Technology Analysis – Software-as-a-
Service (SaaS)
What is SaaS?
Software-as-a-Service is a model of software deployment where an application is hosted
as a service provided to customers across the Internet. The concept behind SaaS is simple –
instead of a software vendor selling a software license that the client then implements and
maintains in its own environment, the vendor – or the service provider – hosts the application on
its own computer in its own data center and provides access to the system over the internet on a
subscription basis.
By eliminating the need to install and run the application on the customer's own
computer, SaaS alleviates the customer's burden of software maintenance, ongoing operation,
and support. Using SaaS also can conceivably reduce that up-front expense of software
purchases, through less costly, on-demand pricing. From the software vendor's standpoint, SaaS
has the attraction of providing stronger protection of its intellectual property and establishing an
ongoing revenue stream. The SaaS software vendor may host the application on its own web
server, or this function may be handled by a third-party application service provider (ASP). This
way, end users may reduce their investment on server hardware too.
SaaS solutions are very different from ASP (Application Service Provider) solutions.
There are three main reasons for this:
1. ASP applications are traditional single-tenant applications but hosted by a third party.
They are client-server applications with HTML front ends added to allow remote
access to the application.
2. The applications are hosted by third-parties who ordinarily do not have specific
application expertise.
3. The applications are not written as net-native apps. As a result, the performance may
be poor and application updates are no better than self-managed premise-based
applications
By comparison, SaaS applications are multi-tenant applications, hosted by a vendor that has all
the application expertise and they have been designed as net-native applications that get updated
on an on-going basis. SaaS solutions have been initially restricted to niche products and CRM,
but have now diversified to other areas as well. Examples of SaaS vendors include
Salesforce.com Inc. (CRM solution), RightNow Technologies Inc., WebEx Communications Inc.
(online collaboration software), Workday Inc. (ERP), Taleo (recruitment system), etc.
SaaS Costs
SaaS is a low-cost way for businesses to obtain the same benefits of commercially
licensed, internally operated software without the associated complexity and high initial cost.
It is a growing approach to delivering business applications. For companies that have
implemented some form of software-as-a-service, the economic results are positive, and there are
several reasons for this. First, the new software design and delivery models of SaaS make it more
viable and less expensive to share one application across hundreds of companies by allowing
many more instances of an application to run in a common environment, vastly improving on the
old client/server model. Second, bandwidth costs continue to drop, making it affordable for
companies to ensure levels of connectivity that allow online applications to perform gracefully.
Third, and perhaps most important, customers are frustrated by the traditional cycle of buying a
software license, paying for a service contract and then having to buy upgrades. Customers have
more control over the relationship if they simply paid monthly fees that could be switched to
another vendor if the first failed to perform.
At the same time, ownership costs are typically less for an SaaS implementation – as
much as 30% lower for a typical CRM installation, according to McKinsey & Co analysis. Costs
drop even faster for commodity services such as e-mail and messaging, which may soon be
offered at prices so low that the traditional licensing model will be uneconomical.
From the vendor’s perspective, SaaS companies may be slightly less profitable than
traditional independent software vendors, but this is primarily a result of smaller scale. Whereas
large software companies (other than Microsoft) typically have operating margins around 25%,
those with annual revenue under $1.2 billion hover around 14% - close to the 13% margin of
SaaS vendors. Several SaaS vendors have higher margins (WebEx at 26%, Digital Insight at
19%) because they’ve been able to achieve scale and a leading position in their niches. The
economies of online delivery would continue to improve as the market grows.
Software-as-a-Service and the Firm
On-Demand, Software-as-a-Service applications are based on a recurring subscription fee
and typically are a pay as you go model. The cost may increase as the usage of the application
increases. In the SaaS model, costs are directly aligned with usage (e.g. # named users, #
transactions, etc.).
A typical SaaS deployment does not require any hardware and can run over the existing
Internet access infrastructure. Sometimes, changes to firewall rules and settings may be required
to allow the SaaS application to run smoothly. A SaaS application can be configured using APIs
but multi-tenant SaaS applications cannot be completely customized.
The SaaS vendor assumes all the support, training, infrastructure and security risks in
exchange for the recurring subscription fees. The SaaS service model is designed to deliver
business applications anywhere, anytime which in turn required the SaaS vendor to employ
dedicated support teams and staff that make themselves available to customers on short notice.
Along with the personnel comes reserve capacity to handle any spikes in usage, outages or
network mishaps and to do this continuously, globally and securely.
There are several reasons why a company should consider favoring SaaS applications for
its software needs:
1. SaaS provides a direct and quantifiable economic benefit over the traditional software
model. A SaaS vendor with x number of customers subscribing to a single, centrally-
hosted software service enables the vendor to serve all of its customers in a consolidated
environment. For SaaS applications that are built to scale well, the operating cost for each
customer will continue to drop as more customers are added. As this is happening, the
provider will develop multi-tenancy as a core competency, leading to higher-quality
offerings at a lower cost.
2. SaaS offerings do not underestimate the people costs of deployment. While companies
understand and scrutinize the cost of software and hardware very well, personnel costs
are usually not examined as closely as they should be. While being an important HR
point of consideration, utilizing an SaaS solution for any department eliminates the need
to employ several IT personnel that would be needed to maintain the system.
3. SaaS applications grow with the company as the business grows. Companies would not
have to make decisions on the type of they need restricted by their own size, but instead
they can make decisions based solely on their business needs.
4. SaaS vendors have greater accountability because of the subscription-based pricing
model. The SaaS HR customer can actually exert more control over its vendors than
traditional software customers. The recurring subscription fee financially motivates the
vendor to maintain adequate support and operational requirements on a recurring basis,
which results in much more accountability from the vendor.
The Software-as-a-Service revolution allows companies to subscribe to software applications
and outsource operating the back-end infrastructure to the SaaS vendor. In most cases, the
SaaS vendor can do this much more cost-effectively; providing overall cost savings for the
company. As a result, companies can spread their IT budget across many more applications
to support and grow their business operations which will in turn contribute to the bottom line.