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The SaaS Value Proposition

Despite the continuous growth and market adoption for Software as a Service (SaaS) solutions, or perhaps because of it, many SaaS vendors are attempting to alter or advance the SaaS definition to more closely align with their particular solutions. Sales pitches that include terms such as ‘multi-tenant’ versus ‘isolated tenancy’ – or – ‘SaaS’ versus ‘Software + Services’ are just a few of the technical arguments which ultimately cause more confusion than value for IT evaluators and buyers.

To separate claims and hype from substance and benefits, focus on the true definition of SaaS as well as the SaaS value proposition.

SaaS Defined

While SaaS is a broadly defined term for which there is no definitive consensus, the below definition of SaaS enjoys general industry agreement.

SaaS is a software delivery model which provides web-based application access from a central shared services hosting facility over the Internet based on a subscription pricing model.

Key SaaS characteristics include the following:

  • Browser-based access to software applications
  • Pay-as-you-go subscription pricing – akin to rental
  • IT management is performed centrally rather than at each customer’s site
  • Shared services application delivery which generally includes impressive Tier 4 data centers and may consist of a multi-tenant architecture or in some instances a single-tenant (or isolated tenant) architecture
  • Centralized software management and upgrades (which eliminates the need for end-users to download and install software patches and upgrades)

Software as a service characteristics remain relatively constant despite the continual evolution of category naming for this disruptive technology. The change in the delivery, pricing and support model has evolved from its original moniker of ASP (application service provider) to utility computing to on-demand to SaaS and likely will fold into the cloud computing nomenclature and paradigm. Notwithstanding progressive naming escalations, the SaaS business model has consistent, profound and sustained value. According to Nicholas Carr, a former editor of the Harvard Business Review and IT visionary, the SaaS or utility computing model will have similar economic and social impact as was incurred a hundred years ago when companies stopped generating their own power with steam engines and dynamos and plugged into the newly built electric grid.

SaaS Value Proposition

The core tenants of the SaaS value proposition are unchanged regardless of vendor and include the following benefits.

  • Subscription pricing for lower TCO (total cost of ownership)
    • SaaS solutions forego hardware and software procurement, annual maintenance fees and upgrades
    • SaaS enables acquiring only the amount of software needed as opposed to traditional licenses per device
    • SaaS allows subscribers to access business functionality at a lesser cost than paying for licensed applications
    • SaaS reduces or eliminates IT salaries expenses for DBAs, system administrators and support or help desk staff
    • Some software vendors facing eroding market share to the SaaS solutions have attempted to suggest that SaaS TCO is higher due to the recurring subscription model, however, while costs vary by customer, several analyst firms have developed TCO models which demonstrate SaaS TCO is normally lower over the life of the application software
  • Faster implementation (faster time to benefits)
    • With no hardware, platform software or application software to install and configure, SaaS business software implementations are typically performed in 45% to 55% of the time and cost of on-premise CRM or ERP applications
  • Outsourced expertise
    • SaaS operations are managed by outsourced experts for improved product delivery and support; hosting organizations offer expert resources such as data center architects, DBA, security and help desk
    • Offloading IT administration and management allows companies to apply greater time and focus to core competencies
  • Predictable IT expenditures
    • Hosting clients turn otherwise variable costs into predictable monthly payments
    • Fewer over-budget IT project surprises
  • Reduced risk
    • Failure to achieve SaaS implementation success or post production results offers customers the option to terminate their subscriptions
  • Vested partnerships
    • Unlike traditional software licenses which are sold without any money back provisions, SaaS agreements are dependent upon recurring subscription renewals; With SaaS, the hosted vendor has a financially vested interest in the customer’s satisfaction and software success
  • On-demand scalability as business grows
    • With SaaS, there is no need to purchase and maintain hardware in advance in order to be able to support cyclical demands or increased business growth; SaaS offers on-demand scalability
  • SaaS solutions forego a highly depreciable (hardware and software) asset which offers no intrinsic financial value. When performing the buy versus rent scenario, remember that if something appreciates over time you may opt to buy it, however, when something depreciates you often opt to rent it. Information systems only ever depreciate. Use the asset – don’t buy it.

Recognizing the true definition of SaaS and the core tenants of the SaaS value proposition will empower IT evaluators and buyers to bypass vendor injected self serving claims and imposed confusion as well as maintain focus on the business value and benefits realized from the SaaS delivery model.

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