It’s a dirty little secret: A large number of established software vendors are under wraps building the solutions that they can offer to the Indian market through the on-demand model. Their target: the 8 million small and medium enterprises.

How big is this opportunity? “If appropriate applications are available then it’s not too speculative to imagine that the addressable market is at least one percent of revenues,” says Sharad Sharma, CEO of Yahoo! India.

Consider the ‘unorganized’ $50 billion retail industry, the $12 billion diamond polishing industry; or the $8.7 billion automobile components industry. Add to this the small cooperative banks, health clinics, and several other industry segments. The list goes on. “None of these micro-firm based networks has been a viable market for the old-style software applications business model. But with the hosted application model the opportunity can now be monetized,” notes Sharma.

It’s about breaking away from the traditional thought process and exploring the blue ocean—the unknown market space, untainted by competition. Like the ‘blue’ ocean, the opportunity in India for SaaS providers is vast, deep, and powerful in terms of profitable growth and infinite opportunities.

The concept of SaaS has been brewing for quite some time now. Starting its life as the Application Service Provider (ASP) model it has moved on and evolved into a hosted model with greater flexibility than it had in its early days. The idea of hosting software applications for the enterprise has generated a considerable amount of interest amongst vendors, as also among enterprises for the flexibility the model offers. According to Springboard Reasearch, India is the fastest growing market for SaaS in the Asia-Pacific region, market expected to grow to $260 million in 2011 from the $27 million in 2007. However, beyond this number, the emerging markets are always said to be more valuable than what their market size indicates. Likewise, in India there is a huge market, which is yet to be created and explored.
What will this new market look like? How does one partake in its growth? Before we go into the new market let us look at the challenges. In India, the four main challenges that act as a stumbling block in the IT adoption are affordability, relevance, distribution, and piracy. These challenges offer a tremendous opportunity for MNC hardware and product companies to tap the potential of Indian SMB market with optimum localization strategy, strong distribution network, understanding the unmet needs of SMB landscape, and designing the right product strategy.

The 8 million small and medium businesses in India generally don’t consume any IT today. However, globalization in trade is forcing SMBs to improve their efficiency in conducting businesses, if they have to stay ahead of competition—with exports for SMB’s in India growing with a CAGR of 12.5 percent over the last 10 years, with more MNCs entering the country, and an imperative growth of mobile workforce technology adoption in SMBs. Since the sector does not have a legacy in IT, easy and affordable technology will drive the overall technology adoption within the small and medium businesses.

This means, they will not go for deploying large-scale business-critical software systems, such as ERP and CRM application suites. Deploying these systems across an enterprise can cost hundreds of thousands of dollars in upfront licensing cost, and also usually requires an army of IT personnel and consultants to customize and integrate it with the organization’s other systems and data. The time, staff, and budget requirements of a deployment of this magnitude represent a significant risk for an organization of any size, and often puts such software out of the reach of smaller organizations that would otherwise be able to derive from it a great deal of utility.

“For these SMB’s SaaS is the affordable, relevant, and reliable way”, explains Moorthy Upalluri, Director, DPE, Microsoft India. SaaS applications don’t require the deployment of a large infrastructure at the client’s location, which eliminates or drastically reduces the upfront commitment of resources. With no significant initial investment to amortize, an enterprise that deploys a SaaS application which turns out to produce disappointing results can walk away, without having to abandon an expensive on-premise infrastructure.

The Indian Psyche
Since many of the SMB owners in the second and third tier cities or rural areas are not aware of existing IT solutions that may solve their problems, there would be a great deal of apprehension about technology adoption. Unlike in the case of small businesses in the U.S, where there is a great amount of PC and broadband penetration and people are technology savvy, the Indian counterpart needs awareness and education. Hence, the focus of most of the IT vendors should not be restricted just to increase their penetration across the country, but also towards educating the SMB owners about leveraging technology to solve their business problems.

Moreover, there should always be easily accessible communication channels available to SMB owners. Enterprises in India, especially the SMBs, are very different from their counterparts worldwide. “Lots of applications around SaaS became successful worldwide because it is a hosted application which is ready to use. But the self-service model will not work in India because the Indian enterprise psyche traditionally needs a front end facing partner who can templatize and customize the stuff even in a SaaS model,” explains Uppaluri. Hence, Microsoft realized that the only way to penetrate the market was to templatize the application so that partners can take it forward. For example, the requirements in the retail sector will be different from a manufacturing industry. The partner in the retail domain can templatize and take it to the customer and meet his requirements.

SMB owners need to be convinced of returns before making any capital investments in IT. In most of the cases, an SMB owner expects the quantified benefits such as growth in revenues and profit margin or significant cost savings. A complex ROI mathematical calculation might not be the best solution in this case. However, IT vendors need to build a case for IT solution and need to highlight benefits that can solve SMB’s key problems.

This is what exactly happened in Tirupur, hailed as the Textile capital of India. In a survey of Tirupur two years ago Microsoft found a strong demand among entrepreneurs for technology, but most were overwhelmed by its cost and complexity. Hence they used to to store contacts and inventories in the heads of managers who can quit one fine morning. Customer data, including cost estimates, proposals, and orders were all maintained either in a ledger or was memorized. It was fairly common for a company to lose track of this information by the time it was needed. The garment exporters in Tirupur did not have to bother about getting the order, but the problem was in execution.

Microsoft led a project in Tirupur to roll out an order-tracking application that knitters could access over the Web by text messaging. All the back-end hardware and maintenance is managed by another vendor. Fees range from $100 to $250 per user per month. Microsoft also donated 20 computers, two servers, and videoconferencing equipment to a technology center in Tirupur, where it gives live demonstrations on how a textile company can streamline its business. Since the whole system worked on SaaS, it did not require much investment for infrastructure. Moreover, the availability and accessibility to partners eased their concern for maintenance and support. As the project was a huge success in Tirupur, Microsoft is now targeting the SMB sector across the country with the whole suite of Saas products like Office Live, Business Productivity Online Suite and Dynamic CRM.

Adoption @ Corporates
Gartner says that the yearly cost of purchasing and managing software applications in enterprises can be four times the initial purchase cost. Moreover, companies spend more than 75 percent of the total allocation in their IT budget on maintaining software and systems. “However the concern that pops up in the minds of large enterprises while thinking of SaaS is how to integrate it with the existing system” says Balaka Barauha Aggarwal, Senior Manager, Emerging Software, Springboard Research. Balaka points out that increasing collaboration with SaaS vendors, ISV’s, telecom companies, and hosting providers in the region is making the integration easier and less risky. Hence, SaaS is now slowly spreading throughout the enterprises, delivering mission-critical solutions well beyond the basic software functionality. It has been steadily moving from the edges to the core, and in another few years will increasingly bring ERP, Supply Chain, and GRC solutions to the enterprise.

Saas also has the potential to transform the way information-technology (IT) departments relate to and even think about their role as providers of computing services to the rest of an enterprise. The emergence of SaaS as an effective software-delivery mechanism is creating an opportunity for IT departments to change their focus from deploying and supporting applications to managing the services that these applications provide. A successful service-centric IT, in turn, directly produces more value for the business by providing services that draw from both internal and external sources and align closely with business goals.

Moreover, the Indian business manager is normally quite technically savvy than those in the other parts of the world and has the mindset to explore newer technologies. Doug Farber, Vice President - Operations, Asia Pacific, Salesforce.com points out that the log in rates by Salesforce customers in India is relatively higher than in Australia, which is the largest SaaS market in the world. “In India, people love analytics and appreciate business intelligence applications which help them to grow the topline. Hence the focus in India is towards such applications,” says Farber.

Another benefit is that, since users are charged a subscription fee, the SaaS vendor takes into account not only the cost of the application and maintenance of infrastructure, but also the cost of the hardware and people employed. Usually staff resources connected to application costs under the traditional model are hugely underestimated or completely ignored when a Total Cost of Ownership (TCO) analysis of software, hardware, and people is done. The staffing or ‘people’ cost associated with deploying and making sure that the software is regularly running properly is somewhat hidden and difficult to measure upfront. In the SaaS model, however, the internal staffing requirement is lower.

“SaaS in India will not be limited to just enterprise applications. It would also be extended to mobile phones; everything will be on the server and integrated with the mobile phone,” explains Farber. This will be the key driver of SaaS market in India, which registered 93 percent growth over the previous year. Currently, the market size for SaaS in India is $54 million.

Every geography is unique when it comes to the market behavior and perception. And India is no exception. Hence as is truly said, “The right solution is not an American product stripped down to meet an Indian price, but a truly Indian product designed from the ground up to carry an Indian price”. Success depends on how fast the vendors understand this and scale around the requirement.

What are SaaS advantages over Enterprise Software?
1. Applications have a low initial cost and can be purchased in small amounts, allowing customers to quickly receive payback and turn something off if it doesn’t work
2. SaaS applications (typically) are sold to a line of business owner with pain and can pay for the solution from an operational budget (power shift from IT to LOB)
3. SaaS vendors can sell from small groups to large organizations, often leveraging lower cost telesales operations with quick sales cycles
4. Implementation is often days or weeks; in some cases with significant data orcontent integration, implementations can be 2-3 months.
6. Defined APIs and web services interfaces (SOA) dramatically simplify the challenges of integration.
5. Browser-based applications allow users to access functionality from anywhere without requiring VPN software
7. Post implementation maintenance and operations risk is bourn by the vendor, which has economies of scale not available to individual organizations
8. In some cases, SaaS has been influenced by consumer Internet applications. Many have used Google, Amazon, etc. to focus on creating a more frictionless customer experience with UIs that obfuscate complexity behind the scenes as well as adoption models that include a consumer download or free version.