Software as a Service (SaaS) may be defined simply as software applications deployed over the Internet. With SaaS, a third-party provider licenses an application to customers either as a service on demand, through a subscription, in a “pay-as-you-go” model, or at no charge when there is opportunity to generate revenue from other streams (advertisement).
The primary advantage of SaaS is purported lower IT costs: smaller monthly fees to use the software, no internal hardware/software maintenance, and update/bug fixes automatically delivered. No hardware, no database servers are necessary for the software. Access to the Internet from PC clients does need to be provided along with secure firewalls and the usual infrastructure for Internet connections.
Key Benefits of SaaS
Lower IT Costs: Low cost of entry and potential lower total cost of ownership (TCO). When you subscribe to a SaaS application, you avoid the overhead associated with implementing conventional software. A typical software implementation involves purchasing and maintaining servers, housing them securely, and installing and maintaining the software. This requires the time and effort of experienced IT personnel and deflects the efforts of employees at a number of levels away from the core mission of your organization.
More Powerful and Secure IT Infrastructure: Few organizations can match the infrastructure and security investments made by SaaS vendors.
Economies Of Scale: Subscription costs for SaaS applications reflect the economies of scale achieved by “multitenancy.” Multi-tenancy means that many customers run their applications on the same unit of software. For example, in a SaaS website calendar application, customer data is all stored in one database. This makes the overall system scalable at a far lower cost.
Pay As You Go: When you subscribe to a SaaS application, you usually pay a monthly or annual subscription fee. Compared to a traditional software license, this subscription payment structure may work to your advantage. An on-going monthly expense is easier to incorporate into your budget than a large one-time outlay. You can cancel or change your subscription at any time without losing a large initial investment. In many cases, SaaS subscriptions are based on metered usage so you pay for exactly what you use. Rather than making a long-term commitment to one fixed account structure, you can add or subtract accounts at any time as your organizational needs shift.
Save Time: Because you eliminate many of the typical implementation tasks associated with licensed software and because the software is already up and running on the SaaS vendor’s data center, deployment time tends to be much shorter with a SaaS application than a traditional one.
Focus Technology Budgets On Competitive Advantage Rather Than Infrastructure: When you subscribe to a web-hosted application, you free your organization from supporting high-cost, time-consuming IT functions, including:
- Purchasing and supporting the server infrastructure necessary to install and maintain the software in-house
- Providing the equipment redundancy and housing necessary to ensure security, reliability, and scalability
- Maintaining a labor-intensive patch and upgrade process
Automatic Upgrades: You will always have the latest software version. The SaaS provider provides upgrades automatically and quickly makes changes if an error is found in the software.
Access Your Data Anywhere: One of the greatest advantages of SaaS is the freedom it gives you in terms of when and where you choose to work. All of the data you use within the software is stored on the servers of the SaaS provider – meaning you can log into your account wherever you are in the world and access it instantly.
SaaS Disadvantages
- Unrealized cost savings
- Opex vs. Capex
- Implementation issues
- Limited customization
- Security concerns
- Licensing issues
- Infrastructure issues
Moreover, there is controversy over purported SaaS cost savings considering capex vs. opex.
Capex (asset is a newly purchased capital asset or an investment that improves the useful life of an existing capital asset) vs. opex (operating expense for normal business operations) is how compute resource is paid for by the consumer of those resources. For example, if one uses a SaaS service, payment is made on either a monthly, yearly or a highly granular level for the use of the resources — either time (so much per server-hour) or consumption (so much per gigabyte of storage per month). The consumer does not, however, own the assets that deliver those resources. The third party SaaS firm owns the server, application and storage machinery.
From an accounting perspective, owning an asset is considered a capital expenditure. It requires payment for the entire asset and the cost becomes an entry on the company's balance sheet, depreciated over some period of time.
By contrast, operating expenditure is a cost associated with operating the business over a short period, typically a year. All payments during this year count against the income statement and do not directly affect the balance sheet.
Depending upon the use scenario of the individual application, paying a yearly depreciation fee may be more attractive than paying on a more granular basis. Consider automobiles — it's economically optimal to purchase a car for daily use in your home town, but cheaper to rent a car for out-of-town business trips.
Some organizations find it very difficult to relinquish control or trust third parties to manage their applications and data.
Some vertical markets require industry specific business applications for which SaaS solutions are not available.
Organizations without clear objectives and defined business processes will be no better off with a SaaS solution than with an on-premise solution.
Many SaaS providers are also stuck and confused about their software licensing models. This is a serious problem because old licensing models don’t fit well with the cloud. As they transition to newer billing models, there is a great amount of confusion because there are so many different models.
Characteristics of SaaS
It is important to ensure that solutions sold as SaaS in fact comply with generally accepted definitions of cloud computing. Consider three layers of cloud computing:
- SaaS (Software as a Service)
- PaaS (Platform as a Service)
- IaaS (Infrastructure as a Service)
- Application design and development
- Bug and enhancement tracking
- Database support
- Security
- Versioning
- Customization
- Web access to commercial software
- Software is managed from a central location
- Software delivered in a “one to many” model
- Users not required to handle software upgrades and patches
- Application Programming Interfaces (APIs) allow for integration between different pieces of software
Organizations considering a move to the cloud should carefully consider which applications they move to SaaS. Candidates for an initial move to SaaS include:
“Vanilla” offerings where the solution is largely undifferentiated. A good example of a vanilla offering would include email where many times competitors use the same software precisely because this fundamental technology is a requirement for doing business, but does not itself confer an competitive advantage.
Applications where there is significant interplay between the organization and the outside world. For example, email newsletter campaign software.
Applications that have a significant need for web or mobile access. An example would be client relationship management and mobile sales management software.
Software that is only to be used for a short term need. An example would be collaboration software for a specific project.
Software where demand spikes significantly, for example tax or billing software used once a month.
Note that SaaS offerings are evolving and include sophisticated business processes such as enterprise resource planning, enterprise content management, human resources and others.
Where SaaS May Not be the Best Option
Examples where SaaS may not be appropriate include;
Applications where extremely fast processing of real time data is required.
Applications where law or other regulation does not permit data being hosted externally.
Applications where an existing on-premise solution fulfills all of the organization’s needs.
SaaS Vendor Due Diligence
It is important to consider how SaaS systems are architected for SaaS delivery. Make sure the benefits of SaaS can be realized: lower cost of operation, lower costs for updates, ability to maintain your own custom code line, robust personalization capabilities, and ability to integrate to your other applications seamlessly.
Most important is SaaS vendor due diligence when it comes to security, reliability, performance and availability. The vast majority of companies that have opened their doors as SaaS providers don’t have the rigorous infrastructure and support structure in place.
SaaS can work for some applications. Yet a better model may be the mixed private - hybrid cloud where the organization builds a private cloud and selectively outsources certain application services to a SaaS provider in the public cloud.
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