McKinsey – Delivering Software As A Service

Just came across this article (free registration required or use bugmenot’s login) from McKinsey Quarterly about delivering software as a service. Thought it is relavent to the high profile Xero, who provide accounting software as a service.

Main points in the article:

  • An IDC report projects that 10% of the market for enterprise software will migrate to a pure software as a service model by 2009.
  • Software as a service vendors are less profitable than some traditional software vendors today, this gap is primarily caused by a lack of scale.
    • A few service vendors already have much higher margins (WebEx, at 26%, and Digital Insight, at 19%) because they’ve been able to achieve scale and a leading position in their niches.
    • Other leaders, such as (which provides on-demand CRM and sales force automation tools) and ADP (the world’s largest automated check processor) have also gained mainstream uptake among midsize and large companies.
  • Software as a service offers several advantages to IT buyers:
    • More frequent (and potentially less painful) upgrades.
    • Lower cost of ownership.
    • Higher level of service from vendors that must become more responsive to customer needs or risk losing subscription revenues.
    • Countering these benefits are the acknowledged risks of reliability and security.
  • The article has a great graph showing the migration of software applications, broken down software catergory, large enterprises, SMEs, if the speed of migration is different for each customer segment).
    • The conclusion was for core financial applications that SMEs are already migrating (pace depends on customer segment) while it may be unlikey for for large enterprises to migrate at all.

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