This post started with a conversation with Paula Thornton. We were discussing the implications of the cloud for business processes and software and I will cover this in another post. Here, I first want to address the business model issue that will either carry forward or compromise this innovation.

Most SaaS providers I talk with are doing very well in the down economy. Some are having record profits. For example, Jen Grant at Box.net said that as a SaaS provider they continue to exceed their revenue targets. She attributed this to pressure on IT departments and business units to keep expenses down. With Box and many other SaaS tools, it is easy to get started and there are no implementation or systems integration costs. Employees still need to do work. Box and other SaaS tools provide a lower cost way to accomplish many content related tasks.

While Spigit, the innovation management software firm, offers both cloud and on-premise solutions, 95% of their customers are choosing SaaS. GroupSwim has gone to a total cloud offering so they can scale quickly, another major benefit of the cloud and making servers virtual. QuickBase has also seen significant growth for its SaaS based shareable database despite a down market. They feel that companies are seeing this class of applications as a way to both cut costs and increase productivity. Traction Software, the SaaS based teaming platform, continues to beat its revenue goals. (correction, Traction is actually not SaaS as Paula notes below, but they are doing quite well and have a great product.) 

SaaS is an important component of the move to Enterprise 2.0. The analysts seem to agree with the software providers I have talked with. IDC recently issued the report, Software as a Service Market Will Expand Rather than Contract Despite the Economic Crisis. They projected that by the end of 2009, 76% of U.S. organizations will use at least one SaaS-delivered application for business use. SaaS applications are also getting an increasing percentage of IT budgets.

So where will this all go?  According to the Wikipedia, electricity was once generated on premise but through a series of technology innovations, the grid and remote sourcing of power became possible. It took a while to get the business models sorted out and FDR won his first election, in part, on the promise to clean up the corrupt electric utilities of the day.

I am not suggesting there is anything like that corruption going on now with the cloud.  However, as use of the cloud grows the final business model does remain to be determined. Will it become a utility in the business sense, as well as the practical sense?  Will it need regulation?  

The players continue to grow. For example, Amazon went from selling books online to also becoming a major cloud service provider. However, it and several of the other major cloud players have not signed the Open Cloud Manifesto. I am not taking sides on this issue, just noting that there is an issue.

The National Institute of Standards and Technology, a non-regulatory arm of the US Commerce Department, has helped by developing a draft definition for federal use of cloud computing. They are ahead of the private sector here. Let’s hope that those who stand to benefit from the cloud can come to agreement that allows the cloud to reach its potential and helps the users, as well as our economy.

It will take a while for the final business model to evolve as the cloud moves data and content storage toward becoming a utility in a practical sense. Let’s hope we do a better job that we did with electricity.