Most people use Software as a Service (SaaS) on a daily basis; think Gmail, Office365, DropBox or MarineTraffic. Still, the vast majority don’t recognise or consider the differences between SaaS and ‘traditional’ software.
With SaaS, users ‘rent’ software which is accessed via the Cloud - software is provided ‘as a service’ as opposed to purchasing a physical copy that is installed on your desktop. SaaS providers maintain the hardware, perform upgrades, backup your data and otherwise perform all the other ‘keeping the lights on’ activities required to keep the software available to the user.
Our previous post provides a more thorough comparison of the initial and operational costs specific to on premise hardware vs Infrastructure as a Service (IaaS). Below, we consider software specific elements of the cloud - SaaS.
Imagine a ‘typical’ software purchase:
Traditional software requires program files to be installed directly (‘locally’) on all computers where a user wishes to access the software from. Simple installations may only require a download and minor configuration to on each computer. Larger installations may require providers to physically visit the site. In the most complex cases, a custom version of the software needs to be created to integrate with existing systems. Set-up, or implementation, fees can be considerable; sometimes more than the software license itself.
With SaaS there are markedly fewer stages to ‘set up’ – in fact the only set up needed for most SaaS products is a login username, password, and access to a browser. Integration is simple as the only program running on the customers side is the browser.
Licensing desktop software (vs. renting SaaS) and servers comes with a responsibility. The architecture of the system requires tailored design and customisation to match the company’s unique needs. Considerations include, but are not limited to, the following:
- Creating a large body of custom code to tailor the software for company specific workflow.
- Balancing the security of the system with the ability for users to access it from multiple, potentially insecure, locations.
- Storing data in a way in which it can be accessed quickly but not ‘bog down’ the servers, and backing up this data so that hardware failure does not become a total system collapse.
Such tailored design requires IT expertise to properly execute, which would often take the form of internal IT staff. For smaller companies this means hiring experts out of necessity rather than a core driver of the business. For larger firms, their IT resources are tied up in a never ending loop of design and redesign to adapt to changes in the software.
Using SaaS enables the outsourcing of this overhead. These issues are inherently easier for SaaS companies to handle as they frequently leverage IaaS from providers such as Amazon, Google and Microsoft. This means data storage, accessibility, security and backups are handled at high performance, high security and scale-efficient data centres.
As for customisation, SaaS companies tend to have open APIs. Open APIs becoming standard has led to a market of modular products and platforms rather than a one size fits all approach. Often referred to as ‘best-of-breed-solutions’, these are creating depth in specific areas that would normally require extensive custom coding. In the same way a smart phone is customised to the user’s needs through apps, a user of SaaS can often achieve the same results as custom code by adding modules.
Support is rarely included in the licensing fee for traditional software, instead usually charged at an annual fee – incumbents such as Oracle have historically set the benchmark at 22% of the initial licensing fee per year. One of the largest enterprise complaints to software vendors has been regarding the enormous support costs, and a reason why third party software maintenance companies like Rimini Street rapidly grew.
With SaaS standard support is generally included within the subscription costs, not bolted on top. There is no cannibalisation of a revenue stream if an SaaS provider supplies a product that requires minimal support, but rather a dramatic cost saving.
With desktop software, minor updates and bug fixes are usually included in the cost of the licensing fee, but a system wide update still has to installed on every machine. The expense comes both in the form of downtime, and the need to rewrite code that was customised for the previous version. As mentioned in the last post, IaaS and SaaS deliver rolling updates as standard, meaning minimal or no disruption to the end user.
Larger updates and complete upgrades are a key revenue stream for traditional software companies. Substantial features are often introduced, creating additional value to existing customers or intended to make the product appealing to additional markets. Inevitably, existing customers have to pay a fee to access these updates. Incentives for the providers are weighted towards releasing an imperfect product that can be improved upon next release.
Windows XP users had to pay to upgrade to Windows 7, and then Windows 8; Microsoft Office and Photoshop have released full upgrades every couple of years for decades. Whilst the upgrades are technically optional, sooner or later the older versions of the product are no longer supported. Mainstream support for Windows 8.1, for example, is due to end next year.
With SaaS, all updates and upgrades are inclusive – the customer is subscribed to one service no matter how much it evolves. With all of the above in mind, here is how the SaaS purchase process compares to the traditional software purchase process shown earlier:
In the words of Leonardo Da Vinci, and a slogan of the 1977 Apple Computer, ‘Simplicity is the ultimate sophistication’. Even the largest legacy software providers are abandoning the upgrade model. Adobe switched in 2013 to the SaaS Creative Suite, Office 365 is the SaaS version of Microsoft Office. Whilst the revenue per user over a one or two year time-frame may be significantly lower, the streamlined model offers substantial cost benefits for the provider as well as the user.
Truly grasping the value of SaaS, however, requires going beyond the immediately tangible cost factors. The incentive structure of these two very distinct business models has a profound effect on the relationship between provider and user. To be explored, in the next post.