Office 2.0: Welcome to the revolution

“Do we really need to own everything?”

That is the question businesses are asking when faced with the enormous infrastructure upgrades associated with buying new applications, according to CEO and founder of on-demand CRM supplier, Marc Benioff.

“SAP and Microsoft tell them that they do,” he says. “We disagree.”

The complex and expensive infrastructures that enterprises have amassed to provide the platforms for business applications are not delivering value for money, he says – and with good reason.

Analysts at Gartner research estimate that 65% of IT spending is used just to ‘keep the lights on’, and delivers no competitive advantage. In contrast, the software-as-a-service (SaaS) model, as exemplified by, NetSuite and hundreds of start-ups, allows businesses to leave the task of building and maintaining the infrastructure to the service providers.

That SaaS model has been gradually building momentum over the past two years. But in the last few months – as some of the major forces in the industry have acknowledged the inevitable move of many applications to SaaS – the whole area has been the subject of intense discussion, inspiring some observers to herald a new era in the software industry, as distinct from today’s client-server paradigm as it was from mainframe-based computing.

“The big fat middle of the industry will be the first to give way to on-demand services.”

Ray Lane, Kleiner Perkins

In imitation of the new breed of consumer websites that promote user generated content dubbed ‘Web 2.0’, this new web-based model of business applications has been christened ‘Office 2.0’.

The manifesto of Office 2.0 may be young but it has quickly become the nexus for the strategies of industry giants: Google is building the world’s largest data centre complex to serve tens of millions with Internet-delivered applications; Yahoo has similar ambitions; and even Microsoft, with its OfficeLive pilot, is acknowledging that, for many users, desktop applications will ultimately not be PC-hosted.

That sense of radical change came together in San Francisco in early October with the inaugural Office 2.0 conference.

As its organiser Ismael Ghalimi, the CEO of business process management company Intalio, explained, the significance of what is going on is hard to understate. “The fact that Office 2.0 applications are hosted online is not just a technical detail. When your data is on-line, it makes collaboration a whole lot easier.”

And that has not gone unnoticed by the likes of Salesforce’s Benioff. He points to what he believes is the most telling Office 2.0 (or ‘Business Web’ as he calls it) function to date: a small link on Google’s online spreadsheet program, Google Spreadsheets, that reads ‘Share this spreadsheet’.

When clicked, that function allows users to enter a list of email addresses of users who are then invited to read or even edit the spreadsheet. “After some 20 years of selling Excel, Microsoft has never made collaboration that easy,” he says.

This ease of collaboration has a significant business benefit, Andrew McAfee of the Harvard Business School told the Office 2.0 conference. “To date, managers have had access to only a small subsection of the company’s information, like how many orders have been taken. With Office 2.0 applications, they can find out who knows what, who is an expert in what field, and access a lot more of the company’s knowledge base.”

Agents of change

The ideas of software-as-a-service and online collaboration are hardly new, so what is creating the sense of revolution echoing through the conference halls and WiFi hotspots of San Francisco?

Three things have conspired to make SaaS significantly more alluring – some cultural, some technical.

The first is AJAX, a collection of Java programming guidelines and recommend-ations that allows much greater control of information displayed on web pages, thereby circumnavigating what has historically been a barrier to SaaS: the browser.

“Since Microsoft released Internet Explorer, the web browser hasn’t evolved,” says Philippe Courtot, CEO of on-demand security company Qualys and a SaaS evangelist. “So in the beginning, had to work very hard with Java, because it was very complicated to make an interactive application in the browser.” With AJAX, interactivity is much more simple and scalable, he adds.

The second factor concerns sentiment towards SaaS within the software industry. Before’s success signalled it was heading for a blockbuster stock market listing, venture capitalists and investors were wary of anything that connected the Internet and business software. Since then, though, investment has poured into software-as-a-service start-ups, and in a matter of a few quarters a whole ecosystem of Office 2.0 companies has developed, accelerating the maturation of the model. Indeed, some believe that it is now impossible for software developers to get venture funding if their applications are not web-based.

There are others waking up to the potential of the new paradigm. Infrastructure providers, such as web hosting and data centre services companies, are now actively courting SaaS start-ups as customers for their services.

“When your business absolutely depends on providing uninterrupted access to web systems, but your expertise is in software development, it is time to turn to a third-party hosting company,” says Brian Garvey, strategy and alliances manager at Rackspace, which provides just such a service.

The third development catapulting SaaS and Office 2.0 into the mainstream has huge appeal: ‘mash-ups’, composite applications created by interweaving multiple software services through standard interfaces to provide functionality that maps directly onto company-specific business processes (see box). By opening up their APIs (application programming interface) and using open interfaces, so anyone can retrieve and input data to the service, SaaS providers allow users and independent software developers to add more functionality to their service offering and tailor it to more vertical markets than the company could ever have developed on its own.

Disruptive behaviour

With this rapid and fluid evolution of functionality underway, sentiment towards SaaS is changing. Gartner predicts that 25% of all software deployments in 2011 will employ the SaaS delivery model, compared to just 5% in 2005, while Forrester Research finds that 57% of large enterprises in the US have expressed interest or are already using SaaS services – albeit in a limited capacity.

Should this pace of SaaS adoption continue, the ramifications will be felt in all sections of the IT industry.

“Google has built infrastrucutre at the scale of the planet. The opportunity is thre for SaaS companies to do the same.”

Philippe Courtot, Qualys

Most immediately impacted will be the packaged software market. Not only do on-premise applications require a larger capital investment to purchase initially, making them riskier than on-demand implementations, they also force companies to invest in the hardware to support them. So as the model gains popularity, they will appear to many businesses the less attractive option.

For vendors of such applications, any kind of switch to the SaaS model will be traumatic. Not only would such a transformation require a complete change in business model and sales culture, but it would also trigger an immediate drop in revenues as customers go from paying a lump sum upfront for their software to paying monthly or quarterly fees.

“There are companies that dominate their markets, and spend more on R&D than any of their competitors can keep up with,” explains Ray Lane, ex-Oracle executive and partner at venture capital firm Kleiner Perkins Caufield & Byers. “Then there are small start-ups with no legacy to protect. Everything in between, I just don’t see a future for them. The big fat middle of the industry will be the first to give way to on-demand services.”

“Many of the companies in the software industry are dead men walking.”

Eventually, ripples will also be felt in the hardware and infrastructure markets. As SaaS grows, the service providers will become the most significant consumers of infrastructure hardware and software. That will change their game, says Qualys’ Courtot.

“As a SaaS provider, I can amortise the cost of switching my infrastructure provider across all of my customers,” he says. “That means infrastructure providers can not rely on lock-in anymore.”

Courtot also believes that when the biggest consumers of infrastructure equipment are industry insiders, companies that rely on the strength of their brand to justify their prices will find themselves undercut by services delivered from emerging markets.

Platform jumping

Software-as-a-service, however, will not just be disruptive to the old guard of Office 1.0 package vendors. Having removed infrastructure and software licence lock-in, SaaS vendors themselves live in constant danger of customers deserting their service for a rival offering.

Moreover, as more SaaS providers emerge with software services targeted at customers’ vertical industry-specific requirements, the opportunity for small numbers of ‘gorillas’ to dominate whole markets will diminish.

This accounts for the rush among SaaS providers to offer not only applications as a service, but also as a platform on which other SaaS application developers can build their own components or even whole products. By establishing themselves as the medium through which organisations find, purchase and integrate software services, SaaS providers believe they can establish a firm foothold in what is an otherwise slippery customer relationship.

It comes as little surprise that the most mature and enterprise-ready of these platforms is that of In 2005, the company launched AppExchange, a community platform through which users can share and distribute applications that sit alongside Salesforce’s central customer relationship management (CRM) functionality.

Already over 400 companies have signed up for the AppExchange mash-up experience – most are niche and specialist but that is the nature of the beast.

At the October event, Salesforce announced plans to make the platform even more sophisticated with the unveiling of an on-demand development platform known as APEX. While previously any customisation of the underlying business logic of its CRM software would require supplementary code, and therefore local infrastructure on which to operate that code, APEX allows users to open the system’s hood and reprogram it using a completely new development language. The new code is stored and executed within’s own infrastructure.

APEX could, in theory, allow independent developers to create entirely new applications using’s platform. At the company’s Dreamforce user conference in October 2006, executive vice president of technology Parker Harris demonstrated a rudimentary warehouse management application developed on APEX, using a combination of functionality, Google’s mapping software via an API and new APEX code.

Other SaaS companies are now weighing in with their own platforms. Also in October, web conferencing provider WebEx, which claims to have the largest number of subscribers of any SaaS company, unveiled Connect, a new on-demand collaboration platform that allows users to integrate software services directly into their communications.

A sales team, for example could set up a ‘WebOffice’ in which they use instant messaging and video to communicate, but which also allows them to access transactional and productivity applications.

David Knight, vice president for WebEx Connect believes the fact that it is centred around communication makes it fit more naturally to the way people work than’s platform. “Workers don’t live in transactional apps,” he says.

For its part, Microsoft is still not saying a lot about the subject of SaaS. With its software installed on over 90% of the world’s desktop PCs, it stands to lose the most if SaaS become the dominant form of applications delivery and the company fails to exploit that shift.

But it certainly recognises the significance of SaaS platforms. “There is a big play for us around providing the platform for independent software-as-a-service providers,” says UK head of technology for development and platforms, Mark Quirk.

This should come as no surprise, he adds. After all, Microsoft first made its name selling a platform on which other vendors could deploy their applications.

World service

According to SaaS’s most ardent advocates, the potential disruptive power stretches way beyond the IT industry: it can be instrumental in flattening global economic asymmetry.

 Companies in emerging economies such as China may not have the capital to invest in a top-to-bottom enterprise architecture, they argue, but by employing software-as-a-service they can leverage the infrastructures of their providers to close the technology gap between themselves and their competitors in developed nation corporations.

And that provides a golden opportunity for SaaS providers. Even if the Fortune 500 companies stick with their traditional systems, even building their own service-oriented architectures, the scope for expansion among SaaS providers is enormous. As Philippe Courtot says: “Google has built infrastructure on the scale of the planet, and it is used all over the world. The opportunity is there for SaaS companies to do the same.”

Mash destruction

The web services-based composite application, or ‘mash-up’, threatens IT management control over applications.

Just as business staff have  leveraged subscription services such as to access an applications set outside the control of centralised IT, the relative simplicity with which software services can now be combined to provide new functionality encroaches on IT territory.  It is potentially application integration for the masses.

One view sees this as a boon: business users can at last be in direct control of the tools they employ. “[Mash-ups] represent the benefits of web services, but at the level of the user and without coding,” says Ajay Gandhi, director of product marketing at BEA.

But another view sees it as a danger. The long development cycles of internally integrated applications may slow innovation and allow precise requirements to be lost in translation, but the rigour that professional developers employ is there for a reason.

Office 2.0 players

            30boxes – Scheduling
            Atlassian Enterprise wikis
            Coghead – Application templates
            CollectiveX Collaboration/apps platform
            DabbleDB Information sharing
            Etelos Office/sales/project mgmt
            Extentech Business intelligence
            Foldera Information organisation
            Genius – Sales prospect tracking
            Google Online office
            iNetOffice Document creation/mgmt
            Joyent – Information sharing  
Koral Content collaboration
            NetSuite Business applications
   – CRM and apps platform
            SugarCRM CRM
            System One Knowledge management
            ThinkFree Online office
            WebEx Collaboration
            Workday Human capital mgmt
            Zoho Online office
            Near-time Collaboration
            Socialtext Enterprise wikis        
Vivapop Calendaring

Further reading in Information Age

The new way to deploy software – September 2006's on-demand delivery vehicle – June 2006

More articles can be found in the Business Applications Briefing Room

Pete Swabey

Pete Swabey

Pete was Editor of Information Age and head of technology research for Vitesse Media plc from 2005 to 2013, before moving on to be Senior Editor and then Editorial Director at The Economist Intelligence...

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