Factors to create value by the application of Software as a Service

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Factors to create value by the

application of Software as a Service

Frank Vermeer Augustus, 2009

Supervisors from the University of Groningen: 1st Prof.dr.ir. J.C. Wortmann

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Factors to create value by the

application of Software as a Service

Amsterdam, August 27, 2009

Master Thesis Technology Management

Author:

Franciscus Daniel Maria Vermeer (1336975) Frank.Vermeer@gmail.com

T: +31644644502

Supervisors from the University of Groningen: 1st Prof.dr.ir. J.C. Wortmann

2nd Prof.dr. G.B. Huitema

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“It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.”

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PREFACE

This research project was undertaken in order to complete my master degree in Technology Management. The project is in the form of a research thesis and is written in combination with an internship in a host organisation.

During the last 12 months, the process of writing my thesis was combined with a internship at the Dialogues Incubator, a innovation department of ABN AMRO. This gave me the wonderful opportunity to conduct a study to the latest developments of Software as a Service

I would like to take this opportunity to thank my supervisor Hans Wortmann, from the University of Groningen, for his valuable comments and extensive reflections during the course of my research. Additionally, I must acknowledge George Huitema, my second supervisor, for his useful feedback.

I would also like to express my gratitude to several people within the ABN AMRO organization. First, to Jeroen Lampe, for his supervision during my internship and, second, to Sven Janssen, Timo Mulder, Evan Gelders, and Mirella de Jong who were kind enough to make time for the interviews.

A special thank you must be reserved for Martijn Kriens. His valuable feedback and invitations to the congress “Service made in Holland” and other SaaS related meetings, organized by the Dutch IIP-SaaS platform. These meetings provided a vital context and helped foster an environment in which my interest in this subject and, consequently my research, could flourish. In this way, I would also like to thank Tom Edwards for his comments.

Finally, I would like to thank my girlfriend for her great support throughout the course of this project and my parents, who gave me everything needed to fully enjoy my life as a student and pursue my ambitions.

I hope that reading this thesis will be a pleasant and interesting experience and that it may provide you with useful information.

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EXECUTIVE SUMMARY

This thesis has been written in combination with an internship at the innovation department of ABN AMRO, Dialogues Incubator. Within the Dialogues Incubator environment, various different start-ups are developed, from the initial business idea to the actual launch of a start-up. The focus of this thesis is on start-ups that mainly deliver their services to customers via the internet. After analyzing the development stage, it becomes clear that the same processes (e.g. registration of new users) are considered and developed repeatedly. This results in unnecessary resources being drained during the development stage of a start-up. In this thesis, I attempt to provide important insights regarding Software as a Service, in order that the Dialogues Incubator’s Innovation Managers (DIIMs) will be better equipped to overcome the problems highlighted above.

Software as a Service (SaaS) refers to remote modular services that are accessible through a software interface. The modular services can be reused and (re-)combined to create new services. At the core of SaaS is the new payment model, a subscription model, in which a user pays per period of time.

SaaS can naturally be seen as three, loosely coupled layers, which enables mass customization. This, in turn, results in easier sharing of resources and leads to economies of scale. Furthermore, the appearance of the service can be tailored to the user. Lower costs combined with the subscription payment model allows a reduced service fee to be implemented and leads to a greater customer base, as a result, the turnover increases. The most important drawbacks of the application of SaaS are security, confidentiality risks and business continuity.

Together, the above statements give rise to the following main research question:

What are relevant factors to create value by the application of Software as a Service for Dialogues Incubator’s Innovation Managers?

Since little research has been done on the application of SaaS from a business orientation, an analysis of other predominant theories on modularity and outsourcing will be carried out. To ensure the factors under investigation are usable by the DIIMs, they are assembled to form an instrument. This Instrument is based on the value analysis theory. An overview of the instrument is outlined in section §5.7.

An evaluation study will be performed to determine the usability and applicability of the instrument, by the DIIMs, and used to improve the usability of the instrument.

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10 1. Not suitable to be performed as SaaS.

2. Suitable, but undesirable to be performed as SaaS.

3. Suitable and desirable to be performed as SaaS, although only by a party inside the Dialogues Incubator environment.

4. Suitable and desirable to be performed as SaaS by a party outside the Dialogues Incubator environment.

The factors identified in the first part of the instrument must be used as starting point for the second part; the evaluation, development, and presentation phases.

Four factors for value creation by the application of SaaS are considered as most relevant for the DIIMs; faster time-to-market, realizing a focus on the core competences, a decrease in the total cost of ownership, and achieving innovation.

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1 INTRODUCTION

This thesis is about value creation by the application of Software as a Service by the innovation managers of the Dialogues Incubator, which is a department of the ABN AMRO.

In the next section, the Dialogues Incubator is discussed and the four core competences of the ABN AMRO are addressed. In Section §1.2, the background of the research paper is introduced, including the four sources for value creation and an introduction to the main topic of this paper: Software as a Service. See also figure 1.1.

Figure 1.1 - Overview of chapter

1.1 The Dialogues Incubator

The dynamic market and globalization has lead to the foundation of the research and development department, Dialogues Incubator. The goal of this department is to create a better understanding of the dynamic markets in which the ABN AMRO bank participates.

The start-ups developed within the Dialogues Incubator environment are obligated to be more or less related to the core competences of the ABN AMRO. The core competences of the ABN AMRO are (Mr. Mulder, 20091):

• Trust

• Security

• Network of the ABN AMRO

• Transactions

This has resulted in start-ups operating in divers areas, such as philanthropy, the sale of entrance tickets, a trade platform, human resource support and an online art gallery. Many of these start-ups

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Mr. Mulder is a Dialogues Incubator Innovation Manager, interviewed at 24-7-2009 (see appendix H-1.2). §1.1 The Dialogues Incubator R&D deparment of ABN AMRO The four competences of ABN AMRO §1.2 Background of research subject

Four value sources •Decrease time to market

•Lower initial costs •And other factors Software as a

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14 are solely software oriented, since all customer interactions are executed via the internet. This research will focus on start-ups which deliver its services via software.

1.2 Background of research subject

At the Dialogues Incubator, there is a need to decrease development processes that are similar and often repeated. This is to ensure less unnecessary resources are spent during the development stage of a start-up. Using common internet search engines, a literature study was undertaken.

This paper will outline that less unnecessary resources can be spent during the development stage of a start-up, due to the re-use of services that are delivered via software. This is enabled by emerging technology like ICT2, hence, this academic area just arise. One term that focuses on the reuse of service delivered via software is Software as a Service, which is the main topic of this paper.

Attributes need to determined how to pinpoint unnecessary resources that are spent. In other words can be asked how to create value with the resources delivered by the Software as a Service (SaaS). The frequently cited framework of Amit and Zott (2001, see appendix A for more details) reports that there are four broader sets of value sources in e-business (table 1.1):

# Value source Driver examples

1. Efficiency a) scale of economics b) faster time to market 2. Complementarities a) product variety

b) product families

3. Novelty a) achieving innovation

b) faster upgrading

4. Lock-in a) positive network externalities b) switching costs

Table 1.1- Four broader sets of value sources (Amit & Zott, 2001, adapted)

This research paper will present that value can be created from all four mentioned value sources by the application of Software as a Service (SaaS). The potential of SaaS is realized by different factors, such as multi-tenancy (which is a special kind of selective outsourcing) and the delivery of customers in the long tail (by a decrease of cost a greater customer-base can be appealed) (both terms are elaborated in §4.4).

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15 The creation of value by SaaS does not stay undetected. The frequently cited Gartner group (20093) reports that, the revenue from SaaS will reach $8 billion in 2009, a 21.9 percent increase from 2008. Furthermore, the forecast states that, by 2013, SaaS revenue will be $16 billion worldwide. SaaS principles have already been applied by many technology-leading giants, such as Google4, Amazon.com5, Microsoft6 and IBM7. This research will explore the application of SaaS principles.

Given the information and problems outlined above, the question arises:

How to create value by the application of Software as a Service within the start-ups of Dialogues Incubator?

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Source: http://www.gartner.com/it/page.jsp?id=968412 accessed on 26-7-2009

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Google apps is a form of Software as a Service (http://www.google.com/apps accessed at 26-7-2009). 5

Amazon.com offers hosting and payment services as Software as a Service (http://aws.amazon.com/ accessed at 26-7-2009).

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Carraro and Chong are both directors at the Microsoft company and are frequently cited in this paper, since their findings about Software + Service, which is a synonym for Software as a Service

(http://msdn.microsoft.com/en-us/default.aspx accessed at 26-7-2009). 7

Spohrer is the director of the IBM research department, they have published many articles about Service Science, which can be seen as the framework of which Software as a Service is part of

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2 PROBLEM DEFINITION

The first section of this chapter elaborates the motivation for this research, section §2.2 delineates the research objective leading to the research question (§2.3). A brief outline of research paper structure is given (§2.4). See figure 2.1.

2.1 Research motivation

After analyzing the development stage of various different start-ups, from the initial business idea to the actual launching of a start-up, it becomes clear that the same processes (e.g. registration of new users) are considered and discussed repeatedly. This results in unnecessary resources being spent during the development stage of a start-up. Moreover, all the software development needed for the start-ups is outsourced and consequently, important dialogues between the business innovation managers and the IT experts is hindered.

In this research project I will tackle the problem highlighted above, what will result in new insights in the development process of the Dialogues Incubator This will be achieved by providing the Dialogues Incubator’s Innovation Managers (DIIMs) a better understanding of services delivered via software.

2.2 Research objective

In terms of ABN AMRO's long term business strategy and planning, more knowledge about services delivered via software is necessary. In recent years, there has been a sharp rise in bank sector services aimed at shifting initiative towards internet applications8. With regards to tactical planning9,

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18 better understanding of SaaS can lead to competitive advantage (by added value). In this research, it is assumed that the creation of value on a tactical time-span will ultimately lead to greater understanding of the opportunities that the use of SaaS will afford the ABN AMRO.

The main objective of this research is to provide an instrument to create value by the application of SaaS. Because none of the DIIMs have an IT background, the scope of this research is purely business-oriented. As a result of the instrument, the most advanced technology services can be used without the need for specific knowledge of the technical IT aspect.

2.3 Research question

Together, the prior statements lead to the following main research question:

What are relevant factors to create value by the application of Software as a Service for Dialogues Incubator’s Innovation Managers?

2.3.1 Sub-questions

The following sub-questions need to be answered before the main research question can be answered adequately:

1. What is Software as a Service?

2. What are the basic principles and theories behind Software as a Service?

3. Which factors support value creation by the application of Software as a Service?

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A tactical plan covers the period from today through to the end of year three

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2.4 Research paper structure

Various steps need to be taken before the main question and the sub-questions can be answered. The outline of the next chapters of this paper and the content rational sequence are addressed in table 2.1.

Chapter mapping Content rational sequence

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3 METHODOLOGY

First, the introduction outlines the choice of methodology. Then, based on the chosen methodology, an explanation of why, certain decisions have been made with regards to the literature selected (section §3.2). As a result of the literature review, an evaluation study was chosen as the most appropriate tool to draw out the relevance of each factor. How these evaluation studies are performed is elaborated in section §3.3 (see figure 3.1).

3.1 Introduction

This research will focus on solving important problems with regards to relevance and the factors that need to be fulfilled in order to create value by the application of Software as a Service. Due to the fact that this inquiry deals with many different disciplines, and its aim is to set relevant factors for the application of SaaS, qualitative research is best suited to this inquiry (Baarde, de Goede, Teunissen, 1995).

Since little research has been done on the application of SaaS from a business orientation, an analysis of other predominant theories on modularity and outsourcing, is carried out (elaborated in section §3.2). Hence, these theories are used to set factors for creating value through the application of SaaS. To ensure these factors are usable by the DIIMs, they are assembled to form an instrument. This instrument is based on the value analysis theory, which eases the application of the factors by the DIIMs. The instrument is used to define which components of a specific business concept can be applied to create value (section §3.2).

When the literature study and the development of the instrument have been completed, the DIIMs will evaluate the instrument with regards to its usability. A field research in form of interviews will be done to evaluate the instrument’s relevance for DIIMs. Besides the interviews, other data will be collected from different kind of documents (e.g. website, process flow diagram, & brochures). The

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22 use of multiple data sources, data triangulation, will increase construct validity (Yin, 2003). After the interviews, the instrument will be developed further, in an iterative way. After each interview the instrument will be improved and become more relevant for the DIIMs. (section §3.3). See figure 3.2.

Figure 3.2 - Overview of methodology

What?

Help DIIMs* to add value to start-ups by the application of Software as a Service Make literature findings relevant for DIIMs* Make instrument relevant for DIIMs* Outcome of research: Instrument

How?

Literature

study

Software as a Service Software Service Modularity (Out)Sourcing Value Analysis

Development

of Instrument

(Value

Analysis

+

₎

Value Analysis Modularity Outsourcing

Evaluation

study of

Value

Analysis

+ Interviews Documentation Website

Value

Analysis

++ Focus on Software as a Service Relevant for DIIMs *

* = Dialogues Incubator Innovation Managers (DIIMs) +

= Modified Value Analysis, focus on SaaS ++

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3.2 Literature study

The search engines of EBSCO Host10, ScienceDirect11, Web of Science12, and IEEE13 have been used to find literature.

The literature cited in this paper is divided in two broad categories:

Ad.1) The search for the defining principles of services delivered by software, started with terms like web-services and service-oriented architecture. These appeared to be too technically (IT) oriented and, therefore, not suitable to use in this research. Moreover, it became clear that there were many synonyms for the principle of services delivered by software (see footnote 14 for a glance of synonyms used by scholars). This is, at least partly, caused by the innovative nature of the field.

It appears that Software as a Service (SaaS) is most widely used as a term describing the principle of services delivered by software. Furthermore, the term SaaS has different explanations in literature. Due to the absence of a clear definition of SaaS, the basic principles behind the SaaS concept have to be determined and used to set the factors from which the instrument I attempting to develop can be constructed.

Ad.2) Based on the literature findings, modularity and (out)sourcing theories are chosen as basic principles behind the SaaS concept. These findings are explained in section §5.1. The factors based upon modularity and (out)sourcing theories are assembled to form an instrument (see figure 3.2). Literature findings have indicated that the well proven Value Analysis (VA) is a good basis for the instrument (elaborated in section §5.1.4). Therefore the instrument can be expressed as a VA+, whereby the + stands for the specific application of SaaS.

10 http://web.ebscohost.com/ 11 http://www.sciencedirect.com/ 12 http://www.isiknowledge.com/ 13 http://www.ieee.org/ 14

Synonyms for SaaS are business service, e-service, software + service, cloud service, service computing, internet service, utility computing service, IT service, and cloud core services.

1. The literature used to define the principles of services delivered by software.

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24 At this juncture, it is important to highlight that the author of this paper has a background in Technology Management with the specialization of discrete technology. Consequently, the theories used in this research (modularity and out-sourcing) are primarily used to apply to physical products and not to services delivered via software. Due to their primary application, the theories used have a proven track record to add value to physical products. Scholars argue that theories applicable to physical goods can be used for other disciplines, such as the service sector (e.g. Aerts, Goossenaerts, Hammer & Wortmann, 2004; Campagnola & Camuffo, 2009). Moreover, as we will see in section §4.3.2, there are reasons why the theories relating to physical products fit this innovative area of the service sector.

To develop the instrument, as stated at the beginning of this sub-chapter, the search terms ‘outsourcing’ and ‘modularity’ were entered into the search engines. The most frequently cited articles were selected, ensuring that the instrument is based on well proven theories. These theories are enhanced with SaaS findings, and in this way an instrument for the application is developed as an analogy to outsourcing and modularity.

3.3 Evaluation studies

During the first part of the evaluation study, the DIIM interviewees are explained the idea behind the instrument and the principles that apply to it. Subsequently, the usability of the instrument is evaluated by the DIIMs, to improve the usability of the instrument for the DIIMs. An effective way to collect the knowledge of the DIIMs is by interactive, in-depth interviews, whereby each interview is used to improve the instrument in terms of its usability for the DIIMs. In this research, a factor is considered relevant if the factor is usable by the DIIMs.

Due to the constraints mentioned earlier, only the relevance of the instrument to the DIIMs is evaluated. Since the full execution of the instrument will change the start-up’s architecture, which takes longer than the couple of hours the DIIMs can spare for an interview by an intern.

According to Yin (2003) for a case study to be regarded adequately, the following issues need to be addressed:

1. Selection of studies a) criteria for selection b) number of studies 2. Data collection

3. Level of generalization of results

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25 interest or accidental contacts. Content selection, also called dimensional sampling, is based on characteristics of the cases (Swanborn, 1996:60). The cases in this research are selected on the basis of content. Since the scope of this paper is focused on the Dialogues Incubator environment, many different kinds of start-ups are present. In view of this, best practice is to choose a range of different kinds of start-ups to examine. This increases the likelihood that the instrument will be generally applicable to all start-ups within the Dialogues Incubator environment.

Another constraint is that the service offered by the start-up should be delivered via software. Hence two criteria are set:

1a-1. A range of start-ups should be examined. The choice will be based upon different customer segments15 and in which business areas they operate.

1a-2. Service delivered via software.

Ad.1b) A study based on multiple cases is more robust than a study based on a single case (Yin, 2003). Different kind of start-ups within the Dialogues Incubator environment need to be selected, to ensure the instrument is generally applicable within the Dialogues Incubator environment. From these criteria, a minimum of three different kinds of services need to be evaluated. It must be noted here that time constraints influence the number of studies. In view of these considerations, three evaluation studies will be carried out.

Ad.2) According to Yin (2003), it is important to use multiple sources of evidence, therefore, documentation, archival records and interviews will be used. The acquisition of documentation and archival records depends on their existence and the willingness of the innovation managers. In addition, the web-site of the start-up and the web-sites of other companies will be used to supplement data collection.

Interviews will be unstructured and open-ended, since the additions of the innovation managers cannot exactly be predicted. This approach also allows the possibility to investigate specific issues, which may arise during the interview (Yin, 2003).

Ad.3) In the hope that innovation managers outside the Dialogues Incubator environment can also benefit of the instrument, an attempt to generalize the instrument is made in section §8.2. Yin (2003) calls this theory-related analytic generalization of the instrument.

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3.3.1 Selected evaluation studies

The above given criteria resulted in the selection of the following three cases (table 3.1):

# Start-up: Interviewee: Customer segment: Business area:

1. TicketRight Timo Mulder Consumer Ticket web-shop, trade platform 2. MyGoodWorks Evan Gelders Consumers & NGO Donations,

philanthropy 3. Associates Mirella de Jong Freelancer & Employer Agency,

contracting Table 3.1 - Selected evaluation studies

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4 SOFTWARE AS A SERVICE

Due to the broad nature of the term software, for some innovation managers, the concept of Software as a Service might be hard to understand. As we will see, this is a misconception. Technical details about software and ICT16 are not needed to understand Software as a Service.

As I posited in the introduction, SaaS as an area of academic study is a relatively new development and, consequently, not a mature discipline. In the first part of this chapter (§4.1), the ramifications of this absence of maturity are detailed. This discussion leads to the suggestion that it is preferable not to directly give the definition of SaaS. The two subsequent sections (§4.2 and §4.3) discuss separately what ‘software’ and ‘as a service’ stand for singularly and as a whole. Sub-Section §4.4 summarizes the findings of ‘software’ and ‘as a service’, which result in the definition of SaaS. Additionally, the most important implications of Software as a Service are given. In section §4.5 the examination of SaaS is concluded. An overview of this section is stated in figure 4.1.

4.1 Introduction

Many different explanations of the term SaaS are given in academic texts (Chantry, 2009) and in internet articles. This abundance of definitions and suggestions only succeeds in furthering the confusion surrounding the term. Moreover, there are many synonyms for SaaS and as of yet no dominant term has been posited (including SaaS!). Examples of frequently used synonyms are business service, e-service, software + service, cloud service, service computing, internet service, utility computing service, IT service, and cloud core services.

I found no academic articles which postulate a definite method for applying SaaS principles to a start-up or even any that give an indication of best practice (Chong & Carraro, 2006; Demirkan, Kauffman, Vayghan, Fill, Karagiannis & Maglio, 2008). Confusion and uncertainty about terms and definitions is

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28 indicative of an experimentation period. After such a period, a dominant design will be established with new design concepts, linked together in a new architecture (Aerts, et al., 2004).

4.1.1 Layered view of services

The term SaaS will be discussed in distinct parts to ensure a clear explanation can be advanced.

A layered view provides a natural way to look at services (see figure 4.2) (e.g. Basole & Rouse, 2008; Aerts et al., 2003). Most scholars divide a service in three layers: a business layer, application layer, and a technology layer. The application layer is also called the software layer. The higher layers make use of the services provided by the lower layers. The lower the layer

the more detailed it is, this is called a more fine grained level. This paper is business oriented and, therefore the business layer is what will be discussed. However, some important insights concerning the application layer are advanced since it is this layer that enables the business layer (Davenport, 1993). Most academic literature about SaaS focuses upon the application or technology layers respectively, since the two lower layers are needed to execute the business layer and are required to be developed first (e.g. Chen, Zhang & Zhou, 2007; Wu, Parsia, Sirin, Hendler & Nau, 2003). An understanding of the basic principles of the application layer are important in order to be able to correctly apply SaaS correctly.

The layered view also gives some insights into the possibility of loose coupling between the three layers. When the layers are split it can result in benefits, like economies of scale. For example, a computer (technology layer) can host multiple applications (application layer). The clear split up of layers results in the need for lower investments, since only one ‘technology layer’ is enough, instead of multiple ‘technology layers’.

4.1.2 Summary

In the current period of experimentation, there is no dominant design. SaaS may become the dominant design, also called radical innovation. Scholars suggest a division of service into three layers. The technology layer enables the higher software layer, which enables the service in the business layer. The clear division of layers results in the possibility of economies of scale.

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4.2 The SaaS principle from a business perspective

This research focuses on the business layer, but to fully understand this layer the principles of its enabling layer, the application layer, need to be understood. In this research the term application layer is considered interchangeable with the term software. The word “software” implies that the service is (at least partly) delivered by programs and other operating information used by a computer (Oxford dictionary, 1993). Information needs to be digitalized if the service is delivered via a program or other operating information used by a computer, since a computer can only work with digital information. This digitalization conveys a shift from information inside a human’s mind to digital information. Knowledge in people’s mind, such as belief systems, tacit norms, and embedded routines, is called tacit information (Kumar & Thondikulam, 2005). Digital information is information explained or written down in ‘codes’, such as bits and bytes or in the form of letters, therefore, this can be called codified information. For simplification, this research paper considers the terms knowledge and information to be interchangeable.

The subsequent sections focus on the shift from tacit knowledge towards codified knowledge. This includes the characteristics (§4.2.1), implications and opportunities (§4.2.2 & §4.2.3).

4.2.1 Transform into codified information

Generally speaking, it is hard to transform tacit knowledge into codified knowledge and vice versa. For example, riding a bicycle is not difficult for most Dutch adults but to explain how to ride a bicycle is difficult, especially to someone who has never sat on a bicycle. Moreover, after you have explained how to ride a bike, it is very difficult for the “cycling student” to transform those words into ´bicycling´.

For this reason, the execution (and the production) of a service has always remained a craft with high variability (Kotler, 2003), since the information needed to execute a service is partly based upon the transformation of tacit into codified information and vice versa. Nowadays, this way of service delivery is changing through the use of information and communication technology. The shift towards only codified information generates many opportunities, as the next sections will outline.

4.2.2 Tacit versus codified information

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30 reformed (as codified information). One can argue that a physical note can be split up into coins. However, such a split is more cumbersome and difficult and cannot be split into less than 1 cent pieces (without losing something, the value). The distribution of codified information is easy, fast and cheap. Furthermore, the computer can do many other things with the codified information; it can store the information, keep up a history record, or copy it. Also, the computer's actions, when splitting, distributing (e.g. via internet) and recombining the information are (almost) costless. Hence, the marginal costs of an activity or transformation of codified information approaches zero. Additionally, the speed of the transfer is extremely quick (the internet makes use of fiber glass cables, whereby light beams are used to send information).

Banks all over the world have operated with codified money for many years. Now, this kind of technology is available, or at least becoming available, for everyone and on a massive scale (Davenport, 2005). The examples are divers: music downloads, distributed by web shops like iTunes; Youtube, where some short movies are watched over a million times; or e-mail applications like Gmail or Hotmail used by millions of people simultaneously. All these advancements are enabled by ICT, like broadband internet, fast computers, and electrical power. Although, not all software should be considered equal, some software gives you competitive advantage, while other is required to ‘just’ run the business (Carraro, 2008).

Due to the codification of information, many opportunities for progress in a range of areas can be realized. All as a result of the high-tech ICT available at this point in time. Below, some examples are given to explain the impact of this shift from tacit to codified information:

1. Most customers of the Albert Heijn (AH) supermarket do have an AH

discount card (Dutch: Bonus kaart). Based on this shopping card the AH have codified the expenses of most of its customers17, to increase sales per customer18. By the application of this shopping card, the possibility for segmentation of its clients has improved dramatically. AH uses this to improve the assortment in shops, so do shops sell other products in cities where many students life than shops in villages (Financieel dagblad, 200819). 2. Many young drivers cannot afford an car insurance, since the price is very

high for them. To solve this problem, the United Kingdom’s largest insurer has launched a ‘pay as you accelerate’ scheme. The scheme operates using a ‘black box’ device with global positioning satellite (GPS) technology which registers the location of a car. This device determines how fast the car is accelerating or slowing down (since then the GPS location change will adjust 17 http://www.motivaction.nl/153/d:269/-Nieuws/Artikelen/Operatie-Consument/ accessed at 30-6-2009 20 http://www.mt.nl/managementteam/158948/Customer_Relation_Management_hoe_ver_kun_je _gaan_met_klantenapartheid.html accessed at 30-6-2009 19

Financieel dagblad [Dutch newspaper] article printed at 30-9-08 downloaded via

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31 fast). If a driver does accelerate and slows down slowly, he or she needs to

pay a lower insurance fee.

The insurance company is thinking to add other features to the insurance; as it appears there is a greater risk of serious injury or fatality between 11 in the night and 6 in the morning, the insurance company is thinking to increase the premium for driving during the night 20.

3. Dialogues Incubator’s projects also struggle to finds of codifying information. For example, they embarked on a project aimed at decreasing traffic

congestion. The project was developed to decrease the number of cars on a specific highway in Rotterdam. A pre-selected test group is offered an amount of money if they do not use their car, between 8am and 9am, on the particular highway. However, determining whether the car is on the highway between this time is one of the main difficulties of the project. The problem arose when attempting to find ways to codify the information relating to the car's position (between 8am and 9am).

Despite these problems, the Dialogues Incubator won the Government tender for this extensive project. The information was codified using an application of Google’s SaaS 21.

Other examples are given in appendix B.

4.2.3 Implication of layers and codified information

An important implication of the division of services into layers, combined with effects of codified information, is the possibility of customizing the user’s experience in a different ways. The applications in the application layer are kept the same, as is the technology layer, only the business layer is customized. Microsoft (Chong & Carraro, 2006:8) describes it as follows: each start-up “uses metadata to configure the way an application appears and behaves for its users.” So, only the business layer of a service needs to be customized, the rest (application and technology) can be kept as standard without the user realizing it. In sum, a customized service means that the business layer is customized, but the application layer (and technology layer) can be standard.

20

http://www.prnewswire.co.uk/cgi/news/release?id=137667 accessed at 30-6-2009. 21

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4.2.4 Summary

The former sub-chapter focused on software, from a business perspective. Traditional services are mostly based upon tacit knowledge. In these situations, the interaction of people is central. Information or knowledge transferred via software is, by definition, codified information. Codified information can easily and very inexpensively, be separated into smaller pieces without losing anything (e.g. information, value). Similarly, it is very cheap and easy to distribute, copy and store this form of information. All this is enabled by technology.

In sub-chapter 4.2, the most important issues regarding the application layer have been discussed. Knowledge of these issues are necessary in order to fully understand the fundamental principles of the business layer, the focus of this research paper.

4.3 The nature of services

In this part, the nature of service is explained. The question is asked “what is a service?” in terms of its growth (in size and in definition) and the implication of this growth accompanied by a new paradigm.

Centuries ago, a large proportion of the world's population worked in agriculture. Today, employment in the service sector is more than 95% in advanced economies. Chesbrough and Spohrer in “research manifesto for service science” (2006) report that today we live in a “post manufacturing” world with a vast array of services that comprise 80% of our economic activity, as shown in figure 4.3 (value added per sector22). 23

22

This is value added per sector in the United States, but the numbers where only slightly different for the Netherlands, therefore this figure can be considered interchangeable with the value added per sector in the Netherlands.

23

Since this source (Spohrer, 2005) is not officially published, numbers and percentages are checked in the online database of OECD. The numbers and percentages appeared to be correct (http://puck.sourceoecd.org/ vl=13842527/cl=19/nw=1/rpsv/ cgi- bin/wppdf?file=5lgp4zfbj5ln.pdf accessed at 22-6-2009).

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4.3.1 Evolution of service

The term “service” arose in 1930s America, covering all activities other than agriculture and manufacturing (Chesbrough & Spohrer, 2006). The early service activities were mostly performed within the manufacturing sector i.e. maintenance, human resource management and the design of products. The growth of the service sector has resulted, in part, from the specialization and outsourcing of service activities (Spohrer, Maglio, Bailey & Gruhl, 2007b). Since then, many different definitions of service have arisen. This has resulted in difficulties as only stipulative definitions are available. A selection of these stipulative definitions are given below:

• Intangible and perishable… created and used simultaneously (Sasser, Olsen & Wyckoff, 1978).

• A change in condition or state of an economic entity (or thing) caused by another (Hill, 1977).

• Characterized by its nature (type of action and recipient), relationship with customer (type of delivery and relationship), decisions (customization and judgment), economics (demand and capacity), mode of delivery (customer location and nature of physical or virtual space) (Lovelock, 1983).

• Deeds, processes, performances (Zeithaml & Bitner, 1996).

• A time-perishable, intangible experience performed for a customer acting in the role of co-producer (Fitzsimmons & Fitzsimmons, 2001).

• The application of specialized competences (knowledge and skills) through deeds, processes, and performances for the benefit of another entity or the entity itself (Bouwman, de Vos & Haaker, 2008:36).

In a review of 46 publications by Parasuraman, Zeithaml and Berry (1985) and a review of more than 100 publications by Edgett and Parkinson (1993) “four unique characteristics” of services were drawn out. Later in this section, we will find out that these four unique characteristics is a good attempt, but does not cover the possibilities of service the way services are applied nowadays. The four characteristics are (Biemans, 2004; Lovelock & Gummesson, 2004) (see table 4.1):

# Characteristic Description

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# Characteristic Description

2. Inseparability Sometimes described as simultaneity of production and consumption. A service is developed during the interaction between supplier and consumer. Hence, the quality of the service depends on the quality of the interaction. This implies that the experience and quality of the person who supplies the service is an important factor.

3. Heterogeneity Also reported as nonstandarization. This amounts to inconsistency in the transformation of the input into the output and is, generally, the result of the variability of the skills of the service executor. This inconsistency leads to an output variance, which can be called heterogeneity.

4. Perishability Also called the inability to inventory. Services cannot be saved, resold, returned or stored for reuse at a later date.

Service perishability recognizes that a service not performed is a lost opportunity. For example, flying with empty seats on an airplane (Fitzsimmons, Noh & Thies, 1998).

Table 4.1 - Four traditional characteristics of services

In more recent literature, scholars begin to dispute the correctness of the “four unique characteristics” of services. It is suggested that the characteristics are based upon what tangible goods are not, instead of explaining what services are (Vargo & Lusch, 2004; Lovelock & Gummesson, 2004). In what follows, each of the weaknesses of the four unique service characteristics will be discussed.

Ad.1) Lovelock and Gummesson (2004) state that a product or service approach is better if arrayed on a tangibility spectrum. With such a spectrum, it is possible to speak about tangible-dominant or intangible-dominant logic. Other scholars refer to this as the goods- versus service-dominant logic (e.g. Vargo & Lusch, 2004). According to Lovelock and Gummesson, within all tangible products there are intangible factors, like a brand name. Moreover, all intangible factors do result in some sort of tangible outcome (e.g. feeling of physical well-being). Gummesson (200024) explains the incorrectness of the characteristic of intangibility as follows:

24

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35 “If I am operated on in the hospital I am myself the ‘machine,’ the ‘object of repair and maintenance.’ It is unpleasant; it may hurt. I can get better, worse, or die. Can it get much more tangible?”

If all market offerings are approached as being somewhere on the spectrum of service dominant versus product dominant logic it implies that intangibility cannot be seen as a characteristic of service, since a service always consists of some tangibility.

The impact of the shift from a goods-dominant logic towards a service-dominant logic is summarized in appendix C.

Ad.2) Services are not inseparable since service production and consumption can be separated, at least in many services. For instance, when transporting freight, laundering clothes or cleaning houses. All these services are purchased to avoid being involved with the task itself. Consequently, there is no simultaneity of consumption and production needed. Accordingly, the customers can be separated from the service executor (Vargo & Lusch, 2004).

Ad.3) The heterogeneity caused by human interaction can (almost) be eliminated. This is facilitated by the use of technology and procedure resulting in lower variety of outcome and, therefore, lower heterogeneity (Lovelock & Gummesson, 2004). Some scholars have postulated the “service factory” concept in which a service provider limits the range of service offering. For example, McDonald’s limits the range of customer information inputs by providing a limited menu (Sampson & Froehle, 2006). This, in turn, limits the variance of the service (which effects the quality of a service) through a decrease in the possibility of mistakes occurring. In new cars, an alarm goes off if the door opens while the car´s headlights are on or the oil level is too low.

Ad.4) The fourth unique characteristic is only partly generalizable. A service like television entertainment or a radio performance is not perishable because it can be recorded and replayed or stored and resold (Lovelock & Gummesson, 2004). However, many services are perishable like the example of the empty airplane seats, sketched above.

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4.3.2 Service Science

In what follows, a comparison will be made between the industrialization of manufacturing in the past decades and the industrialization of services now. The paradigm shift, suggested by a variety of different scholars, is heavily based upon this industrialization of the services sector.

Due to the widespread availability of energy (steam energy), transport (railroads) and standards (well-defined components) the manufacturing sector has industrialized in the past century (Sharma & Loh, 2009). A the same time, services have largely remained a craft with high variability (Kotler, 2003). This radical industrialization, as seen in the manufacturing sector, is now occurring in the service sector. The industrialization of services is driven by internet and communication infrastructure (transport), powered by cheap computing power (energy), and enabled by well-defined technology and components (standards) (Sharma & Loh, 2009).

There is (almost) no academic research published on the birth and growth of the service sector. Therefore, the chances of attaining a full understanding of the foundations of this sector are limited (Chesbrough & Spohrer, 2006; Bullinger, Fahnrich & Meiren, 2003). As a result of this, advances in the service sector are extremely difficult.

Many of the IBM research institutes' articles (e.g. Chesbrough & Spohrer, 2006; Spohrer et al., 2007b; Vargo et al., 2008; Spohrer & Maglio, 2007; Spohrer, Anderson, Pass, Ager & Gruhl, 2007a) suggest that it is necessary to establish a science of service25 to define and correlate the many common elements across the different types of services26.

The influence of the research carried out by IBM is widespread. The University of California in Berkley and North Carolina State University have launched academic courses based upon the by IBM proposed service science. Also, the University of Groningen in the Netherlands has set up a course based upon the principles of service science.

25

Scholars, mostly associated with IBM research institutes, do call this service science: Service science,

management and engineering (SSME).

26

Chesbrough and Spohrer (2006:37) give the following examples of these common elements:

• Combination of knowledge into useful systems

• Exchange as processes and experience points

• Exploitation of ICT and transparency

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37 In conclusion, previously, services have been understood as a kind of craft, a one to one, time consuming interaction between people. Recently, there has been a shift towards viewing service as a science (Vargo et al., 2008; Chesbrough & Spohrer, 2006).

4.3.3 Everything ‘as a service'

Service-dominant logic (section §4.3.1) can be extended to the ‘everything as a service’ philosophy (e.g. Vargo et al., 2008; Spohrer & Chesbrough, 2006). Shane Robinson27, the executive vice president of HP reports this as follows:

“We’re moving to a future state where everything will be delivered to you as a service, from your work life to entertainment to various communities. At HP we call this “Everything as a Service,” and we believe this is where the world is headed.”

Pinhanez (2007:146) clearly explains the difference of the traditional goods-dominant logic and the service-dominant logic. He explains how and why activities and products can better be approached as services:

“From the point of view of an airline passenger, flying is as ubiquitous as driving a car — if not more —because the flying technology is offered as a service. There is no need to know about flying techniques, protocols, regulations, or even the technology behind the flying machine itself. Airline customers just enter the plane, sit, try to relax, and wait for the arrival.

In many other cases, a user has also the option to choose between using herself a set of tools or procuring a service to accomplish a goal. To go from Boston to New York, you can drive your car (the tool option) or take the air shuttle (the service option). Similarly, enterprises and organizations often have to decide to offer a new product as a tool or as a service. For instance, users can now buy music files (seen here as tools to produce audio) in iTunes music stores or subscribe to Internet radio services like Rhapsody.”

The key characteristic of ‘as a service’ is that a user does not have to be aware of how the component works. In other words, a user does not have to know the processes, people or technology behind the service and, accordingly, only the input and output is interesting. Hence, the execution of the service itself can be regarded as a black box, in which only the input and output of the service are relevant. This results in the only relevant part being the highest layer, the business layer, since

27

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38 communication between the user and the service provider only occurs at this level. Consequently, changes and innovation in the application and technology layer can be applied without affecting the delivered service, since these layers are considered as a black box. Thus, changes and innovations within processes executing a service can be implemented more easily. This is due to the fact that the input and output ‘protocol’ is kept unchanged (Sanz, et al., 2007). Although, for a start-up that relies on a outsourced service, it is probably good to know the technology behind the service execution, for example, to create better alignment.

This service orientation is expanding in many different (and unsuspected) areas, as the following examples will show:

1. A contract to build a new highway, not only, stipulates the construction of the road, but also, the maintenance of the build road for a specified period of time 28.

2. In the construction sector, a contractor no longer buys a certain amount of different screws when they are needed. Instead, he buys a service in the form of a walk-in shed on the construction site. This shed contains a supply of all the necessary screws all the time 29.

3. In the past, the facilities department of ABN AMRO paid cleaning companies for cleaning the building based upon the number of persons who clean the building. Nowadays, they have changed their policy and only pay a flat fee for the whole building to be cleaned. Thus, the input is a dirty building and the output is a clean one, which kind of technology or how many people used is no longer the issue. The issue now becomes what is to be cleaned and how clean is considered as ‘clean’ as stated in a Service Level Agreement (SLA) 30.

An important issue that arises from all of this is the realization that whether a service is provided by humans or by a high-tech computer is irrelevant. The only issue is whether the service is performed to a satisfactory level.

28

E.g. for the N31 road in Friesland (North of the Netherlands) three companies have to design, build and maintain the carriageway for the Dutch Highway & Water authority from 2008 till 2023.

http://www.bamppp.com/index.php?language_id=1&page_id=126&subpage_id=0& accessed at 30-6-2009 29

This information is given by Thijs van de Spek, a contractor at a Dutch construction company (2009). 30

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4.3.4 Summary

Based upon the industrialization of service, some scholars argue about a paradigm shift, similar to the shift that occurred in the manufacturing sector in the last century. The paradigm shift is centered around the shift from a goods-dominant logic to a service-dominant logic.

Within the ‘everything as a service’ philosophy, a user only desires that a certain input is transformed into a certain output. How this transformation is done is not relevant, hence the execution or the transformation process of a service can best be seen as a black box.

4.4 Software + as a Service

In this section both the terms ´Software´ and ´as a Service´ (discussed in previous two sections) are united (§4.4.1), which lead to the definition of SaaS (§4.4.2). Thereafter, the most important implications of the theory about SaaS are stated and a conclusion is formed.

4.4.1 Overview Software + as a Service

As mentioned in the introduction, there is no dominant design for SaaS and, therefore, both terms ‘Software’ and ‘as a Service’ are extensively elaborated. The findings of both the former and the latter sections will be combined. In the interests of clarity, a short outline of each sub-section is given:

§4.1 Service can be separated in three layers, whereby the lower layer enable the higher. In order to customize the way the application appears and behaves for its users, only the highest layer needs to be customized.

§4.2 The software, enabled by technology layer, is codified information and can therefore easily and inexpensively be divided, distributed, and reproduced. §4.3 The industrialization of “services” has resulted in everything becoming ‘ a

service.’ This transforms a certain input into a certain output. The transformation can be regarded as a black box.

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# Finding Implication

1. Service separated in three layers

The lower layer enables the higher one. An example is given of a computer server which can run different applications. Each application can be executed from different business layer items. Thus, the appearance of a service can be

customized for its users simply by changing the business layer, while the application or

technology layer is kept standard. 2. Information can easy

and costless be divided

Codified information can, easily and

inexpensively, be divided into smaller pieces without losing any kind of information. To recombine the divided components is also easy and cheap.

3. Information can easy and costless be distributed

The technology layer enables easy and

inexpensive transfer of codified information or knowledge worldwide. This occurs without any loss of information and with extraordinary speed.

4. Information can easy and costless be reproduced

Codified information can easy and inexpensively be reproduced since the marginal cost are (near to) zero.

5. The ‘as a service’ approach

The ´As a Service’ approach implies that users only bother about the input and output of a process. Users neither own nor care about the transformation process. Hence, companies cannot sell their product or service in the traditional way. (See Ad.5 for further explanation.)

6. Execution as a black box

As stated above, the user is not concerned with the execution of the service itself. All that is important is that their own particular input is transformed into a particular output. The format of the input and output is standardized, while the process of the transformation / execution of the service is kept totally flexible.

Table 4.2 - The implications of the findings

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41 for the use of the SaaS application for each period (i.e. monthly). In practice, this implies that a user can license a (professional) customer relations management package for about 30 U.S dollars a user per month. This new payment model is a vital characteristic of SaaS.

4.4.2 Definition SaaS

The definition of SaaS given by the Dutch ICT Innovation Platform (IIP)31 is as follows, and is closely in line with the findings of §4.4.1. Therefore their definition is used:

SaaS refers to a service delivery model in which remote componentized (business) services are accessible through a software interface and can be combined to create new (business) services delivered via flexible networks.

4.4.3 Implications

In the text of this chapter, certain aspects of providing Software as a Service have been highlighted. In light of this, we can posit that, if it is easy and almost costless to divide distribute, and reproduce a service and if there is some standardization of input and output, this circumstance has the following implications :

• It is possible to divide your service into small components. Where, at least, some defined components needs to have more or less standardized input and output.

• It is possible to distribute the service component, without incurring any charge, all over the world. This implies that the service can be executed by an entity in the world which is very good at the execution of this service.

• This entity can easily and, without incurring any fee, increase the ‘production’ of this particular service due to the fact that reproduction is cheap and easy.

• The ‘overall’ service is divided in smaller services, thus, some of these smaller defined services can be executed by other entities. The value, which the overall service adds, is delivered by smaller defined services. These are partly executed by the service delivery party itself, but also, possibly, delivered by other service providers. This mutual creation of value is called co-creation.

31

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• The user does not have to realize the service is co-created, since the way the application appears and behaves can be customized by changing only the business layer.

Together, all of the above implications result in a new architecture of an offered service.

4.4.3.1 Multi-tenancy

The ideal result of the execution of SaaS is that each entity (e.g. start-up) executes its core competence application and lets other entities execute their core competence. In such a circumstance, each entity executes its application, not only for its own, but also for all other entities. Accordingly, a multi-tenant web is established, in which, each entity only is responsible for what it is accomplished in. On the top of figure 4.4, an old entity sketched, compare this with a multi-tenant service, which is outlined on the bottom.

In the old, traditional way there is one ‘tenant’

between the business layer and the application layer (the technology layer is considered out of scope). Thus, for each service that delivers value, a unique application is developed.

In the SaaS way, there are multiple tenants between the business layer and application layer. As a result, different business layers use the same application layer, without the user realizing it. This is because the user only communicates with the business layer, which is delivered by one party via a customized business layer.

What do academic articles say about multi-tenancy?

• According to Motahari-Nezhad, Stephenson and Singhal (2008) multi-tenancy refers to sharing resources among users, whereby higher utilization leads to cost reduction.

• Aulbach, Grust, Jacobs, Kemper and Rittinger (2008) mention that economies of scale is the most important factor, moreover, they argue that the costs of research can be divided.

• Oracle (2008) suggests that support of multi-tenancy is the biggest decision whether or not to design a SaaS.

• The research centre at Microsoft (Chong & Carraro, 2006) argues that multi-tenancy leads to higher-quality at a lower cost.

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• Cullen et al. (2005) state that ‘selective’ outsourcing is better than ‘total’ outsourcing. They explain ‘selective’ outsourcing as using multiple suppliers based upon their core competences.

• The extensive literature review about outsourcing by Dibbern, Goles, Hirschheim and Jayatilaka (2004) reports that outsourcing has evolved from the one vendor to a set of complex arrangements involving multiple vendors and multiple clients.

It is reported that SaaS principles enables multi-tenancy, which can be viewed as selective outsourcing of standard and modular application components to superior service providers.

4.4.3.2 Long tail

Many examples of software tend to be customized to meet the individual customers´ needs. This often requires dedicated hardware, IT support and other attention. Consequently, only the larger businesses can afford to do this. For each such customized software solution, there are many small and medium-sized businesses who could benefit of it, but cannot afford it (Chong & Carraro, 2006).

If the upkeep, like the dedicated hardware and IT support, is centralized, the costs can go down through economies of scale. In addition, the development of software (without high customization) can be divided over more customers. This leads to lower costs because the smaller businesses can be targeted. Anderson (2004) calls this the power of the long tail. Hereby more revenue can be created with a lower revenue per customer but with more customers. See figure 4.5 and 4.6.

Figure 4.5 - Traditional service delivery (Carraro, 2003)

Figure 4.6 - Multi-tenancy service delivery (long-tail) (Carraro, 2003)

O’Reilly (2005:5) visualizes this phenomenon as “to reach out to the entire web, to the edges and not just the center, to the long tail and not just the head.” Furthermore, he suggests the long tail enables the “leverage of the customer”, by self service and algorithmic data management. For example, the algorithmic at Amazon.com's bookshop where books are ranked based upon customer reviews.

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44 and similar technologies. They describe a situation where products and services can be profitable even if they are only of interest to a very small percentage of people.

4.4.3.3 Security

Besides the positive implications of SaaS, there are, of course, negative aspects. One of the most commonly highlighted disadvantages is security (Armbrust et al., 2009; McKinley, Sadjadi, Kasten & Cheng, 2004). Since the core competences of the ABN AMRO (security & trust) are closely related, this is a very important issue. Security addresses protection from malicious entities, such as hackers. The approach to this problem must be comprehensive and ensure the integrity of data (McKinley et al., 2004).

The McKinsey Quarterly (Dubay & Wagle, 2007) reports that identity and access security is unlikely to migrate from traditional in-house delivery to SaaS, due to risks. Nonetheless, they argue that security management has potential to be performed by SaaS.

According to Yee (2006) there are six security risk categories (see footnote32). One of these categories is data confidentiality, which deals with the protection of data and how this data can be made accessible only to permitted users. This can be achieved through the use of a security infrastructure which ensures that customers’ sensitive data and credentials are secure (Oracle, 2008).

Some scholars argue that security and trust can be implemented through security policy management (e.g. Bether, 2008; Dubay & Wagle, 2007). Whereas, others (e.g. Armbrust et al., 2009; Wang, Huang, Qu & Xie, 2004) report that encrypting data before placing it in on internet is a good solution to secure data.

Another widely accepted perspective on the application of SaaS results in the access of superior infrastructure regarding reliability, security and scalability (Saaksjarvi, Lassila & Nordstrom, 2005; Currie, 2003). This is in line with the former sub-sections (multi-tenancy and long tail), in which is stated that the customer can get access to “best-of-breed” applications that would be too expensive to buy (Saaksjarvi et al., 2005).

4.4.3.4 Business continuity

Another risk associated with SaaS is the continuity of the business, which is influenced by different factors, such as reliability and availability. Outsourcing will lead to greater dependency on suppliers

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Factors to create value by the application of Software as a Service

Factors to create value by the

application of Software as a Service

Factors to create value by the

application of Software as a Service

PREFACE

EXECUTIVE SUMMARY

TABLE OF CONTENTS

1 INTRODUCTION

1.1 The Dialogues Incubator

1.2 Background of research subject

2 PROBLEM DEFINITION

2.1 Research motivation

2.2 Research objective

2.3 Research question

2.4 Research paper structure

3 METHODOLOGY

3.1 Introduction

What?

How?

Literature

study

Development

of Instrument

(Value

Analysis

)

Evaluation

study of

Value

Analysis

Value

Analysis

3.2 Literature study

3.3 Evaluation studies

4 SOFTWARE AS A SERVICE

4.1 Introduction

4.2 The SaaS principle from a business perspective

4.3 The nature of services

4.4 Software + as a Service

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