessemer even advises to initiate 
various incentives (e.g. discount, concessions, etc.) in order to motivate firm's customers 
to pay in advance.    
 CMRR pipeline 
In order to survey the future perspectives SaaS firms must also have a clear view in 
CPipe values.  
65 
 
 Churn rate 
Churn has many causes from dissatisfaction with the current service (downtime, UI or 
workflow complexity, etc.) as the most evident one to customer's bankruptcy or merger. 
However, retaining the firm's customer base is the key challenge for subscription based 
services.  
 CAC ratio  Customer Acquisition Cost Ratio 
The CAC ratio is indispensible in order to follow up the sales and marketing 
investments (When should one expand the sales force?) and expenses (Are the marketing 
costs justifiable, taking into account the CMRR growth?).   
 CLTV  Customer Life Time Value  
Customer Life Time Value indicates whether the chosen business model is profitable or 
not.  
Summarizing the above discussion in the TABLE 9 below, Bessemer represents the measurements 
and the targets for each metric.  
Metric 
Measurement 
Target 
CMRR 
o Growth rate 
o Up sell versus new customers 
o Should be more than 50% 
o Up sell  churn 
Cash flow 
o Free Cash Flow 
o Payment terms 
o Professional service GM 
o Breakeven at 50 % growth rate 
o 1-year upfront mix > 50% 
o > 0 on the project basis 
Churn 
o Churn rate 
o Churn < 12% 
CAC ratio 
o CAC ratio 
o CMRR renewal cost 
o CAC > 1 
o <30% of annualized GM 
CLTV 
o CLTV 
o G&A as % sales 
o R&D as % sales 
o CLTV > 0 
o G&A 15% at scale 
o R&D 10% at scale 
CPipe 
o CMRR 
o 3 to 5 times CMRR target for 
the quarter 
TABLE 9: SAAS RELATED METRICS 
 
 
 
 
 
66 
 
2. Transparency in pricing strategy  
The new delivery model implies novel ways in charging the customer. Concurrently, the major 
SaaS advantage lies on the cost side of the offering. In order to underline the cost advantage of 
the firm's offering and persuade the customer, SaaS vendor must establish a clear price setting. 
Customer should have a clear understanding that pricing is not only monthly/usage subscription, 
but in some cases, may require additional fees for storage service or further support levels.  
3. Service Level Agreements (SLA) 
Mistakenly, SLA is contemplated as a guarantee for 100% service delivery. However, it is rather 
a communication mean, which establishes expectations that customers may have about service 
delivery, while taking into account what is possible in terms of support and technology. Either 
SLA provides an expedient when particular agreements are not met.   
In order to set clear expectations SLA should include and explicitly specify following elements, 
based on the recommendations provided by Software and Information Industry Association 
(SIIA) (SaaS SLA Requirements, 2010):  
 Service hours should take into account the customer's meridian circle, and what is 
more important, the SaaS vendor's help desk should have clear guidelines about 
different trouble shooting scenarios and (authorized) actions to execute (Wainewright, 
2010). 
 Availability may be represented as an up-time percentage (e.g. 99,9%, 99,99%, etc), 
or as percentage of downtime (0,1%, 0,01%, etc.). However, in promising certain 
service levels SaaS vendor should mention whether window required for (non- / 
urgency) maintenance activities is taken into the calculation or not (Falcon, 2009).  
 Reliability concerns data safety, data reliability and customer protection and is 
expressed in the number of outages, congestions while accessing hosted services and 
the time required to restore the affirmed level of service. (Fear of SaaS Reliability, 
2008) 
 Support is indispensible, even if the SaaS vendor thinks that SaaS offering is fool-
proof. Support should include all the arrangements in order to get the necessary 
assistance not only in technical nuances, customization or integration (Kaplan J., 
2008c), but also in optimization, or in gaining the maximum value and productivity 
(Blaisdell, 2010) out of a SaaS application.     
67 
 
 Performance standards 
should be stipulated beforehand, 
including SLA 
measurements as transaction-, Business Process-, system Availability Performance, 
accessibility, scalability and response and repair time commitments.  
 Penalties for non-compliance with the agreements.    
4. Publish Health Dashboard (Rachitsky, 2008) 
With the view to reinforce the SLA, SaaS provider also should make public a history
31
 of the 
uptime and outages; and present the service and platform partners, such that the effectiveness of 
service delivery could be demonstrated, especially if customers require high availability and 
connectivity of the offering.  
Another important element is the history of the response time. This data reassures the customer 
that in case of emergency help or support will be rapidly provided. 
At the same time, public health dashboard should also provide data on every current service 
that a SaaS provider offers. Status descriptions have to be timely, accurate and easy to find. 
5. Minimize operational risk perception with SAS70 Type II audits/Safe Harbor (Directive 
95/46/EC) and Payment Card Industry (PCI) compliance 
With recent adoption of the Sarbanes-Oxley Act of 2002 on controls over the financial 
reporting and reliability of an entity's system (Statements on Auditing Standards, 2010), SaaS 
vendors may use SAS70 (Type II) and Trust Services (SysTrust and WebTrust) as very 
powerful marketing tools.  
The former standard provides control on financial matters of the SaaS provider and [] an in-
depth audit of control objectives and control activities, which often include controls over 
information technology and related processes (About SAS 70, 2009). The latter group of 
standards, [] provides assurance that an organizations systems controls meet one or more 
of the Trust Services principles and related criteria. Areas addressed by the Principles include: 
security, online privacy, availability, confidentiality and processing integrity issues (Building 
Trust and Reliability, 2007, p.11).  
                                               
31 For instance: Amazon Web services URL: <http://status.aws.amazon.com/> or Blue Tie URL: 
<http://support.bluetie.com/?q=node/819> or salesForce.com URL : <http://trust.salesforce.com/trust/status/> or 
collection of various health dashboards URL: <http://delicious.com/lennysan/healthdashboard> (09.04.2010) 
68 
 
Important to make a distinction between SysTrust which is alluded to hosted applications in 
general ([] from personal computer- based payroll application with only one user to a multi-
application, multi-computer banking system that has virtually unlimited users within and outside 
the organization" (Building Trust and Reliability, 2007, p.7)), while WebTrust focuses on e-
commerce applications, where system robustness, security, online privacy, availability, 
confidentiality and processing integrity are of significant importance. (Building Trust and 
Reliability, 2007) 
For the US SaaS vendors operating in European Union, comparable legislation prospects prevail, 
but under the Safe Harbour Principles. The principles are established in accordance with EU 
Directive 95/46/EC on data protection (Safe Harbour Principles, 2010). 
SaaS vendors that provide healthcare application or that manage data electronic health care 
transactions should take the Health Insurance Portability and Accountability Act (HIPAA) into 
account. HIPAA's Security Rule requires administrative (includes legislative compliance with 
the HIPAA act), physical ([] controls physical access to protect against inappropriate access 
to protected data) and technical ([] protects communications, containing PHI
32
, transmitted 
electronically over open networks from being intercepted by anyone other than the intended 
recipient) safeguards (Health Insurance Portability and Accountability Act, 2010). 
SaaS vendors dealing with customers paying online, or which hold, process or exchange 
cardholder information should comply with Payment Card Industry (PCI) Data Security 
Standards. Standards are established to prevent credit card fraud. (About the PCI DSS, 2010) 
Some may assert that [] secure data state may be more expensive than managing the risk of 
confidentiality breaches (PCI DSS, 2010), however studies have shown that this cost is 
justifiable (PCI Compliance Cost Analysis, 2010).     
6. Explore the advantages of the ecosystem 
The advantage of the SaaS ecosystem is twofold. Firstly, next to the internet as a direct sales 
channel, ecosystem enables supplementary selling through referrals by the clients/users, selling 
on the SaaS vendor's behalf, virtual/actual conferences, joint press releases or mailings with 
partners. Secondly, the ecosystem provides an opportunity for a young start-up to enter the SaaS 
business through strategic collaboration or leveraging partnerships. Making innovative 
                                               
32 PHI stands for Protected Health Information 
69 
 
combinations of existing applications, delivering this way competitive advantage to the user, is 
the key to success. 
4.2. What can go wrong? 
One can distinguish two different origins of failures that in the end have similar causes, but 
different ways that lead to them. It is important to make clear difference between, on the one 
hand products and services that are developed, especially, to be used in the SaaS context, and on 
the other hand those that must make a transition from the on-premise rationale to SaaS/on-
demand. 
In the first case one faces obstacles as wrong choice of the underlying business model, inability 
to deliver promised services on time or within agreed SLA, or inefficiency in creating the needed 
trust relationship.  
In the latter case, the transition from the one on-premise business model to on-demand of the 
same or partly adjusted for SaaS product can drive management to make tradeoff between 
existing 
infrastructural 
elements 
and 
outsource 
capabilities, 
workarounds 
and 
integration/collaboration elements. The improperly made tradeoff will lead to fiasco of the 
planned transition and consequently to the termination of a potential new business idea. Next to 
the required trade-off, organization must be ready and willing to adopt SaaS rationale, in this 
way adjusting [] adjusting their [companys] core competencies, training methods and 
processes (Ramanujam, 2007, p. 2). 
In what follows, we concentrate ourselves on the underlying causes, making abstraction of the 
origin, whether it is a new business initiative or a transformation of the existing one.  
1. Industry's acceptance    
The overall success of a company, active in the SaaS-sector, is highly determined by the [] 
industrys willingness to accept the security and logistics of an off-premise SaaS-based model 
(Chandler, 2007, p.2).  
Success rate of the brightest companies, as CrystalReports.com, PivotLink, Oco, LucidEra, 
Dimensional Insight, Salesforce.com and OnDemandIQ cannot outperform high failure rate, that 
can be explained, following the Gartner's rationale, by the fact that SaaS-providers are still in the 
embryonic phase (Bitterer et al., 2008) which is characterized by high uncertainty (of the 
70 
 
business drivers) and threaded by curse of innovation (Gourville, 2005). 
The issue with the curse of innovation is that industry may be still satisfied with the current 
solution, and consequently will be reluctant to change, even if the new solution is superior in 
terms of technology or service delivery. To succeed in the emerging market, service vendors will 
have to make the transition as painless as possible for the users, or even consider offering 
services for free (however see associated risks in the later chapter on following freemium 
strategy).   
The majority of CIO's, even those who support the concept of the online delivery, may be very 
concerned about the security and reliability of the new approach and may hesitate to change, if 
the current system is not broken. Therefore, it is very important to demonstrate (superior) value 
of the concept to the IT professional based on business applications (e.g. CRM, human 
resources,...), such that they [] will be more willing to adapt this mode of applications 
delivery within the IT realm (Dubey & Wagle, 2007, p.11)  (e.g. e-mail, storage,...).  
2. Breakdown of trust 
A lot of SaaS failures can be attributed to a basic sociological-human factor as trust. From the 
moment customers start to disbelief in company's trustworthiness, in function of service delivery 
and certitude, one may close the books, because customers will abandon the ship, which will 
consequently sink. Causes for breakdown of trust are numerous (Krigsman, 2008). Most evident 
one is the breakdown of delivery or simply translated, technological collapses, which are 
discussed in more detail later in this section (infra p. 71). However, there is more. From the 
research, performed by SaaS-pioneer Salesforce.com, combined with the study on Trust in IT 
outsourcing by the State University of New York at Buffalo, following conclusions can be 
drawn.  
In the phase before adoption of a SaaS-based solution, [] the lack of reputable vendors was 
found to dissuade adoption of new technologies (Randeree, Kishore, Rao, 2009, p.6). 
Customers must have certitude that [] in turbulent times, the vendors that they contract can 
guarantee that they will not disappear or renege on the service level agreements (Randeree, 
Kishore, Rao, 2009, p. 5). Therefore, the lack of solid reputation or capability of the vendor 
undermines the basic trust, prohibiting this way further business development.   The lacks of 
trust in post adoption relationship due to misunderstanding between customer and service 
provider, information asymmetries and rigid governance mechanisms, as consequence [] 
71 
 
poison the partnership and lead to termination (Randeree, Kishore, Rao, 2009, p. 7). 
Not only the trust between service provider and customer determines the viability of the 
company, yet there are also connections with partners in the ecosystem around. Early pioneers of 
SaaS era wrongly assumed that the on-demand business model was compatible with old-
fashioned system integrators (SI) or traditional independent software vendors (ISV). These, 
however, are less appropriate partners to compete in innovative ecosystem. It has been shown 
that the majority of today's SaaS-based companies are successful, thanks to synergies from 
partnerships with [] the emerging SaaS incumbents (Salesforce.com, Webex, etc...) and the 
new generation of smaller, more nimble and SaaS-savvy SI firms (Byron, 2008, p.2)  
Providing as an example the SaaS mash-ups that are growing at an exponential rate and deliver 
solutions, which were not imaginable in the past in terms of speed, cost and usability 
(Wainewright, 2008).   
Albeit, the success or failure of a partnership within SaaS environment is again in function of the 
[] alignment between parties on key objectives and metrics (Wang & Adrian, 2007, p. 1). 
Forrester's research discloses three major forces that drive to misalignment (Wang & Adrian, 
2007). Comparable to what has been mentioned in the customer-vendor context (vertical 
integration), can be partly applied for relationships between partners (horizontal integration) 
((Randeree, Kishore, Rao, 2009). If partners are not able: 
 
to define, and consequently to agree on, shared market goals 
 
to communicate to each other the preferred Go-To-Market (GTM) strategies 
 
to align the whole organization with a partnering commitment 
then it is reasonable to expect that coordination-, monitoring-, negotiating- and governance costs, 
will deteriorate the earnings, and stimulate the opportunistic behavior.  
3. Breakdown of delivery (Krigsman, 2008) 
One of the critical requisite that is own to SaaS, but which is sometimes underestimated, is [] 
the system architecture that is capable of supporting peak usage demands and the ability to 
process large numbers of transactions in a secure and reliable environment (Miglucci, 2006, 
p.2). For that purpose, in order to minimize downtime and poor performance, companies should 
invest in reliable and scalable architecture, guaranteeing necessary network bandwidth, security 
72 
 
certifications, backup tools and monitoring systems (The 7 Secrets of SaaS Startup Success, 
2008) (supra, p. 24). 
Surprisingly, we discovered a mismatch between customer expectations (on service level) and 
the actual potential of service delivery.  
On the one hand, as appears from the IDC's IT Cloud Services Survey: Top Benefits and 
Challenges, top three IT cloud services challenges, which SaaS users face (see FIGURE 32), and 
somehow claim, are: security, availability and performance (Gens, 2009). 
However, when it comes to secure and reliable environment, next state of affairs emerged 
from the SMB Disaster Preparedness Survey, carried out by Symantec in 2009. Survey 
uncovers a [] large discrepancy between how SMBs [service providers] perceive their 
disaster readiness (see FIGURE 32) and their actual level of preparedness (see FIGURE 33). 
Furthermore, Symantec discovered that there are large, tangible costs to this lack of 
preparedness. SMBs can  and often do  lose business as a direct result of being unprepared 
for disasters (SMB Disaster Preparedness, 2009, p.3), which are neglected because of low 
frequency/ high impact nature of events. 
 
FIGURE 32: CUSTOMER PRIORITIES IN DEALING WITH SAAS BASED SERVICES (Gens, 2009) 
73 
 
 
FIGURE 33: CUSTOMER'S SATISFACTION ON RECOVERY PLANS IN CASE OF DISRUPTIONS OR OUTAGES (SMB Disaster 
Preparedness, 2009) 
 
4. Following freemium strategy 
Among a mixture of, previously stated, reasons, explaining why SaaS may fail, one of the 
fundamentals that may lead to failure, is the non-workable business model behind SaaS 
architecture on its own. As discussed above, SaaS enjoys various possible ways to create 
business value for all stakeholders, but in this section we will focus on one particular and 
famous, among start-ups strategy, namely the freemium strategy and identify conditions under 
which one may make of it a million-dollar-business and under which one will never be able to 
take off.  
Citing Murphy we can clearly see the core disadvantage of freemium strategy and one of the 
major reasons why following this course often leads to disastrous results is that: Business-
focused people understand that free is not sustainable and they will wonder how long the vendor 
will be around if they do not charge for their product. (Murphy, 2010) 
It is simple to understand that having thousands of users, which use services for free, does not 
lead to thousand or even hundred of (potential) customers, in contrary. In addition a well 
accepted assumption that current users may become future customers, through upgrading or up-
selling, does not always work in the reality.  
74 
 
However, the aforementioned does not apply for every entity in the ecosystem. Well known 
examples are Google Apps or Adobe, which use freemium strategy to push SaaS adoption 
accompanied with elaboration of installed base and diffusion of related products. These gigantic 
companies are able to establish and reinforce their market power, but this revenue generation is 
possible not solely thanks to the freemium strategy. On the contrary, freemium strategy is used to 
attract the market attention, through free (partial) offering, creating in this way at the same time 
the entrance barriers for potential newcomers, and differentiating their product offering and the 
channels to reach customers. 
This all lead to the following conclusion: freemium strategy may lead to potential failure under 
following conditions. First factor is the firm size: small companies, which do not have any 
market power and which are obliged to offer products or services for free, in order to be able to 
compete on the established market, because current free offer is used as an entry barrier by 
greater companies, are less likable to survive in already dominated market, even if the proposed 
solution is superior. Secondly, having only one product, which already has to be offered for free, 
does not leave any room for revenue generation for small companies. The more one can 
differentiate in product types, the more chances to survive one will have.  
5. High overhead costs  
Looking at the failure problem from internal, organizational point of view, many companies do 
not survive because of too heavy SG&A expenses, which cannot be supported with the generated 
revenues (Krishna et al., 2007). As deducted from Bessemer Venture Partners research on 
success factors of SaaS business model", mistake that is often made is the following: [] 
companies staff up their sales efforts too quickly and make them too large before the sales model 
has been refined. (Byron, 2008). Explanation behind this statement can be found, if one 
considers Sales Learning Curve (SLC) (Leslie & Holloway, 2006). Concisely summarizing the 
SLC phenomenon we can state that the introduction of new product requires time to learn how to 
approach customers and sell product/services in the most efficient and effective way. The more a 
company learns about the sales process, the more efficient it becomes at selling, and the higher 
the sales yield. A longer learning curve in the introduction of a new product is associated with a 
greater revenue gap. (Leslie & Holloway, 2006). 
Hiring decisions, which are not based on the progress made by the actual sales representatives, in 
function of Contracted Monthly Recurring Revenue (CMRR) (Byron, 2008) lead to overstaffing, 
cash shortfalls and exaggeration of SG&A expenses. 
75 
 
6. Adopting traditional cost structure within new SaaS set-up    
As previously stated companies have a huge tendency to follow on-premise logic and try to 
please all customers' requirements and supply all special features. This, unwillingly, obliges the 
would-be SaaS vendor to stay within traditional multi-instance, single-tenant set-up, while the 
ultimate goal is to evaluate and adapt single-instance, multi-tenant structure, which reasonably 
has to lead to cost advantages and mono-structure with a low TCO value proposition.   
Working within traditional framework, with the only difference that the same license software is 
now provided via Internet, prohibits company to fully exploit all competitive potential, own to 
on-demand business model. Disaggregating customers leads to different business processes, 
different purchase processes, different pricing models and different support processes. For this 
reasons, following differentiation strategy, which causes gigantic operational cost, is [] where 
most SaaS companies lose their way, or rather find their way to long term unprofitability (York, 
2009, p.3). 
7. Focusing on complex/extremely customized solutions 
Another mistake many companies make, trying in this way to create a competitive advantage, is 
to provide a highly customized solution, underlying this way customer's differentiation and 
solution's inimitability. However following this strategy, customized service provider becomes 
the victim of its own intentions. Focusing on the needs of ultimately single customer, cost 
disadvantages arise on multiple dimensions. Firstly, the aggregation and scale economies are 
eliminated, due to the narrow customer base, leading to arising operational costs. Secondly, 
providing a highly customized solution, limits the potential target segment, this way decreasing 
the potential of future revenue generation.  
What's more, from the research made by McKinsey, some business applications (Dubey & 
Wagle, 2007) are just not recommended to be provided on-demand, due to the lack of business 
potential and which are unlikely to migrate to on-premise setting in general, even after 
reasonable time (see FIGURE 34).  
76 
 
 
FIGURE 34: MIGRATION OF APPLICATIONS FROM TRADITIONAL DELIVERY TO SOFTWARE AS A SERVICE  
(Dubey & Wagle, 2007) 
 
 
 
 
 
Security 
management
Identity, access 
management
Secure 
content 
management
Threat 
management
Security and 
vulnerability 
management
Storage 
management
Backup, 
archival 
software
Storage 
resource 
management
Storage 
replication 
File system 
software
System 
management
Change, 
configuration 
management
Performance 
management
Event 
automation / 
job scheduling
Network and 
service 
management
Development, 
integration tools
Application, 
development 
deployment
Development 
tools
Integration 
deployment 
tools
Financial 
applications
Payroll
Human-Capital 
Management
Customer 
Relationship 
Management
Engineering 
applications
Product Life 
cycle 
management
Project 
management
Business 
intelligence
Supply Chain 
Management
Product 
Planning 
Inventory 
Management
Procurement Logistics
Collaboration, 
Communication 
IP telephony
Messaging 
Applications
Conferencing 
Applications
Content 
applications
Authoring 
applications
Web content 
management
Web analytics Document and 
record 
management
Information 
marketplace
Information 
services
Search tools
E-commerce 
(online store-
front)
Niche 
applications
Location based 
services
LE                                 SME
Likely to migrate in 3 years
Already migrated
Unlikely to migrate
pace of migration varies  among di fferent customer segments  
Not applicable (application associated 
with hardware)
Infrastructure 
management
Core business 
application 
Enterprise 
resource 
management
77 
 
5. Future Trend 
 [The market will show consistent growth [21% per year] through 2013 when 
worldwide SaaS revenue will total $16 billion for the enterprise application 
markets.] (Gartner, 2010) 
[The latest forecast predicts the SaaS market to hit $14 billion in 2013.] (Weier, 
2009) 
[The Stamford, Conn. research firm said worldwide IT spending will hit $3.4 
trillion for 2010, a jump of 5.3 percent from 2009's $3.2 trillion IT spending. And 
that growth will continue into 2011 when IT spending is expected to surpass $3.5 
trillion, a 4.2 percent increase from this year.] (Hickey, 2010) 
[It has been estimated that the software as a service (SaaS) market will be worth 
146.5 billion by 2015 as more businesses seek cost-effective solutions.] 
(Outsourcery News, 2010) 
The SaaS trend watchers as Gartner, Forrester or IDC are more than optimistic about SaaS future 
as can be seen from the above mentioned statements. The near terms (period between 2010 and 
2013) prospects approximate 21% yearly growth in revenue. Long term (period after 2013) 
perspectives predict that SaaS will bypass the on-premise licensed software sales in 2015 (Hall, 
2006). 
In order to understand this positive expansion, we provide a brief trend analysis on very recent 
evolution (compared to the discussion on SaaS evolution on p. 4) within SaaS development and 
discuss the current circumstances that will cause this tendency for SaaS adoption and 
accelerated proliferation of SaaS business model. 
The direction in which SaaS based applications evolve can be presented by means of the so 
called SaaS Waves (see FIGURE 35). Saugatuck research distinguishes three different 
development eras, namely SaaS 1.0, SaaS 2.0 and Cloud Computing. Each era builds on the 
predecessor in terms of business processes and customer complexity. With other words [the 
focus of SaaS shifts from cost-effective delivery of stand-alone application services (Wave I), to 
integrated business solutions enabled by web services APIs and ESBs (Wave II), to workflow- 
78 
 
and collaboration-enabled business transformation (Wave III), leading to measured, monitored 
and managed business processes (Wave IV)] (McNee, 2008).  
SaaS adoption rates will vary highly between and within the markets, but the general trend that 
we have identified in our qualitative research is that the penetration will be present in both 
directions:  
 vertical-specific solutions which are offered within existing accounts as part of the 
service portfolios or through partners 
 horizontal applications with common processes among distributed virtual 
workforce teams and within Web 2.0 initiatives 
 
FIGURE 35: BEYOND SOFTWARE AS A SERVICE: CLOUD COMPUTING (McNee, 2008) 
These expectations converted into the numbers and classified by the industry application, lead to 
the results presented in TABLE 10. The adoption leaders are the Content, Communication and 
Collaboration (CCC) applications and those focused on Customer Relationship Management 
(CRM) practices. This is also easily explained, as those applications belong to the Wave I and 
Wave II solutions, which are highly matured (well developed, tested, improved and adapted to 
the SaaS environment). The growth of Supply Chain Management (SCM) and Enterprise 
Resource Planning (ERP) solutions is constrained by the implementation and integration 
complexity. 
 
 
 
High 
Low 
79 
 
Enterprise Application Software Markets 
2008 
2013 
Content, Communications and Collaboration (CCC) 
2,16 
5,07 
Office Suites 
1,36 
1,86 
Digital Content Creation (DCC) 
0,07 
0,37 
Customer Relationship Management (CRM) 
1,84 
4,02 
Enterprise Resource Planning (ERP) 
1,26 
1,96 
Supply Chain Management (SCM) 
0,75 
1,65 
Total Enterprise Software 
7,44 
14,93 
TABLE 10: WORLDWIDE SOFTWARE REVENUE FOR SAAS DELIVERY WITHIN  
THE ENTERPRISE APPLICATION SOFTWARE MARKETS (BILLIONS OF DOLLARS) (Pettey & Stevens, 2009b) 
 
 
FIGURE 36: WORLDWIDE SOFTWARE REVENUE FOR SAAS DELIVERY WITHIN THE ENTERPRISE APPLICATION SOFTWARE 
MARKETS (BILLIONS OF DOLLARS) 
 
The SaaS evolution, represented in numbers (as given above), does not explain which role the 
SaaS based solution going to play within SaaS ecosystem. Therefore we present five possible 
scenarios (Guptill & McNee, 2009), as identified by the Saugatuck research in 2009 (see 
APPENDIX 5.1: Saugatuck SaaS Scenarios).  
 By 2014, SaaS applications will focus on the niche market where adoption is limited 
to departmental of divisional initiatives and where it will be employed only as useful 
components of larger corporate systems.  
 SaaS fails to substitute the on-premise software applications, but still causes 
significant transformation within software vendor and IT client relationship as agent 
of change.  
0
2
4
6
8
10
12
14
16
2008
2013
Market Size in billions USDOffice Suites
Supply Chain Management (SCM)
Enterprise Resource Planning 
(ERP)
Customer Relationship 
Management (CRM)
Digital Content Creation (DCC)
Content, Communications and 
Collaboration (CCC)
80 
 
 Defence of the entrenched: this scenario suggests that the Software + Services 
(supra, p. 50), or the hybrid model will dominate, as the majority of the customers 
will be rediscovering the traditional licensed software in combination with cloud 
infrastructure.   
 SaaS solutions become the integrated and integral part of the firm's IT systems, on 
the level of infrastructure, operations and development. SaaS providers assume the 
tasks of IT system management, while internal IT department focuses on SaaS 
vendors' (operational) portfolio management.    
 Under utility world scenario SaaS [becomes de facto IT for the majority of the 
user firms]. IT department functions shift from operational (budgeting and planning) 
to strategic solutions portfolio management. 
The second facet, namely the current macro circumstances which stimulate this trend, are 
expounded using the PESTLE framework (see FIGURE 37), which comprises Political, 
Economic, Social, Technological, Environmental and Legal drivers (Blatman, Robinson, 
Callewaert, 2009). 
 
FIGURE 37: EXPECTED IMPACT OF MACRO TRENDS ON CLOUD COMPUTING ADOPTION GROWTH (Blatman, Robinson, Callewaert, 
2009) 
Political axle is one of the elements that will affect the SaaS adoption in a neutral to negative 
way. Reason lies behind the fact that even with agreements such as Safe Harbour Act between 
the US and EU (supra, p. 67), issues on security, privacy, ownership and location of data are still 
pending and have to be resolved in order to facilitate the global SaaS adoption.  
0
1
2
3
4
Political
Economic
Social
Technological
Legal
Environmental
Neutral
SaaS
81 
 
Economic circumstances as financial crisis, the current economic downturn with consequent 
tighter IT budgets will claim [leaner alternatives with rapid deployment and rapid ROI, less 
upfront capital investment]. (Blatman et al., 2009) The answer to the requirements posed by the 
economic contemplations is provided by the rationale behind the SaaS delivery model.   
Increasing popularity of social interactions appearing on internet, for personal (e.g. Facebook, 
Netlog, Twitter, etc) or professional (Google Buzz, LinkedIn, Digg, Delicious, etc.) means, 
constitute the social element. A research reveals that by 2015 70% of the companies will be 
using the private or internal cloud, which will be delivered as SaaS (Blatman et al., 2009). 
Higher social acceptance of the new on-line delivery way will also encourage the faster 
widespread SaaS adoption among enterprises. 
Next to the economic circumstances, technological developments will highly promote the SaaS 
adoption. Firstly, enabling technologies are becoming commoditized, what will consequently 
drive the cost down. Secondly, companies are [further encouraged by the fact that with SaaS, 
responsibility for continuous operation, backups, updates and infrastructure maintenance shifts 
risk and resource requirements from internal IT to vendors or service providers]. (Blatman et al., 
2009) However, initial concerns about security, response time and service availability may still 
form an impediment for many organizations. 
Current environmental trends which pursue the creation of leaner and greener enterprises will 
indirectly stimulate the SaaS adoption. The higher infrastructure utilization of the SaaS-based 
solutions minimizes the CO2 emissions. 
Insufficient legislation on confidentiality and IP issues may preclude the future international 
growth. Free flow of information between countries has to be harmonized as there is no common 
global legal framework available today (Save Harbour Act is limited to US and EU 
relationships). 
 
 
 
 
82 
 
6. SinYate: real world example 
In previous parts of our dissertation we primarily focused on the theoretical and more general 
background of SaaS, elaborating on the analysis of SaaS as a business model, its ecosystem, 
advantages and disadvantages compared to the on-premise solution and the success and failure 
factors, accompanying the implementation of SaaS. In this part we abandon the theoretical 
analysis and take a role of SaaS implementers in order to find the best on-demand solution for a 
young start-up company SinYate, currently passing the incubator phase and intending to provide 
the services under a SaaS model.   
Firstly, we give an explanation on the services, offered by SinYate. Secondly, we make an 
analysis of the company's strategy and the way the strategy would be realized, based on the 
Hamel framework. And finally, we will elaborate on more technical part, pointing out the 
architecture behind the SinYate platform.  
 
6.1. 
SinYate Offer 
"SinYate's mission is to support the new mobile revolution by improving the quality of 
mobile applications through the automation of test processes." (SinYate, 2009) 
As it is clear from the SinYate's mission statement, the young company targets the emerging 
market of mobile applications, focusing on the testing segment. To be more precisely, SinYate 
offers a platform which allows web designers, mobile operators and mobile web transcoders to 
test in a full automatic way the customer experience of rich mobile internet sites. (SinYate, 
2009) 
As explained by the developers
33
 of the platform, via pre or custom defined metrics, developers 
and decision makers can test and adapt the mobile web sites, based on analytical reports. The 
report contains scores on different metrics and is guidance to optimization of customer mobile 
                                               
33 The platform is developed by two masters engineering Thomas Mons and Zhong Yuan Xu, supported by Siruna 
(URL: <www.siruna.com>), a mobile internet technology provider, and IBBT (www.ibbt.be), a leading Belgian 
public research institute for Broadband Technology and associated with the universities of Ghent, Leuven and 
Brussels. 
 
83 
 
experience. The tests are done on real devices or emulators, what provides superior accuracy and 
guarantees that the mobile website performs appropriately on all tested mobile devices.  
During the analysis of the SaaS ecosystem we explicitly mentioned the increasing 
competitiveness of the SaaS market and relatively high bargaining power of customers due to the 
low switching costs (supra, p. 53). As a consequence, the SaaS providers must try to differentiate 
themselves from their competitors in order to attract new and to retain the existing customers.  
In order to analyze in what extend SinYate offers unique and attractive services and 
differentiates it from the competitors, we make a use of a Hamel framework (Hamel, 2000). 
 
 
FIGURE 38: HAMEL FRAMEWORK (Hamel, 2000) 
The core of the framework is composed of the four basic elements - customer interface, core 
strategy, strategic resources and value network  each covering three to four related aspects, as 
displayed in FIGURE 38. Those basic elements are connected through the three links, being 
customer benefits, configuration and company boundaries.   Let us apply each of those elements 
to the SinYate offering, starting with the Core Strategy, followed by Strategic Resources, 
Customer Interface and ending with the Value Network.  
 
 
84 
 
6.1.1. Core Strategy 
According to Hamel (2000), the core strategy of the firm is represented in the three important 
elements, namely business mission, product/market scope and basis for differentiation. The core 
strategy forms actually the starting point of a business and at the same time determines the goal 
to be achieved through the appropriate use of strategic resources and available capabilities.  
 As already mentioned at the beginning of this chapter, SinYate's mission, which 
describes the objective of the strategy, is "[] to support the new mobile revolution by 
improving the quality of mobile applications through the automation of test processes." 
(SinYate, 2009). In other words, SinYate wants to provide automatic mobile testing 
platform, addressing the emergent market of mobile rich internet applications (RIAs).  
 For a startup company as SinYate it is of great importance to decide which customers and 
markets  national and/or international  to target and what kind of product mixes  to 
compose, determining in such a way  the product and market scope of the business.  
Seen the SinYate's intention is to address the market of mobile rich internet applications, 
it seems most appropriate to focus firstly on the mobile web developers and mobile web 
transcoders active in the same mobile RIAs market. The SinYate's mobile testing 
platform can be evaluated by these potential customers as a service, which adds value to 
their final delivery by improving the quality of the mobile website and resulting in higher 
satisfaction and advanced mobile experience among the end users.  Next to the web 
designers and transcoding companies, the mobile operators (e.g. Mobistar n.v.
34
) and the 
suppliers of the high end mobile devices (e.g. Apple) also belong to the startup's 
potential customers.  
All those targeted customers have a choice between three kinds of service packs  
development pack, productivity pack and individual tests - dependent on the frequency of 
the executed tests and required features.  
o The productivity pack is targeted towards production environments, where it is 
crucial to be able to test a certain web application quickly, in most cases after an 
error has been reported. To ensure the speed requirement, only basic testing is 
performed (taking screenshot s, HTTP/server errors) and reporting is kept brief.  
                                               
34 More on the company on <http://www.mobistar.be/> 
85 
 
o The development pack is targeted towards web agencies and mobile integrators 
(or any other companies that develop mobile web applications). In these 
environments, it is important to test thoroughly and to deliver detailed test reports 
that allow efficient fixing of errors. Therefore, the development pack offers such 
aspects as thorough testing (crawling, deep analysis), intelligent, detailed 
reporting (including regression reporting) and the possibility to schedule tests. 
o The offering of individual tests targets everyone who occasionally wants to use 
the platform. Potential customers are small web developers, developers that would 
like to try out the platform or companies that would like to assess the quality of 
their mobile web application.  
TABLE 11 gives an overview of all the features and options, which are included in the 
various service packs.  
                                               Service pack 
 Included features               
Individual  
Tests 
Productivity 
Pack 
Development 
Pack 
Screenshot mosaic 
X 
X 
X 
Basic error reporting (HTTP/server errors) 
 
X 
- 
Scheduling 
- 
- 
X 
Crawling 
10 pages 
- 
20 pages 
Advanced & intelligent reporting 
X 
- 
X 
Regression reporting 
- 
- 
X 
Support 
- 
X 
X 
Max. number of different test campaigns 
1 
10 
1 
Cumulative test runs 
1 
100 
60 
Number of devices 
10 
50 
10 
Devices (per run) 
4 
15 
10 
TABLE 11: SINYATE MOBILE TESTING SERVICE PACKS 
Regarding rather limited Belgian market potential, the SinYate team plans to leave the 
national boarders and to search for the customers on the international markets from the 
first days of the activities, starting from neighboring countries and expanding all over the 
world, what seem to be feasible with the delivery of the service over the internet. 
86 
 
 In order to attract the customers and to survive the competition with the incumbents of 
the mobile applications testing market, it is important to determine the basis for 
differentiation or in other words to describe how the company competes differently from 
its competitors.  
The major difference with the existing market players, which are described in the TABLE 
12 below, lies in the fact that SinYate offers fully automated platform, which allows 
executing the tests on the real devices and provides the possibility to choose between 
basic and more enhanced analytical reports.  
 
Description 
Testing 
Devices 
Reporting 
W3C Mobile 
OK 
Checker
35
 
This checker performs 
various tests on a Web Page 
to determine its level of 
mobile-friendliness.  
 
manual 
no real 
devices 
Limited to 
- page size 
- network usage 
- results on 26 
metrics 
Device 
Farms 
Banks with attached real 
devices, which can be 
connected through the 
internet. 
semi-
automated 
real 
devices 
 - Very limited 
reporting  
- Not possible to 
calculate results 
based on defined 
metrics 
DotMobi
36
 
Offers free mobiReady 
tool, which evaluates mobile-
readiness using industry best 
practices & standards.  
semi-
automated 
emulators 
- readiness scoring (1 
to 5)  
- in-depth analysis of 
pages 
TestQuest
37
 Offers testing tools which 
adapt to almost any test 
environment, using device- 
and OS-independent 
components to provide a wide 
range of automated tests. 
automated 
emulators 
PC based diagnostic 
monitoring 
application, which 
provides the limited 
reports 
Keynote
38
 
Provides independent testing 
and monitoring of mobile 
content, applications, and 
services 
real devices 
real 
devices 
Intuitive reports and 
graphs showing 
detailed performance 
and availability 
metrics. 
TABLE 12: EXISTING PLAYERS ON MOBILE APPLICATIONS TESTING MARKET 
 
 
                                               
35 More on the services of the company on  <http://validator.w3.org/mobile/>  
36 More on the services of the company on  <http://ready.mobi/launch.jsp?locale=en_EN>  
37 More on the services of the company on  <http://www.testquest.com>  
38 More on the services of the company on  <http://www.keynote.com/>  
87 
 
During the comparison of SinYate with the existing and already established market players, the 
customers would probably wonder what are the benefits of the automated testing on real devices 
with the provision of the analytical reports? First of all, automated testing results in time saving 
such that the customers can execute a greater amount of tests during the same period of time in 
contrast to the time consumed during manual testing. Secondly, testing on real devices provides 
realistic and reliable results compared to the testing on simulators. At third, the analytical 
reporting gives clear overview of the testing results, providing the scores on each metric and 
guiding the tester on the possible optimization of the mobile website.   
6.1.2. Strategic Resources 
The realization of the intended core strategy, described here above, is not feasible if the firm 
does not possess the strategic resources, composed of the three elements, being the core 
competences, strategic assets and core processes (Hamel, 2000). 
 Core competencies are skills and capabilities of the firm, needed for the development of 
the product. Own to the technical nature of the services, offered by SinYate, the major 
competencies of the company are represented by the IT knowledge (know-how, know-
when and know-why) of the technical developers, who are responsible for the actual 
development of the mobile testing platform. Furthermore, SinYate benefits from the 
support of the experienced Siruna
39
, IBBT
40
 and University of Ghent professionals, 
which can be seen as a bootstrapping strategy what is very valuable for the young 
startup.    
 Seen the fact that SinYate operates in the IT industry targeting the on-demand 
applications market, the actual testing platform represents the most important strategic 
asset of the company.   
 From the definition analysis of core processes, key activities are those that create added 
value to customer from resources and assets. Applied to SinYate, it is obvious that the 
development of the test platform and the delivery of the tool on a SaaS basis belong to 
the key activities of SinYate. 
                                               
39 Siruna is a managed solution provider for mobile internet websites. The provider helps companies bring their 
online content to any type of mobile device. More about Siruna on < http://www.siruna.com/ >. 
40 IBBT (Interdisciplinary Institute for Broadband Technology) is an independent research institute founded by the 
Flemish government to stimulate ICT innovation. The IBBT team offers companies and organizations active support 
in research and development. More information on the activities of IBBT can be foun on the company website 
<http://www.ibbt.be/en>.   
88 
 
As often told during the various management and strategy courses, the successful realization of 
the postulated strategy does not solely depend on the acquirement of the most brilliant resources, 
but on the possibility to combine the available competencies, assets and processes in the unique 
way in order to create the competitive advantage and to differentiate from the competitors. In 
Hamel framework the ability to achieve this unique combination is represented by the 
configuration aspect, which links the core strategy with the strategic resources (Hamel, 2000). 
SinYate tries to achieve this uniqueness by complementing the young talented development team 
with the experience of the industry captains as Siruna and IBBT.  
6.1.3. Customer Interface 
Customer interface element covers four important aspects  fulfillment and support, information 
and insight, relationship dynamics and pricing strategy - which describe how the service is 
offered and delivered to the customer, influencing the relationship with the latter (Hamel, 2000).    
 Fulfillment and support describes the way the firm reaches and supports its 
customers. As it is already obvious, SinYate tends to deliver its application on the 
SaaS basis, which incorporates completely different channel strategy than in case of 
on-premise software. (supra, p.19)  
In our opinion, SinYate has three possibilities to attract potential customers. First of 
all big customers, as for example mobile operators (e.g. Mobistar n.v.) or the 
producers of mobile devices (e.g. Nokia) are best reached through the direct sales 
force. Secondly, SinYate can build up the customer base through the partnership 
with the relative industry players as (mobile) web designers, mobile web transcoders 
(e.g. Siruna) and the providers of the mobile website creation services (e.g. Osmobi
41
) 
by offering the packaged solution. Finally, SinYate can introduce the affiliate 
program on a commission basis such that the customers reach SinYate via the 
banners on other websites.  
From the moment the potential customers become the real ones, it is very important 
to ensure effective and quick support. If customer faces some problems, various 
support alternatives exist. Firstly, the user of the mobile testing platform can consult 
the FAQ (Frequently Asked Questions) and/or HELP section. In more urgent 
                                               
41 OSMOBI is a web service to make Drupal, Joomla! and Wordpress sites mobile with great ease and great power. 
More about Osmobi on < http://www.osmobi.com/>  
89 
 
situations, SinYate provides HotLine support, available 24 hours a day, 7 days in a 
week. Furthermore, SinYate plans to offer training and consulting services for 
customers, who need some guidance on the use of the application.  
 Information and insight aspect describes the collection and use of information on 
customer behavior and habits. It is crucial for SinYate when considering the 
importance of meeting the customer needs and developing the additional 
functionalities and features. FAQ/HELP sections and HotLine support are one of 
the sources of information on customers, their requirements and even complaints. 
Furthermore, the platform offers the possibility to collect the statistical data on, for 
example, the testing frequency of particular customer, the tests mostly used in 
general, less popular tests, etc. 
 The nature of interaction between the customer and the firm is reflected in the 
relationship dynamics, which differs between various customers dependent on the 
SLA's, the duration of the contract and the usage frequency. It is obvious that 
customers, who use the services only once (e.g. private developer, who wants to test 
the website, mobilized with Osmobi) does not search for the tough relationship with 
continuous support and frequent interaction. Otherwise, efficient and even value-
adding interaction is crucial for the long-term relationship with such customers as the 
website transcoders and mobile operators, who will use the mobile web testing on a 
continuous basis. 
 The last but very important aspect of customer interface is the pricing strategy, which 
refers to the combination of different pricing methods. SinYate makes a distinction 
between three pricing strategies, namely per-year-based, per-project-based and run-
based, in relation to the three service packs (supra, p. 85), all represented in TABLE 13 
below.  
                                               Service pack 
 Pricing               
Individual  
Tests 
Productivity 
Pack 
Development 
Pack 
Payment  
per run 
per year 
per project 
Basic price 
50 
4000 
4000 
Extra devices 
15 per  1 
1000 per 5  
1000 per 5  
Extra TC runs (per device) 
- 
- 
225 per 40  
TABLE 13: SINYATE PRICING STRATEGY 
90 
 
6.1.4. Value Network 
After the core strategy is defined, the strategic resources, needed to realize the intended strategy, 
are identified and the customers to target are determined, it is time to leave the internal 
boundaries of the company and to work out the value network around SinYate, deciding on 
potential suppliers and partners of the startup.   
Seen the fact that the testing services will be offered on the SaaS basis, we firstly have to search 
for the suppliers of the services or products, needed to set up the required SaaS infrastructure, 
which consists of the three layers, namely infrastructure (IaaS), platform (PaaS) and application 
layer (supra, p. 25). As will be explained later in the text (infra, p. 93), the development of the 
platform and application layers will be accomplished internally, such that SinYate has to look 
only for the appropriate IaaS provider as the supplier of the reliable infrastructure.  
Furthermore, taking into account that the testing will be performed on real mobile devices 
instead of the simulators,   SinYate has to either use the services of the device banks (e.g. Device 
Anywhere) or address the producers or distributors of high-end mobile devices as the suppliers 
of required smart phones. SinYate also considers the possibility to build more trustful 
relationship with the providers of real devices in the form of the partnership enriching the value 
of each other's offering.  
Finally, as already mentioned previously (supra, p. 88), SinYate is partnering with Siruna and 
IBBT, which extensively support the developers by providing professional advice and sharing 
the IT and commercial expertise.  
FIGURE 39 gives an overview of SinYate's value network or company boundaries as also called 
by Hamel, including the suppliers, partners and potential customers of the company.  
 
91 
 
 
FIGURE 39: SINYATE VALUE NETWORK 
 
On the next page the reader is presented with the TABLE 14, which summarizes the analysis of all 
the elements of Hamel framework, applied for SinYate.  
 
 
 
 
 
92 
 
CUSTOMER BENEFITS 
CONFIGURATION 
COMPANY BOUNDARIES 
Time saving (vs. manual testing) 
Reliable testing on real devices (vs. emulators) 
Consultative reporting (incl. reports on demand) 
Young talented development team complemented 
with the experienced industry captains 
Partnering with Siruna/IBBT 
IaaS outsourced to Amazon.com 
Possible partnership with device banks 
 
 
CUSTOMER INTERFACE 
CORE STRATEGY 
STRATEGIC RESOURCES 
VALUE NETWORK 
Fulfilment: 
- SaaS based delivery 
- Direct sales force 
- Partnerships 
- Affiliate program 
Support: 
- FAQ/Help section 
- HotLine support (24/24) 
- Training/consulting services 
Business Mission: 
 
Provide automatic testing platform, 
addressing Mobile RIAs in a SaaS 
model 
Core Competences: 
- Bright engineers  
- 
IT knowledge 
- Support by market professional 
as Siruna and IBBT 
Suppliers: 
- 
Iaas Provider (Amazon.com) 
- Mobile devices 
producers/distributors 
 
Information & Insight 
- FAQ/Help section 
- HotLine support 
- Statistical data 
Market Scope: 
- Mobile web designers 
- Mobile web transcoders 
- Moible operators 
- Providers of high-end mobile 
devices 
- 
(Inter)national Markets 
Product Scope: 
- Productivity Pack 
- Development Pack 
- 
Individual Tests 
Strategic Assets: 
- Testing platform in latest stage 
of developmnet 
Partners: 
- Siruna/IBBT 
- Device banks 
- Mobile devices 
producers/distributors 
Relationship Dynamics: 
- Efficient, value-adding 
interaction with and support for 
trust customers  
Pricing Strategy: 
- Per-year based (Productivity 
Pack) 
- Per-project based (Development 
Pack) 
- Run based (Individual Tests) 
Basis for Differentiation: 
- Fully automated testing 
platform 
- Real devices 
- Analytical reporting 
Core Process: 
- Technical development 
- SaaS based delivery 
TABLE 14: THE OVERVIEW OF HAMEL FRAMEWORK APPLIED FOR SINYATE 
93 
 
6.2. SinYate Architecture 
As stipulated in chapter 2 (supra, p. 24) during the theoretical analysis of the infrastructure 
behind SaaS, the SaaS developers must arrange an appropriate supporting infrastructure, building 
up the  suitable logical architecture, choosing the right maturity level and deciding on the most 
reliable database architecture and authentication system, simultaneously keeping in mind the 
connectivity, business continuity and security considerations. In this part of our master 
dissertation we apply the theory around the SaaS infrastructure on the SinYate testing platform 
in order to identify the best architectural solution, which will allow the company to meet the 
customer needs in the most effective and efficient way.  
6.2.1. 
Logical architecture 
As the reader already knows, (supra, p. 24), the SaaS is build up of the three major layers, 
namely infrastructure, platform and application layer.  Taking into account the cost consideration 
and the availability of the necessary resources and capabilities, it is crucial to make a right 
decision whether to deploy all the three layers internally or to outsource the first and/or second 
layer.  
In order to make a right outsourcing decision, let us first take a look on the architecture behind 
the SinYate mobile testing services. As can be seen on FIGURE 40, Java virtual machine and 
MySQL for data storage form the base of the SinYate testing platform. Furthermore, there is 
some supporting middleware consisting of OSGiTM, Jetty Server, Log4J, Quartz and Hibernate. 
Finally, on the top one can find the Graphical User Interface (GUI) (Mons & Yuan Xu, 2009). 
Here below, the reader finds the explanation on the middleware components of SinYate 
architecture.  
94 
 
 
FIGURE 40: SINYATE ARCHITECTURE (Mons & Yuan Xu, 2009) 
 OSGiTM framework is a module system and service platform for the Java programming 
language that implements a complete and dynamic component model. (OSGiTM, 2010) 
The bundles, which represent the application or component can be remotely installed, 
started, stopped, updated and uninstalled without requiring a reboot. The service registry 
allows bundles to detect the addition of new services, or the removal of services, and 
adapt accordingly. According to the developers of SinYate platform "OSGi simplified 
[...] architecture, as it was no longer needed to keep track of devices, test modules or 
metrics: the OSGi bundle repository would do just that." (Mons & Yuan Xu, 2009, p.76) 
 Hibernate is an ORM (Object-Relational Mapping) framework, which provides 
capability to interact with database in an object oriented way (Bhatt, 2010). Hibernate 
supports a large number of database management systems as Postgres, MySQL, Oracle 
and Microsoft SQL server through the use of SQL dialects. (Mons & Yuan Xu, 2009) 
 Jetty is a pure Java-based HTTP server and servlet42 container (application server). (The 
Eclipse Foundation, 2010)  The choice of Jetty server is justified by its capability to serve 
static and dynamic content either from a standalone or embedded instantiations, to 
provide web services in an embedded Java application and to support the OSGi 
framework (Mons & Yuan Xu, 2009). Furthermore, Jetty components are open source 
and available for free for commercial use.  
The Jetty Server is used for the web GUI and the communication with the devices 
attached to the platform.  
                                               
42 A servlet is a Java class which conforms to the Java Servlet API, a protocol by which a Java class may respond to 
http requests. Thus, a software developer may use a servlet to add dynamic content to a Web server using the Java 
platform. 
95 
 
 Quartz is a full-featured, open source, job scheduling system that can be integrated with 
or used alongside virtually any Java application. Quartz can be used to create simple or 
complex schedules for executing tens, hundreds, or even tens-of-thousands of jobs. The 
jobs created with Quartz can be scheduled in any way (OpenSymphony, 2005). The 
testing platform will use Quartz mainly to schedule test campaigns. Quartz is crucial for 
the automation of the testing platform, what belongs to the key differentiator of SinYate 
services.  
 Log4J is a Java-based logging utility, offered for free by Apache Software Foundation 
under the Apache license
43
 (Log4J, 2010). Log4J is used for the implementation of the 
logging and authentication functionalities.  
All those aiding and enabling components described here above form the platform (PaaS) layer. 
On the top of all those components lies the actual testing platform, which is a group of OSGi 
bundles working together, which belong to the application layer of SaaS. Seen the fact that 
platform and application layers are already developed, using the frameworks, available for free, 
only the first infrastructure layer must be outsourced to the IaaS provider.  
From the comparison of different IaaS providers (see TABLE 15), made by JMP Securities 
analyst Patrick Walravens, Amazon EC2, offered by Amazon.com, seems to have the most cost-
effective IaaS proposition.   
 
Amazon EC2 
GoGrid 
Rackspare 
Cloud Services 
Jouent 
AppNexus 
Base Price 
$0.4 x 30 days 
x 24 hours = 
$288 
8 GB x $0.08 
x 24 x 30 = 
$461 
$0.48 x 24 hours 
x 30 days = $346 
$1000 + $80 
(amortized 
setup fee) 
$247 x 4 cores 
x (1 + 3.5%) = 
$1022 
Storage Cost 
(50GB) 
50GB x $0.15 
= $2.7 
40 GB x $0.15 
= $6 (First 
10GB free) 
Inclusive 
Inclusive 
$100 
Data Trasfer 
Cost (10GB 
in, 10GB out) 
$0.1 x 10 + 
$0.17 x 10 = 
$2.7 
$5 
$0.22 x 10 + 
$0.08 x 10 = $3 
$1.50 
$30 x 10 + 
$40 x 10 = 
$700 
Other Cost 
$1.20 
None 
None 
$5 
*$75 x 2 + 
$300 = $450 
$ per VM 
$300 
$472 
$349 
$1110 
$2238 - $3000 
(plus setup 
fee) 
*Refers to Support Cost: Assumes 2 email/phone (2x$75) support events and one application troubleshooting ($300) in a month 
TABLE 15: PRICING COMPARISON AMONG IAAS PROVIDERS (Walravens, 2009) 
                                               
43 Apache license is a free software license authored by the Apache Software Foundation (ASF). The Apache 
License requires preservation of the copyright notice and disclaimer, but it is not a copyleft license  it allows use 
of the source code for the development of proprietary software as well as free and open source software. 
96 
 
6.2.2. Maturity model 
The next decision concerns the choice of the maturity level which depends on how scalable, 
multi-tenant-efficient and configurable (supra, p. 25) the SaaS application should be in order to 
meet all the functional requirements, defined by the developers.  
In order to make a right decision on the appropriate maturity level, let us first give an overview 
of the functional requirements, which were identified based on the shortcomings of the existing 
testing solutions and on feedback received from some potential users (e.g. mobile web agencies). 
(Mons & Yuan Xu, 2009) The developers of the platform make a distinction between platform 
and client
44
 requirements, listed in TABLE 16 below. The reason for this distinction lies in the fact 
that [] these clients are not an integral part of the platform and can be developed completely 
independently" (Mons & Yuan Xu, 2009, p.30).  
PLATFORM REQUIREMENTS 
CLIENT REQUIREMENTS 
Support most popular real devices, simulators, 
device banks, OS and browsers 
Be able to communicate with the platform 
through a predefined XML-based protocol 
Support any kind of network technology (GPRS, 
EDGE, 3G,) 
Be able to register the new client and remember 
the credentials for the authentication processes in 
the future 
Track the status of the connected devices 
Send regular heartbeats to the platform to enable 
the tracking of the device status by the platform. 
Support new devices without altering the 
platform 
Save and use the new configuration, after 
receiving the configuration update from the 
platform 
Add new kinds of tests and reports without 
restarting the platform 
Execute given assignments in the exact order as 
received from the platform 
Communication, reporting and storage 
components must be able to cope with the 
various changes (e.g. addition of new tests, 
reports)  
Ensure the pull based communication with the 
platform in order to bypass the firewalls layers. 
Be able to schedule tests for future execution 
Foresee a mechanism to support new kinds of 
assignments with a minimal ripple effect to the 
rest of the system. 
Allow end-users to define new test campaign 
through a user-friendly interface 
Enough configuration: 
- Provide user with the full control on the 
used devices and tests and generated 
reports 
Evolve easily with time: 
- Easy to add or change metrics, devices 
and testing modules 
TABLE 16: FUNCTIONAL REQUIREMENTS OF SINYATE PLATFORM  
                                               
44 Clients referring to the client application 
97 
 
In order to meet all those requirements in most efficient and cost-effective way, the testing 
platform must be enough configurable and multi-tenant efficient, which corresponds to the 
third maturity level. As explained previously (supra, p. 25), designing the SaaS infrastructure 
according to this maturity level results in efficient exploitation of the resources by hosting a 
single instance, which serves all the customers, who will share the same application, running on 
the same operating system, on the same hardware, with the same data storage mechanism. The 
high level of configurability will allow providing customized testing solutions by offering the 
possibility to compose the necessary test campaign on the various real devices with the provision 
of basic or advanced analytical reporting. The scalability aspect must not be neglected too seen 
the SinYate's potential to operate on the international scale and to grow continuously. But the 
developers of the platform are sure that the scaling up measures will be sufficient to meet the 
increasing system load, such that there is no need to consider the highest maturity level, which 
involves higher operating costs.  
6.2.3. 
Data-architecture 
When deciding on the design of the appropriate database system, the SinYate developers must 
evaluate some technical and business considerations in order to set up the most suitable data-
architecture, choosing between more isolated (isolated databases vs. isolated schemes) or more 
shared approach (shared schemes). Based on the description of the possible data-architectures in 
chapter 2 (supra, p. 27) of our master dissertation, we first make a comparison between the 
isolated and shared options evaluating some economical and technical considerations, 
represented in TABLE 17.  
The second column in the table indicates the importance of the particular consideration for 
SinYate. Taking into account the startup status of the SinYate, which incorporates the limited 
funds available for the development and launching of the platform, the initial investment 
consideration belongs to the highest importance category. Furthermore, it is also very crucial to 
keep the operational costs as low as possible trying to benefit from the economies of scale, 
increasing the chance for survival during the period of negative cash flows.  Facing the existing 
resistance from the potential customers to the cloud services due to the lost ownership of and 
control over the data, the security issue is also ranked as highly important. What is more, most of 
the customers request the isolation of their data from the data of other customers as 
compensation to the lack of data control.  
98 
 
 
Criticality
45
 
Isolated 
Databases 
Isolated 
Schemes 
Shared 
Schemes 
Initial investment
46
 
1 
+ 
++ 
+++ 
Operational costs
a
 
1 
+++ 
++ 
+ 
Security  
1 
+ 
+ 
+ 
Tenant 
conside-
rations
47
 
 # tenants 
2 
+ 
++ 
+++ 
 DB size/tenant 
2 
+++ 
++ 
+ 
 # users/tenant 
3 
+++ 
++ 
+ 
Value-added 
services/tenant 
2 
+++ 
++ 
+ 
TABLE 17: COMPARISON BETWEEN VARIOUS DATA-ARCHITECTURES 
During the evaluation of the tenant considerations, we ranked them as being less important than 
the costs and security aspects. This due to the fact that according to the technical developers, the 
SinYate platform can be easily extended (e.g. scaling up measures) in order to support increasing 
number of tenants, the growing database requirements per tenant, etc.. Consequently, making 
tradeoff between the economical considerations and the customers' requirements concerning the 
isolation of the corporate data, the isolated schemes approach seems to be most suitable. On the 
one side, this option allows to separate the data by attributing each customer to a personal 
isolated scheme and thus meet the customer requirements. And on the other side by storing all 
those schemes in a common database, SinYate can lower the operational costs, achieving 
economies of scale.  
6.2.4. 
Authentication System 
Previously in this chapter we have mentioned that the log-in function is implemented using the 
Log4J logging utility (supra, p. 94) not yet elaborating on the authentication system in general. 
Consequently, in this part we are considering what kind of authentication system  centralized or 
decentralized  would be most suitable for the SinYate testing platform.  
As explained in chapter 2, the main difference between the centralized and decentralized 
approaches lies in the fact that the latter incorporates the deployment of the federation server 
which allows the provision of the single sign-on (SSO) option to the customers (supra, p. 31).  
                                               
45 Criticality indicates the grade of  importance of the particular consideration for SinYate ranging from 1 (most 
important) to 3 (less important) 
46
  Greater number of  + signs refers to the higher costs 
47  Greater number of + signs indicates better suitability of the approach to meet the associated requirement 
99 
 
Therefore, the choice of the appropriate authentication system depends on whether the potential 
customers give high priority to the SSO experience and are ready to carry extra costs associated 
with the installation of the federation server within the corporate network.  
Seen that SinYate first of all targets the mobile web developers and transcoders all over the 
world, it seems rather unfeasible and cost ineffective to deploy the decentralized authentication 
system. In addition, the chance that those potential customers would request the SSO is 
negligible, due to the necessary investment in the installation of the federation server. As a 
consequence, the centralized approach, which implies the use of the central user account 
database serving all application clients and does not involve any changes to the customers' 
infrastructure, would be the best solution to safeguard the decent authentication processing. 
What is more, in case some customers explicitly demand the SSO option and are ready to carry 
the costs of the federation server, it is feasible to combine both authentication approaches. 
6.3. Finance  
"70% of SaaS Companies Will Not Exist in Twelve Months Time." (UbikwitiTM, 2009) 
This pessimistic comment was given during a panel discussion at OpSource SaaS Summit in San 
Francisco in early March 2009. The reason behind such enormous failure rate lies in the inability 
of many SaaS companies to balance their burn rate with revenues and profits, especially in the 
period of economical crisis. That is why it is of great importance for SinYate to assess in 
advance as realistic as possible the firm's profitability potential, by identifying all possible 
revenue streams and all the costs, associated with the development and the delivery of the 
service.  
6.3.1. 
Cost Structure 
Staying consistent with our cost analysis in chapter 2 (supra, p. 34), during the evaluation of the  
SinYate's cost structure we make a distinction between two big cost categories, namely the 
major investments in the underlying infrastructure and required assets and the monthly 
recurring costs, associated with the management of the processes, development and delivery of 
the services.  
Seen that the core process of SinYate is represented by the technical development of the testing 
services, the major investments concern the deployment of the required infrastructure and 
100 
 
acquirement of assets such as computers and software to be used by the engineers in the 
development process. 
 
Year 1 
Year 3 
Year 5 
Infrastructure 
30 000 
50 000 
- 
Computers 
6 000 
16 000 
20 000 
Software 
20 000 
- 
- 
TOTAL 
56 000 
66 000 
20 000 
TABLE 18: MAJOR SINYATE INVESTMENTS (IN ) 
 
 TABLE 18 gives an overview of all the major investments inclusive the required amount and the 
period of the actual acquisition of extra resources and the extension of the underlying 
infrastructure, which is in line with the growing number of customers and international 
expansion.  
Next to the periodical investments, the activities of SinYate incorporate monthly recurring costs, 
related to the SinYate's key activities, namely the technical development and the delivery of the 
testing platform to the customers. Consequently, the remuneration of the personnel, which 
mainly consists of the software engineers, sales force and the operations staff, represents the 
major portion in the cost structure of the start-up (see FIGURE 41). Furthermore, SinYate must 
foresee considerable marketing funds in order to realize the ambition of reaching the 
international customers and becoming a worldwide player. Finally, with regard to the SaaS 
nature of the SinYate's offering, infrastructure and operational expenses, needed to maintain and 
ensure the continuous availability of the testing service, represent the third considerable portion 
in the overall SinYate cost structure.  
 
101 
 
 
FIGURE 41: SINYATE COST STRUCTURE 
 
 
6.3.2. 
Revenue Streams 
According to the findings of 16 Ventures and as already worked out previously, the SaaS 
business model provides the opportunity to generate revenues in seven various ways (supra, p. 
40). In this part we make an attempt to evaluate the revenue potential of SinYate and identify 
which of those seven revenue streams (see FIGURE 42) are applicable to SinYate.   
 
FIGURE 42: SAAS POSSIBLE REVENUE STREAMS (SaaS Revenue Modelling, 2010) 
The first and the major portion of income, classified as recurring revenue stream, evidently 
originates from the testing services, offered in the form of three different service packs, namely 
productivity pack, development pack and individual tests (supra, p. 85). The first two packs are 
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
year 1
year 2
year 3
year 4
year 5
Depreciations
Remunerations and other social 
costs
Marketing 
Infrastructure and operational 
costs
Services rendered by third parties
102 
 
obtainable under the subscription base, while the individual tests are priced following the 
usage-based principle (supra, p. 89). Furthermore, the customers have the possibility to extend 
the standard service pack with some extra features and options (e.g. extra devices, extra runs) 
against the additional fee.  
As mentioned earlier in this chapter (supra, p. 88), SinYate intends to provide some extra 
services such as training and consulting if demanded by the customers, benefiting in such a way 
from an additional source of revenues. The training incorporates the guidance on the metrics and 
composition of the required test campaigns, while the consulting services include the advices on 
the choice or composition of the most appropriate service pack, dependent on the testing 
frequency, required metrics, reporting and number of mobile devices.  
There also exists the possibility to use the partners and other parties in the SinYate ecosystem as 
another potential source of revenues by for example combining the related services in order to 
compose the all-in service pack for mutual customers (e.g. Siruna's mobilization service and 
SinYate's testing service). Additionally, all the parties in the ecosystem can be involved in the 
common affiliate program on the commission base.  
Finally, SinYate can fully exploit the possibility of gathering the statistical information, offered 
by the developed platform, in order to generate aggregated data reports which can be traded to 
the players in SinYate value network. As an example, the mobile web transcoders or mobile web 
developers can use the information on the most frequently occurring bugs and errors in order to 
improve the transcoding or developing process, in such a way positively influencing the 
customer satisfaction. 
The other three revenue streams, namely the advertising, ancillary and product revenues are in 
our opinion not applicable for SinYate due to several reasons. First of all, advertisement does not 
belong to the SinYate's core business such that the chance to generate considerable revenues 
from the advertisements, especially for a start-up company, retains very small. Secondly, the 
SinYate testing platform does not require any operational changes on the customer's system and 
can be easily accessed via the internet, eliminating the possible product and ancillary revenue 
streams.  
 
 
103 
 
7. Conclusion 
Through thorough analysis of SaaS Business Model presented in this master dissertation, we can 
clearly conclude that SaaS is not a fairy tale with the happy end for everyone. This Business 
Model has its specific advantages and disadvantages, depending on the role in the SaaS 
ecosystem, which influences the decision to offer and to implement the services based on SaaS 
business model.  
It is likeable to foster the SaaS business model from the customer point of view because of the 
following factors. The first and the determinant issue is the question whether the considered 
application makes a part of the company's core activity. If this is not the case, the application can 
be outsourced and consumed as a service; resulting in the cost savings for the customer, thanks 
to the substitution of capital expenditures by the operational expenditures through extensive 
outsourcing of the IT infrastructure and other costs, associated with the installation, exploitation 
and maintenance of the on-premise software.  Secondly, the total cost of ownership for SaaS 
compared to the on-premise software is much lower for the Small and Medium sized Enterprises, 
what results in a higher adoption rate of SaaS by companies with limited number of users. 
Because of the pay-per-use the customer avoids the overcapacity and over budgeting. 
Furthermore, the client benefits from the 24/7 support and maintenance.  
However, the customer may still fear for the security of the data storage. Moreover, there exists a 
risk of downtime and in case of the provider's bankruptcy, some difficulties with data ownership 
and transmission may occur. 
The other party, namely the service provider, faces different factors, which influence the 
evaluation of offering the Software as a Service. Firstly, SaaS business model gives the 
possibility to create the economies of scale through servicing multiple customers with the same 
infrastructure. At the second place, we think of hitting-the-long tail effect, such that even the 
smallest customers can afford otherwise expensive software. And finally, the supplier has the 
advantage of collecting the short term cash on a constant base.  
Contrarily, the major obstacles for a provider are the costs associated with the initial investment 
in the infrastructure, security and the creation of installed base. Furthermore, not being on 
compliance with some aspects of the service level agreement may lead to penalty payments and 
eventually customer loss.  
104 
 
Taking into account the current development on the market of cloud computing, we have clearly 
seen that potential users are still unaware of the benefits of SaaS Business Model and still have 
some doubts for implementation of SaaS.  This leads to the fact that the providers have to push 
and educate the customers such that they are convinced about the security of the model. From the 
moment that the customer is released from the prejudice of unsecure SaaS model, we believe 
that the demand will be pulled by the customer. This scenario promises a high adoption of SaaS 
in the business world and potentially announcement of a new era for cloud computing.  And we 
truthfully believe that business-to-business segment is the first to be conquered, eventually 
followed by the business-to-consumer segment. 
The die-hards of SaaS truly see this business model as the revolutionary one, which will fully 
replace the traditional on-premise software. However, not all kinds of applications can be put in 
the cloud which implies 
that 
this 
transition is surely not for 
the near future.
x 
 
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xx 
 
Appendices 
APPENDIX 2.1: FINANCIAL POSITION OF QUOTED SAAS COMPANIES 
 
 
FINANCIALS: NETSUITE INC. (N.N)
48
 
Revenue 
Periods 
2007 
2008 
2009 
March 
23.229 
34.118 
41.567 
June 
25.513 
36.553 
40.304 
September 
28.065 
40.404 
41.705 
December 
31.734 
41.401 
42.964 
Totals 
108.541 
152.476 
166.54 
Note: Units in Millions of U.S. Dollars 
 
Earnings Per Share 
Periods 
2007 
2008 
2009 
March 
-1.23776 
-0.03376 
-0.06114 
June 
-1.21635 
-0.05199 
-0.08068 
September 
-0.21339 
-0.10328 
-0.12929 
December 
-0.21527 
-0.07339 
-0.10456 
Totals 
-2.44588 
-0.26271 
-0.37623 
Note: Units in U.S. Dollars 
Consensus Estimates Analysis  
# of Estimates Mean High 
Low 
1 Year Ago 
SALES (in millions) 
Quarter Ending Mar-10 
15 
43.73 
45.31 
42.60 
50.73 
Quarter Ending Jun-10 
15 
44.97 
46.75 
44.00 
52.60 
Year Ending Dec-10 
16 
184.10 189.85 182.00 208.23 
                                               
48
<http://www.reuters.com/finance/stocks/financialHighlights?symbol=N.N> (15.03.2010) 
xxi 
 
Year Ending Dec-11 
11 
214.21 231.74 205.00 240.00 
EARNINGS (per share) 
Quarter Ending Mar-10 
16 
0.01 
0.02 
0.01 
0.03 
Quarter Ending Jun-10 
16 
0.01 
0.03 
0.00 
0.03 
Year Ending Dec-10 
16 
0.08 
0.14 
0.06 
0.14 
Year Ending Dec-11 
12 
0.17 
0.26 
-0.03 
0.28 
LT Growth Rate (%) 
5 
26.00 
35.00 
15.00 
24.17 
Sales and Earnings Figures in U.S. Dollars (USD) 
 
Valuation Ratios  
Company 
Industry 
Sector 
S&P 500 
P/E Ratio (TTM) 
-- 
205.11 
10.18 
16.71 
P/E High - Last 5 Yrs. 
NA 
1.77 
0.43 
20.13 
P/E Low - Last 5 Yrs. 
NA 
0.52 
0.10 
5.04 
Beta 
-- 
0.67 
1.16 
1.36 
Price to Sales (TTM) 
5.27 
0.27 
0.44 
2.21 
Price to Book (MRQ) 
8.36 
1.71 
1.34 
3.14 
Price to Tangible Book (MRQ) 
14.70 
2.83 
2.39 
5.91 
Price to Cash Flow (TTM) 
-- 
2.54 
6.29 
23.28 
Price to Free Cash Flow (TTM) 
-- 
18.92 
18.89 
21.00 
% Owned Institutions  
-- 
-- 
-- 
-- 
 
Dividends  
Company 
Industry 
Sector 
S&P 500 
Dividend Yield 
NA 
0.09 
0.05 
1.50 
Dividend Yield - 5 Year Avg. 
-- 
1.43 
1.31 
2.58 
xxii 
 
Dividend 5 Year Growth Rate 
-- 
9.31 
14.53 
-9.32 
Payout Ratio(TTM)  
-- 
13.59 
6.90 
29.14 
Growth Rates  
Company 
Industry 
Sector 
S&P 500 
Sales (MRQ) vs Qtr. 1 Yr. Ago 
3.78 
-3.31 
-7.45 
12.74 
Sales (TTM) vs TTM 1 Yr. Ago 
9.22 
-0.29 
-6.76 
-2.75 
Sales - 5 Yr. Growth Rate 
56.60 
6.13 
6.89 
6.74 
EPS (MRQ) vs Qtr. 1 Yr. Ago 
-42.47 
499.05 
152.49 
197.23 
EPS (TTM) vs TTM 1 Yr. Ago 
-43.16 
-- 
-- 
-- 
EPS - 5 Yr. Growth Rate 
-- 
-1.00 
10.89 
8.26 
Capital Spending - 5 Yr. Growth 
Rate  
24.67 
3.72 
13.85 
9.58 
Financial Strength  
Company 
Industry 
Sector 
S&P 500 
Quick Ratio (MRQ) 
1.55 
2.31 
1.47 
0.83 
Current Ratio (MRQ) 
1.55 
2.64 
1.83 
0.98 
LT Debt to Equity (MRQ) 
-- 
25.94 
65.07 
142.02 
Total Debt to Equity (MRQ) 
-- 
49.50 
92.12 
202.74 
Interest Coverage (TTM)  
-- 
0.56 
0.28 
11.00 
Profitability Ratios  
Company 
Industry 
Sector 
S&P 500 
Gross Margin (TTM) 
66.31 
6.69 
8.30 
30.29 
Gross Margin - 5 Yr. Avg. 
66.66 
31.69 
21.65 
27.24 
EBITD Margin (TTM) 
-7.68 
-- 
-- 
-- 
EBITD - 5 Yr. Avg 
-24.58 
13.68 
11.49 
14.92 
xxiii 
 
Operating Margin (TTM) 
-14.12 
1.82 
1.14 
-- 
Operating Margin - 5 Yr. Avg. 
-29.63 
8.97 
7.47 
17.17 
Pre-Tax Margin (TTM) 
-14.09 
1.83 
1.19 
12.92 
Pre-Tax Margin - 5 Yr. Avg. 
-29.44 
9.81 
7.80 
16.82 
Net Profit Margin (TTM) 
-14.48 
1.26 
0.98 
10.40 
Net Profit Margin - 5 Yr. Avg. 
-29.98 
5.68 
5.02 
12.30 
Effective Tax Rate (TTM) 
-- 
6.03 
7.57 
11.78 
Effecitve Tax Rate - 5 Yr. Avg.  
-- 
38.78 
39.06 
26.01 
Efficiency  
Company 
Industry 
Sector 
S&P 500 
Revenue/Employee (TTM) 
-- 
1,529,076 
14,071,560 
561,111 
Net Income/Employee (TTM) 
-- 
13,979 
115,280 
62,047 
Receivable Turnover (TTM) 
6.35 
1.23 
1.39 
8.21 
Inventory Turnover (TTM) 
-- 
2.74 
1.79 
6.20 
Asset Turnover (TTM)  
0.81 
0.25 
0.23 
0.49 
Management Effectiveness  
Company 
Industry 
Sector 
S&P 500 
Return on Assets (TTM) 
-11.69 
1.03 
0.33 
5.07 
Return on Assets - 5 Yr. Avg. 
-- 
4.50 
3.62 
5.42 
Return on Investment (TTM) 
-20.77 
1.91 
0.57 
6.64 
Return on Investment - 5 Yr. Avg. 
-- 
7.10 
5.82 
6.97 
Return on Equity (TTM) 
-21.80 
0.83 
1.31 
14.72 
Return on Equity - 5 Yr. Avg.  
 
 
 
 
xxiv 
 
FINANCIALS: SALESFORCE.COM, INC. (CRM.N)
49
 
Revenue 
Periods 
2008 
2009 
2010 
April 
162.412 
247.622 
304.924 
July 
176.579 
263.077 
316.061 
October 
192.803 
276.487 
330.549 
January 
216.906 
289.583 
354.049 
Totals 
748.7 
1076.77 
1305.58 
Note: Units in Millions of U.S. Dollars 
 
EARNINGS PER SHARE 
Periods 
2008 
2009 
2010 
April 
0.00605 
0.0768 
0.14708 
July 
0.03078 
0.07957 
0.16749 
October 
0.0533 
0.08091 
0.1609 
January 
0.05966 
0.11044 
0.15605 
Totals 
0.14994 
0.34679 
0.63006 
Note: Units in U.S. Dollars 
 
CONSENSUS ESTIMATES ANALYSIS 
  
# of Estimates Mean 
High 
Low 
1 Year Ago 
SALES (in millions) 
Quarter Ending apr-10 
29 
367.09 
374.86 
356.99 
371.86 
Quarter Ending jul-10 
29 
374.89 
385.94 
367.60 
385.41 
Year Ending jan-10 
29 
1,293.81 1,297.84 1,292.35 
-- 
Year Ending jan-11 
30 
1,536.76 1,580.44 1,500.32 1,568.05 
Year Ending jan-12 
26 
1,812.02 1,919.06 1,709.07 1,708.98 
                                               
49
 <http://www.reuters.com/finance/stocks/financialHighlights?symbol=CRM.N>(15.03.2010) 
xxv 
 
 
EARNINGS (per share) 
Quarter Ending apr-10 
29 
0.18 
0.31 
0.12 
0.29 
Quarter Ending jul-10 
29 
0.19 
0.33 
0.13 
0.30 
Year Ending jan-10 
30 
0.63 
0.65 
0.61 
-- 
Year Ending jan-11 
30 
0.82 
1.31 
0.55 
1.27 
Year Ending jan-12 
26 
1.10 
1.94 
0.82 
1.53 
LT Growth Rate (%) 
12 
30.75 
40.00 
15.00 
37.45 
Sales and Earnings Figures in U.S. Dollars (USD) 
 
VALUATION RATIOS  
Company 
Industry 
Sector 
S&P 500 
P/E Ratio (TTM) 
118.93 
20.31 
9.46 
16.71 
P/E High - Last 5 Yrs. 
NA 
7.73 
2.48 
20.13 
P/E Low - Last 5 Yrs. 
NA 
2.42 
0.51 
5.04 
Beta 
1.99 
0.78 
1.22 
1.36 
Price to Sales (TTM) 
7.38 
1.43 
0.64 
2.21 
Price to Book (MRQ) 
9.22 
3.87 
1.93 
3.14 
Price to Tangible Book (MRQ) 
10.10 
11.53 
2.66 
5.91 
Price to Cash Flow (TTM) 
65.22 
6.83 
5.21 
23.28 
Price to Free Cash Flow (TTM) 
44.38 
41.96 
15.28 
21.00 
% Owned Institutions  
-- 
-- 
-- 
-- 
DIVIDENDS  
Company 
Industry 
Sector 
S&P 500 
Dividend Yield 
NA 
0.28 
0.05 
1.50 
Dividend Yield - 5 Year Avg. 
0.00 
2.11 
1.05 
2.58 
xxvi 
 
Dividend 5 Year Growth Rate 
-- 
7.99 
8.63 
-9.32 
Payout Ratio(TTM)  
0.00 
43.68 
18.98 
29.14 
GROWTH RATES  
Company 
Industry 
Sector 
S&P 500 
Sales (MRQ) vs Qtr. 1 Yr. Ago 
22.26 
-2.77 
1.98 
12.74 
Sales (TTM) vs TTM 1 Yr. Ago 
21.25 
-3.18 
-3.48 
-2.75 
Sales - 5 Yr. Growth Rate 
49.24 
8.48 
9.17 
6.74 
EPS (MRQ) vs Qtr. 1 Yr. Ago 
41.30 
-2.56 
182.59 
197.23 
EPS (TTM) vs TTM 1 Yr. Ago 
83.93 
-- 
-- 
-- 
EPS - 5 Yr. Growth Rate 
56.90 
2.41 
-0.55 
8.26 
Capital Spending - 5 Yr. Growth 
Rate  
65.75 
33.88 
15.41 
9.58 
FINANCIAL STRENGTH  
Company 
Industry 
Sector 
S&P 500 
Quick Ratio (MRQ) 
1.88 
2.20 
1.47 
0.83 
Current Ratio (MRQ) 
1.88 
2.34 
1.74 
0.98 
LT Debt to Equity (MRQ) 
43.13 
13.61 
27.56 
142.02 
Total Debt to Equity (MRQ) 
43.13 
18.78 
43.42 
202.74 
Interest Coverage (TTM)  
-- 
1.47 
-0.11 
11.00 
 
PROFITABILITY RATIOS  
Company 
Industry 
Sector 
S&P 500 
Gross Margin (TTM) 
80.24 
26.58 
11.61 
30.29 
Gross Margin - 5 Yr. Avg. 
78.72 
58.59 
34.17 
27.24 
EBITD Margin (TTM) 
13.65 
-- 
-- 
-- 
EBITD - 5 Yr. Avg 
8.71 
26.24 
22.19 
14.92 
xxvii 
 
Operating Margin (TTM) 
8.83 
8.47 
0.43 
-- 
Operating Margin - 5 Yr. Avg. 
5.48 
22.48 
11.36 
17.17 
Pre-Tax Margin (TTM) 
10.91 
8.36 
0.29 
12.92 
Pre-Tax Margin - 5 Yr. Avg. 
8.00 
23.44 
9.10 
16.82 
Net Profit Margin (TTM) 
6.49 
6.03 
-1.03 
10.40 
Net Profit Margin - 5 Yr. Avg. 
4.77 
14.76 
6.22 
12.30 
Effective Tax Rate (TTM) 
40.52 
13.21 
36.29 
11.78 
Effecitve Tax Rate - 5 Yr. Avg.  
40.37 
32.52 
21.06 
26.01 
EFFICIENCY  
Company 
Industry 
Sector 
S&P 500 
Revenue/Employee (TTM) 
328,862 
9,483,183 
3,598,737 
561,111 
Net Income/Employee (TTM) 
21,333 
255,865 
-214,286 
62,047 
Receivable Turnover (TTM) 
4.44 
3.01 
2.15 
8.21 
Inventory Turnover (TTM) 
-- 
3.71 
2.82 
6.20 
Asset Turnover (TTM)  
0.66 
0.36 
0.37 
0.49 
MANAGEMENT EFFECTIVENESS  Company 
Industry 
Sector 
S&P 500 
Return on Assets (TTM) 
4.30 
4.35 
0.83 
5.07 
Return on Assets - 5 Yr. Avg. 
3.73 
11.18 
5.63 
5.42 
Return on Investment (TTM) 
7.56 
6.22 
1.38 
6.64 
Return on Investment - 5 Yr. Avg. 
7.50 
16.38 
8.38 
6.97 
Return on Equity (TTM) 
9.41 
8.03 
1.11 
14.72 
Return on Equity - 5 Yr. Avg.  
7.81 
18.37 
9.54 
9.94 
xxviii 
 
FINANCIALS: RIGHTNOW TECHNOLOGIES INC (RNOW.OQ)
50
 
Periods 
2007 
2008 
2009 
March 
25.702 
32.898 
36.037 
June 
26.465 
35.221 
36.34 
September 
29.246 
36.237 
38.731 
December 
30.664 
36.079 
41.579 
Totals 
112.077 
140.435 
152.687 
Note: Units in Millions of U.S. Dollars 
 
EARNINGS PER SHARE 
Periods 
2007 
2008 
2009 
March 
-0.18266 
-0.10128 
0.03916 
June 
-0.17406 
-0.09326 
0.00112 
September 
-0.1083 
-0.04301 
0.0606 
December 
-0.09931 
0.02084 
0.07889 
Totals 
-0.56355 
-0.2183 
0.18156 
 Note: Units in U.S. Dollars 
 
CONSENSUS ESTIMATES ANALYSIS 
  
# of Estimates 
Mean 
High 
Low 
1 Year Ago 
SALES (in millions) 
Quarter Ending mrt-10 
16 
42.37 
42.54 
42.00 
40.97 
Quarter Ending jun-10 
16 
43.32 
44.00 
41.73 
42.37 
Year Ending dec-10 
17 
177.97 
179.59 
176.50 
170.16 
Year Ending dec-11 
14 
203.44 
211.89 
196.75 
192.65 
 
 
                                               
50
 < http://www.reuters.com/finance/stocks/financialHighlights?symbol=RNOW.OQ > (15.03.2010) 
xxix 
 
EARNINGS (per share) 
Quarter Ending mrt-10 
18 
0.08 
0.09 
0.02 
0.06 
Quarter Ending jun-10 
17 
0.09 
0.12 
0.03 
0.07 
Year Ending dec-10 
18 
0.42 
0.46 
0.20 
0.29 
Year Ending dec-11 
15 
0.68 
0.85 
0.57 
0.45 
LT Growth Rate (%) 
7 
28.71 
45.00 
15.00 
28.20 
Sales and Earnings Figures in U.S. Dollars (USD) 
VALUATION RATIOS  
Company 
Industry 
Sector 
S&P 500 
P/E Ratio (TTM) 
96.35 
2.66 
9.46 
16.71 
P/E High - Last 5 Yrs. 
NA 
3.85 
2.48 
20.13 
P/E Low - Last 5 Yrs. 
NA 
0.71 
0.51 
5.04 
Beta 
1.03 
1.09 
1.22 
1.36 
Price to Sales (TTM) 
3.62 
0.54 
0.64 
2.21 
Price to Book (MRQ) 
13.72 
3.47 
1.93 
3.14 
Price to Tangible Book (MRQ) 
19.01 
4.29 
2.66 
5.91 
Price to Cash Flow (TTM) 
41.40 
1.76 
5.21 
23.28 
Price to Free Cash Flow (TTM) 
140.18 
17.25 
15.28 
21.00 
% Owned Institutions  
-- 
-- 
-- 
-- 
DIVIDENDS  
Company 
Industry 
Sector 
S&P 500 
Dividend Yield 
NA 
0.05 
0.05 
1.50 
Dividend Yield - 5 Year Avg. 
0.00 
0.83 
1.05 
2.58 
Dividend 5 Year Growth Rate 
-- 
15.08 
8.63 
-9.32 
xxx 
 
Payout Ratio(TTM)  
0.00 
0.97 
18.98 
29.14 
GROWTH RATES  
Company 
Industry 
Sector 
S&P 500 
Sales (MRQ) vs Qtr. 1 Yr. Ago 
15.24 
7.94 
1.98 
12.74 
Sales (TTM) vs TTM 1 Yr. Ago 
8.72 
0.14 
-3.48 
-2.75 
Sales - 5 Yr. Growth Rate 
19.84 
10.57 
9.17 
6.74 
EPS (MRQ) vs Qtr. 1 Yr. Ago 
278.55 
56.79 
182.59 
197.23 
EPS (TTM) vs TTM 1 Yr. Ago 
182.95 
-- 
-- 
-- 
EPS - 5 Yr. Growth Rate 
9.01 
11.46 
-0.55 
8.26 
Capital Spending - 5 Yr. Growth 
Rate  
7.89 
8.30 
15.41 
9.58 
 
FINANCIAL STRENGTH  
Company 
Industry 
Sector 
S&P 500 
Quick Ratio (MRQ) 
1.42 
1.84 
1.47 
0.83 
Current Ratio (MRQ) 
1.42 
2.01 
1.74 
0.98 
LT Debt to Equity (MRQ) 
0.00 
33.97 
27.56 
142.02 
Total Debt to Equity (MRQ) 
0.05 
58.98 
43.42 
202.74 
Interest Coverage (TTM)  
-- 
-0.99 
-0.11 
11.00 
PROFITABILITY RATIOS 
  
Company 
Industry 
Sector 
S&P 500 
Gross Margin (TTM) 
68.85 
4.74 
11.61 
30.29 
Gross Margin - 5 Yr. Avg. 
68.10 
40.98 
34.17 
27.24 
EBITD Margin (TTM) 
7.76 
-- 
-- 
-- 
EBITD - 5 Yr. Avg 
0.49 
18.66 
22.19 
14.92 
xxxi 
 
Operating Margin (TTM) 
2.85 
0.98 
0.43 
-- 
Operating Margin - 5 Yr. Avg. 
-4.75 
13.33 
11.36 
17.17 
Pre-Tax Margin (TTM) 
4.22 
1.03 
0.29 
12.92 
Pre-Tax Margin - 5 Yr. Avg. 
-2.57 
13.85 
9.10 
16.82 
Net Profit Margin (TTM) 
3.85 
0.56 
-1.03 
10.40 
Net Profit Margin - 5 Yr. Avg. 
-2.88 
7.92 
6.22 
12.30 
Effective Tax Rate (TTM) 
8.98 
2.16 
36.29 
11.78 
Effecitve Tax Rate - 5 Yr. Avg.  
-- 
66.58 
21.06 
26.01 
EFFICIENCY  
Company 
Industry 
Sector 
S&P 500 
Revenue/Employee (TTM) 
190,859 
501,342 
3,598,737 
561,111 
Net Income/Employee (TTM) 
7,339 
51,959 
-214,286 
62,047 
Receivable Turnover (TTM) 
4.74 
0.63 
2.15 
8.21 
Inventory Turnover (TTM) 
-- 
1.64 
2.82 
6.20 
Asset Turnover (TTM)  
0.93 
0.08 
0.37 
0.49 
MANAGEMENT EFFECTIVENESS  Company 
Industry 
Sector 
S&P 500 
Return on Assets (TTM) 
3.59 
1.03 
0.83 
5.07 
Return on Assets - 5 Yr. Avg. 
-2.27 
7.12 
5.63 
5.42 
Return on Investment (TTM) 
9.04 
1.33 
1.38 
6.64 
Return on Investment - 5 Yr. Avg. 
-4.92 
9.81 
8.38 
6.97 
Return on Equity (TTM) 
17.41 
2.93 
1.11 
14.72 
Return on Equity - 5 Yr. Avg.  
-8.99 
11.62 
9.54 
9.94 
xxxii 
 
FINANCIALS: CHINA.COM INC. (8006.HK)
51
 
  
Company 
Industry 
Sector 
S&P 500 
P/E Ratio (TTM) 
-- 
2.66 
9.46 
16.71 
P/E High - Last 5 Yrs. 
-- 
3.85 
2.48 
20.13 
P/E Low - Last 5 Yrs. 
-- 
0.71 
0.51 
5.04 
Beta 
0.99 
1.09 
1.22 
1.36 
Price to Sales (TTM) 
5.12 
0.54 
0.64 
2.21 
Price to Book (MRQ) 
-- 
3.47 
1.93 
3.14 
Price to Tangible Book (MRQ) 
-- 
4.29 
2.66 
5.91 
Price to Cash Flow (TTM) 
-- 
1.76 
5.21 
23.28 
Price to Free Cash Flow (TTM) 
-- 
17.25 
15.28 
21.00 
% Owned Institutions  
-- 
-- 
-- 
-- 
 
DIVIDENDS  
Company 
Industry 
Sector 
S&P 500 
Dividend Yield 
-- 
0.05 
0.05 
1.50 
Dividend Yield - 5 Year Avg. 
0.00 
0.83 
1.05 
2.58 
Dividend 5 Year Growth Rate 
-- 
15.08 
8.63 
-9.32 
Payout Ratio(TTM)  
-- 
0.97 
18.98 
29.14 
 
GROWTH RATES  
Company 
Industry 
Sector 
S&P 500 
Sales (MRQ) vs Qtr. 1 Yr. Ago 
-6.98 
7.94 
1.98 
12.74 
Sales (TTM) vs TTM 1 Yr. Ago 
-14.15 
0.14 
-3.48 
-2.75 
                                               
51
 <http://www.reuters.com/finance/stocks/financialHighlights?symbol=8006.HK>  (15.03.2010) 
xxxiii 
 
Sales - 5 Yr. Growth Rate 
-9.14 
10.57 
9.17 
6.74 
EPS (MRQ) vs Qtr. 1 Yr. Ago 
-368.30 
56.79 
182.59 
197.23 
EPS (TTM) vs TTM 1 Yr. Ago 
89.29 
-- 
-- 
-- 
EPS - 5 Yr. Growth Rate 
-- 
11.46 
-0.55 
8.26 
Capital Spending - 5 Yr. Growth 
Rate  
-16.52 
8.30 
15.41 
9.58 
 
FINANCIAL STRENGTH  
Company 
Industry 
Sector 
S&P 500 
Quick Ratio (MRQ) 
-- 
1.84 
1.47 
0.83 
Current Ratio (MRQ) 
-- 
2.01 
1.74 
0.98 
LT Debt to Equity (MRQ) 
-- 
33.97 
27.56 
142.02 
Total Debt to Equity (MRQ) 
-- 
58.98 
43.42 
202.74 
Interest Coverage (TTM)  
-- 
-0.99 
-0.11 
11.00 
 
PROFITABILITY RATIOS  
Company 
Industry 
Sector 
S&P 500 
Gross Margin (TTM) 
55.28 
4.74 
11.61 
30.29 
Gross Margin - 5 Yr. Avg. 
60.20 
40.98 
34.17 
27.24 
EBITD Margin (TTM) 
-- 
-- 
-- 
-- 
EBITD - 5 Yr. Avg 
-39.34 
18.66 
22.19 
14.92 
Operating Margin (TTM) 
-52.54 
0.98 
0.43 
-- 
Operating Margin - 5 Yr. Avg. 
-47.47 
13.33 
11.36 
17.17 
Pre-Tax Margin (TTM) 
-52.52 
1.03 
0.29 
12.92 
Pre-Tax Margin - 5 Yr. Avg. 
-48.56 
13.85 
9.10 
16.82 
xxxiv 
 
Net Profit Margin (TTM) 
-55.06 
0.56 
-1.03 
10.40 
Net Profit Margin - 5 Yr. Avg. 
-49.91 
7.92 
6.22 
12.30 
Effective Tax Rate (TTM) 
-- 
2.16 
36.29 
11.78 
Effecitve Tax Rate - 5 Yr. Avg.  
-- 
66.58 
21.06 
26.01 
 
EFFICIENCY  
Company 
Industry 
Sector 
S&P 500 
Revenue/Employee (TTM) 
437,022 
501,342 
3,598,737 
561,111 
Net Income/Employee (TTM) 
-240,609 
51,959 
-214,286 
62,047 
Receivable Turnover (TTM) 
-- 
0.63 
2.15 
8.21 
Inventory Turnover (TTM) 
-- 
1.64 
2.82 
6.20 
Asset Turnover (TTM)  
-- 
0.08 
0.37 
0.49 
 
MANAGEMENT EFFECTIVENESS  Company 
Industry 
Sector 
S&P 500 
Return on Assets (TTM) 
-- 
1.03 
0.83 
5.07 
Return on Assets - 5 Yr. Avg. 
-6.19 
7.12 
5.63 
5.42 
Return on Investment (TTM) 
-- 
1.33 
1.38 
6.64 
Return on Investment - 5 Yr. Avg. 
-6.92 
9.81 
8.38 
6.97 
Return on Equity (TTM) 
-- 
2.93 
1.11 
14.72 
Return on Equity - 5 Yr. Avg.  
-6.64 
11.62 
9.54 
9.94 
 
 
 
 
 
 
 
xxxv 
 
FINANCIALS: EPICOR SOFTWARE CORPORATION (EPIC.OQ)
52
 
Periods 
2007 
2008 
2009 
September 
101.329 
102.224 
98.693 
December 
105.706 
127.945 
100.447 
March 
103.1 
135.762 
98.576 
June 
119.697 
121.948 
111.908 
Totals 
429.832 
487.879 
409.624 
 Note: Units in Millions of U.S. Dollars 
 
EARNINGS PER SHARE 
Periods 
2007 
2008 
2009 
September 
0.07682 
-0.13861 
-0.0276 
December 
0.10869 
0.00474 
-0.1123 
March 
0.13917 
0.04643 
0.0059 
June 
0.38365 
0.02618 
0.11314 
Totals 
0.71164 
-0.05914 
-0.02139 
Note: Units in U.S. Dollars 
 
CONSENSUS ESTIMATES ANALYSIS 
  
# of Estimates 
Mean 
High 
Low 
1 Year Ago 
SALES (in millions) 
Quarter Ending mrt-10 
7 
99.51 
100.51 
99.00 
106.78 
Quarter Ending jun-10 
7 
105.43 
106.58 
102.99 
117.35 
Year Ending dec-10 
7 
425.07 
431.00 
415.64 
474.61 
Year Ending dec-11 
5 
449.45 
467.30 
436.08 
525.00 
 
 
                                               
52
 <http://www.reuters.com/finance/stocks/financialHighlights?symbol=EPIC.OQ> (15.03.2010) 
xxxvi 
 
EARNINGS (per share) 
Quarter Ending mrt-10 
7 
0.10 
0.11 
0.10 
0.11 
Quarter Ending jun-10 
7 
0.13 
0.14 
0.12 
0.15 
Year Ending dec-10 
7 
0.55 
0.58 
0.50 
0.64 
Year Ending dec-11 
5 
0.64 
0.69 
0.59 
-- 
Sales and Earnings Figures in U.S. Dollars (USD) 
 
VALUATION RATIOS  
Company 
Industry 
Sector 
S&P 500 
P/E Ratio (TTM) 
-- 
20.31 
9.46 
16.71 
P/E High - Last 5 Yrs. 
NA 
7.73 
2.48 
20.13 
P/E Low - Last 5 Yrs. 
NA 
2.42 
0.51 
5.04 
Beta 
1.78 
0.78 
1.22 
1.36 
Price to Sales (TTM) 
1.44 
1.43 
0.64 
2.21 
Price to Book (MRQ) 
1.97 
3.87 
1.93 
3.14 
Price to Tangible Book (MRQ) 
-- 
11.53 
2.66 
5.91 
Price to Cash Flow (TTM) 
15.75 
6.83 
5.21 
23.28 
Price to Free Cash Flow (TTM) 
-- 
41.96 
15.28 
21.00 
% Owned Institutions  
-- 
-- 
-- 
-- 
DIVIDENDS  
Company 
Industry 
Sector 
S&P 500 
Dividend Yield 
NA 
0.28 
0.05 
1.50 
Dividend Yield - 5 Year Avg. 
-- 
2.11 
1.05 
2.58 
Dividend 5 Year Growth Rate 
-- 
7.99 
8.63 
-9.32 
Payout Ratio(TTM)  
-- 
43.68 
18.98 
29.14 
 
xxxvii 
 
GROWTH RATES  
Company 
Industry 
Sector 
S&P 500 
Sales (MRQ) vs Qtr. 1 Yr. Ago 
-8.23 
-2.77 
1.98 
12.74 
Sales (TTM) vs TTM 1 Yr. Ago 
-16.04 
-3.18 
-3.48 
-2.75 
Sales - 5 Yr. Growth Rate 
12.74 
8.48 
9.17 
6.74 
EPS (MRQ) vs Qtr. 1 Yr. Ago 
332.16 
-2.56 
182.59 
197.23 
EPS (TTM) vs TTM 1 Yr. Ago 
65.95 
-- 
-- 
-- 
EPS - 5 Yr. Growth Rate 
-- 
2.41 
-0.55 
8.26 
Capital Spending - 5 Yr. Growth 
Rate  
-- 
33.88 
15.41 
9.58 
 
FINANCIAL STRENGTH  
Company 
Industry 
Sector 
S&P 500 
Quick Ratio (MRQ) 
1.40 
2.20 
1.47 
0.83 
Current Ratio (MRQ) 
1.41 
2.34 
1.74 
0.98 
LT Debt to Equity (MRQ) 
85.15 
13.61 
27.56 
142.02 
Total Debt to Equity (MRQ) 
85.22 
18.78 
43.42 
202.74 
Interest Coverage (TTM)  
0.81 
1.47 
-0.11 
11.00 
 
PROFITABILITY RATIOS  
Company 
Industry 
Sector 
S&P 500 
Gross Margin (TTM) 
45.76 
26.58 
11.61 
30.29 
Gross Margin - 5 Yr. Avg. 
50.42 
58.59 
34.17 
27.24 
EBITD Margin (TTM) 
13.69 
-- 
-- 
-- 
EBITD - 5 Yr. Avg 
15.03 
26.24 
22.19 
14.92 
Operating Margin (TTM) 
4.24 
8.47 
0.43 
-- 
Operating Margin - 5 Yr. Avg. 
7.92 
22.48 
11.36 
17.17 
xxxviii 
 
Pre-Tax Margin (TTM) 
-1.12 
8.36 
0.29 
12.92 
Pre-Tax Margin - 5 Yr. Avg. 
5.32 
23.44 
9.10 
16.82 
Net Profit Margin (TTM) 
-0.30 
6.03 
-1.03 
10.40 
Net Profit Margin - 5 Yr. Avg. 
5.62 
14.76 
6.22 
12.30 
Effective Tax Rate (TTM) 
-- 
13.21 
36.29 
11.78 
Effecitve Tax Rate - 5 Yr. Avg.  
-5.71 
32.52 
21.06 
26.01 
 
EFFICIENCY  
Company 
Industry 
Sector 
S&P 500 
Revenue/Employee (TTM) 
-- 
9,483,183 
3,598,737 
561,111 
Net Income/Employee (TTM) 
-- 
255,865 
-214,286 
62,047 
Receivable Turnover (TTM) 
4.31 
3.01 
2.15 
8.21 
Inventory Turnover (TTM) 
61.37 
3.71 
2.82 
6.20 
Asset Turnover (TTM)  
0.55 
0.36 
0.37 
0.49 
 
MANAGEMENT EFFECTIVENESS  Company 
Industry 
Sector 
S&P 500 
Return on Assets (TTM) 
-0.17 
4.35 
0.83 
5.07 
Return on Assets - 5 Yr. Avg. 
4.07 
11.18 
5.63 
5.42 
Return on Investment (TTM) 
-0.21 
6.22 
1.38 
6.64 
Return on Investment - 5 Yr. Avg. 
5.47 
16.38 
8.38 
6.97 
Return on Equity (TTM) 
-0.42 
8.03 
1.11 
14.72 
Return on Equity - 5 Yr. Avg.  
9.90 
18.37 
9.54 
9.94 
 
 
xxxix 
 
APPENDIX 3.1: 12 IAAS PROVIDERS (Source: Conry-Murray, 2009) 
 
xl 
 
 
xli 
 
 
 
 
xlii 
 
APPENDIX 3.2: SAAS-INTEGRATORS (Source: Herbert, 2010) 
 
 
 
 
xliii 
 
APPENDIX 5.1: SAUGUTUCK SAAS SCENARIOS (Source: ITR Manager.com, 2009)