‘SaaS’ – the product advantage and need

India has all the potential to lead the world in the SaaS segment, yet the largest number of SaaS companies relocate out of India, for want of ease-of-doing-business. SaaS is one of the major blocks in the emerging Software product Industry of India and it needs urgent attention in this digital economy age.

Whether SaaS is a product or service is often debated.

From the perspective of integration of SaaS into the overall policy frame work of the country, it is crucial for us to understand the dynamics of the SaaS business.

This is the first in a series of blogs to understand the dynamics of SaaS as a sub-sector within the Software Product Industry. The idea of this blog is not to prove that SaaS is not a service, but to emphasize that it closely relates to the Software Product Industry, and is distinct from the custom built, project/program run or SLA based IT/ITES services Industry. And further, there is a need to include this as a part of the Indian Software Product Industry (iSPI) in order to be in an advantageous position to both – promote the SaaS business and also to develop an eco-system that is synergistic to all segments of the Software Product Industry.

SaaS has both a product and a service component. The product precedes the service. The service is not just the access but also the elements of all that goes into providing service to a consumer. Whereas customer satisfaction is focal to the service component, the attractively featured product, stability, cutting edge technology, speed and security are focal to the product side. The product needs a continuous investment and development. Product is the flesh and blood of the SaaS business body, and the body needs the air of service, to breath and run. The interplay between the product and the service component of a SaaS offering is important for success.

SaaS – Product advantage side

SaaS as a product or a service is a border line debate. Here are some important pointers to why SaaS has more weight to be classified as a product than a service:

Software-as-a-Service is an online access or delivery model, thus offering a different business model. In most situations, the same Software (with same features) product can also be sold in a Pre-packaged form, delivered and used in an on-premises model.

A software in any form (on media, downloaded online, on premises or accessed online over Intranet or Internet) provides a service to a user but the software itself is a “product” or an “intangible good”. There is no doubt that SaaS is also a pre-packaged software. The distinction is in the delivery model and the business model.

Hence, all three forms i.e. the Pre-packaged software sold on a media, downloaded online and SaaS model possess the properties of ‘digital/intangible goods’. The other models of channel sales and distribution e.g. EULA, paper license and self-generated access PINs, all can apply to any of these three forms.

SaaS is subject to the same IP law and IP right issues as the non-SaaS product is.
SaaS is mostly sold in an MRP format, the price-quantity relation is very clearly defined. MRP is a concept clearly applicable to supply of goods, produced.
The condition ‘license for use’ can be a condition for a service but for a product the license is for “right to use” and as soon as the license is sold to the customer, for a consideration the “right to use” is transferred for the specified period of time. Thus, implying a condition of transfer of “right to use”.
Trade is the most important aspect: Many people assume SaaS means a direct B2C relationship between the SaaS Product Company and the end users. No SaaS company can become global unless it focuses on the ‘trade’ aspect of the business.

Even direct B2C has to incorporate trade as an important attribute. Microsoft when it sells office365 hosted product is a SaaS company that is trading a bundle of products and an integrated services through its channel partners. Scale can be attained only when a SaaS producer take with him a strong ecosystem of trading partners.

When trade has to be activated as an important attribute of a successful SaaS business, the transfer of ‘right to use’ or trade of ‘right to use’ becomes inevitable. Being a product company carries a built in message to channel partners for trade.

What is traded is the features of product, the ‘goods’ that you sell and the ‘service’ component gets activated only when the end-user interfaces. B2C can either convert in to a B2B2C or B2nb>c.

The Software Products of modern age may be a combination of complex scientific or commercial applications with a mix of data, voice, video, images, texts, document files.

A combination of one can produce another. SaaS therefore, cannot be limited to the strict periphery of a ‘computer program’ or ‘information technology software’ but graduate to be a ‘digital good’ that forms the basis of a ‘digital economy’.

Considerable capital is invested in R&D, product development and product improvisations on continual basis in any SaaS based product. The differentiation is achieved in Product side by bundling the differential features. The Differentiation in service side is also incidental to the robustness, user friendliness, ease of use, security and most importantly the together the quality of product itself.

Hence, even when the service side is so important to the SaaS business, the Q-o-S itself depends heavily on the quality of the SaaS Product.

The Software Product and SaaS Industry in India

The global Software Product Industry is estimated to reach $1.2 trillion by 2025. The Indian Software product industry today is about 5% of the total exports. The total revenue of software product industry in India is $6.1 billion today. Indian Software Product Industry by conservative 10% estimate will be $100+ billion by 2025.

According to the Google-Accel Report the SaaS business in India is about $600+ million and will be $10 billion by 2025, which makes it 1% of the entire Software product estimates.

IDC has a higher forecast which says, by 2018, 27.8% of the worldwide enterprise applications market will be SaaS-based, generating $50.8 billion where SaaS revenue is forecast to grow at 17.6% CAGR. 27.8% translates to approximately one third of worldwide enterprise applications market.

If a combination of all these numbers are to be believed, the global SaaS market in 2025 at a CAGR of 17.5% will be $157 Billion. If the share of SaaS (27.8% of global enterprise app market) comes true and is retained the SaaS business in 2025 will be much higher than $157 Billion.

The domestic market in India is not strong enough. Most SaaS players are presently targeting the matured global markets with matured online acceptance and internet penetration. The online acceptance in India is also on rise and the rising e-commerce industry speaks volumes about it.

The Domestic market is going to get further strengthened due to various factors in coming times. “Digital India” will increase internet penetration as well as improved bandwidth accessible to consumers. A drive for cashless economy will push large number of SMEs. “India Stack” will enable large number of SaaS products. Government buying will increase in SaaS space with acceptability of cloud and opex business models.

In view of the above, India can certainly aspire to be at a much more than $10 billion by 2025. India will need to harness its prowess to aim at 15% global SaaS market and hence aspire to cross the $20 billion mark by 2025, which is double of the Google-Accel report which seems to focus just the SMB market.

Pursuing the Policy for Software Products

The above mentioned targets require a serious look at the country level “strategy” and developing a complete eco-system that can help the SaaS industry boom in India.

This requires consolidating Software product as an Industry with SaaS as an important vertical block and accordingly a need for following:

Focused policy by Govt. of India
Aligned trade and tax regimes
Participative Industry action by various agencies on ground

iSPIRT has been following action at various levels on all of the above.

The National policy frameworks provide recognition to an Industry sector or sub-sector as well as provide a strategic frame work for growth of this Industry. There are two major Industrial policy frameworks.

The IT Policy is primarily catering to the IT Services industry and has mixed agenda.
National Policy for Electronic (hardware). The focus of this policy is to promote electronic products.

There is no national level policy focused on Software products.

To further this objective, iSPIRT is pursuing a National Policy for Software Products (NPSP). SaaS naturally forms a part of this proposed NPSP within the realms of Software products industry. Included part of these plans is the trade and tax specific issues with Govt. of India on reforming and making these regimes futuristic to compete in the world trade and ease of doing business in India.

One of the results of this active follow up on Govt. policy has been the Startup policy. SaaS has one of the biggest tractions in the Software Product startup space. SaaS startup is closest to the Software product startup in terms of issues and challenges faced.

Conclusion note

Both the product and the service side of SaaS cannot be ignored. Even the service component in SaaS is about using this digital (intangible) product. Both – the product is intangible and also the service it provides is intangible – just as any other enterprise on premises software product. Yet, product is an overwhelming part, right from stage when SaaS is conceived.

The issues of product development, funding, marketing, trade and taxation are all common to the Software Product Industry.

In view of the above, it is advantageous for the SaaS Industry to position itself as a product-based service providing industry. This will help build an integrative Software Product industry of India, which can develop global products in all segments enterprise, on premises, mobile apps, cloud and SaaS based, even as we keep progressing towards building SaaS as new generation Industry.

SaaS will be the segment to reckon with as India emerges into a Software Product Nation in next decade.

References

[1] Google Accel Report – SaaS India, Global SMB Market, $50B in 2025 Public Version 1.1 – 7 March 2016. http://www.slideshare.net/AccelIndiaVC/google-accel-report-saasinindia-public-version-11-7-march-2016.

2 IDC report reference. http://www.forbes.com/sites/louiscolumbus/2014/12/20/idc-predicts-saas-enterprise-applications-will-be-a-50-8b-market-by-2018/#1de5d71295ae

3 Startup India http://startupindia.gov.in/