These companies actively hide the fact that you are paying to rent technology that runs your day-to-day operations and many times use ambiguous marketing terms to obscure this from you.
We want to clarify this for you right now. SaaS is not a magic potion for you or your business. It's simply software that runs from someone else’s computer and is the software necessary for your business to grow and thrive.
In order to fully understand SaaS, you cannot simply take what is stated in the advertisements or the sales pitches. Therefore, you need to dig deeper by examining the actual cost, the lack of control over your data, the actual structure of the SaaS application, and finally, the method of operation of a SaaS platform within a contemporary organization.
SaaS Meaning Defined: The Basic Structure of Cloud Services
SaaS stands for software as a service, meaning software is supplied over the internet on a monthly basis rather than installed locally on an individual’s hard disk drive.
Think of it this way: in the past, if you had an email account, you would have had to purchase expensive physical hardware, have the hardware stored in a cool area of your house or office building, and pay monthly to have IT people maintain that hardware. Today, with tools such as Gmail and Microsoft Outlook, you can simply log into either system using your web browser to access your email.
The vendor maintains all hardware, backs up your data, and gives you the ability to access it from anywhere that has a connection to the internet. You simply pay a monthly fee to have access to these tools.
Business is changing in that businesses no longer purchase technology; they rent technology as an ongoing service. The transition from a one-time purchase to a rented service follows a defined and specific path of operation.
The Implementation Process Consists of Four Steps
- The vendor provides the application and support by writing the software code and hosting the application within their own cloud hosting infrastructure.
- The vendor is responsible for all back-end operations for the application, such as maintaining database structures, managing server operations, and ensuring back-end security.
- The user can access the software via a standard web browser or via a mobile application.
- The user pays a subscription-based recurrent fee for access to the software, usually based on the number of employee seats and/or total use of the software.
The Architecture Behind the Subscription Model
The architecture of the subscription model differs from that of an owned software model primarily in how the data is stored. As a consequence of this difference, vendors have the ability to provide the service at a lower price point because of their ability to group customers together into shared environments to reduce costs.
Therefore, understanding how the service is structured will help you make a better purchase decision.
Multi-Tenancy vs. Single-Tenancy
The majority of SaaS applications utilize a multi-tenancy architecture. This architecture allows thousands of customers to utilize the same database and the same core code. While your data is segregated from that of other customers through a strict set of security rules, customers share a digital apartment building.
This ability to share environments also allows vendors to roll out updates at a time when all customers are upgraded simultaneously.
In contrast, single-tenant architecture provides each customer with its own separate instance of the application and its own isolated database. As a result, the single-tenant architecture is much more expensive than the multi-tenant architecture, but it provides highly regulated industries with complete control of their environments.
Vendor-Managed Infrastructure
When you utilize a cloud service, you are provided with a vendor-managed infrastructure. The vendor makes all decisions regarding system upgrades and the scheduling of server downtimes to perform routine maintenance.
When a vendor has downtime, everyone in that company is affected by it, meaning they can't use any of their applications until the vendor's systems are up again. You gain simple use and rapid implementation at the cost of giving up total control of the underlying technology.
SaaS vs. Other Cloud Models: IaaS, PaaS, and On-Premise
When comparing SaaS to the other models of cloud computing, it's common for many businesses to confuse the various models. Without a clear understanding of the layer of the technology stack you are purchasing, you cannot make an informed and educated purchase.
On-Premise Software
You purchase your own hardware, you purchase a software license, you do the installation yourself, and you maintain and manage everything yourself. You incur a tremendous amount of up-front costs and ongoing IT expenses.
IaaS (Infrastructure as a Service)
You rent raw server space and network resources from a provider like AWS. You still have to create and maintain your own operating system and applications on top of that infrastructure.
PaaS (Platform as a Service)
You rent a server and development environment designed specifically for developers who want to create their own custom applications, without having to worry about the hardware layer.
SaaS (Software as a Service)
You rent a complete, final application and therefore do not manage any part of the application except for your user account setups and data.
Real-World SaaS Examples: Enterprise and Consumer Use Cases
Generic definitions provide very little guidance to decision-makers. To really understand the marketplace, you must look at the actual platforms that are driving business today. The move to cloud-based software involves virtually every department of a company.
Collaboration and Communication Tools
In most cases, the easiest way to enter the world of cloud software is through simple team communication tools. The emergence of cloud computing services such as Microsoft 365 and Google Docs has transformed the way standard office files can be easily created, modified, and shared with multiple users in real-time regardless of their location.
Slack has also taken the place of internal email chains and provided companies with hosted chat channels for team members to communicate more efficiently. Zoom uses web-based technology to conduct video conferencing without the need for special broadcast equipment in your office.
Operation and Data Management
Heavy enterprise operations are increasingly reliant on subscriptions. Salesforce has become the leading provider of Customer Relationship Management (CRM) through its ability to synchronize worldwide sales data with ease.
Enterprise Resource Planning (ERP) software is provided through cloud versions of SAP and Oracle. Companies can easily manage their financial operations on a daily basis using Intuit's financial management software. All of these examples illustrate how complex software applications can be accessed directly through the internet.
Cloud Adoption and the Trade-Offs
When evaluating whether to adopt a cloud-based solution, it is important to keep in mind that there are risks associated with this business model. Every decision made to acquire a cloud-based service will require a level of calculation and risk analysis.
When to Use Cloud-Based Services
The advantages of cloud-based services are clear to most modern organizations. The most significant benefit is the drastically reduced initial cost associated with not having to purchase any physical server hardware.
The speed with which businesses can implement a cloud-based service is astonishing. If a company signs up for a service on Tuesday, the company can be utilizing the service by Wednesday morning with its entire global team. Additionally, all updates, including security patches, are applied automatically, eliminating the need to continually check for new patches.
The ability of your employees to use a device with the same amount of effort on their phone when they’re in an airport as it would take them at their desk in the office is referred to as device flexibility.
What Are the Downsides of Vendor Dependence?
On the other hand, vendor dependence has very real downsides. The number one concern when assessing vendor dependence is the risk of price increases. If your vendor decides to raise their prices by 40 percent next year, you are either forced to pay the price increase or face the daunting task of moving all your data to a new vendor.
Reduced flexibility with your own workflow processes is yet another downside. There is the possibility of extreme reliance on connectivity. If you experience a network outage, either locally or due to your vendor's server crashing, your expensive software will be rendered completely useless.
Trends in the Future: AI and Shared Economic Growth
Trends within the service industry are changing quickly. Many service providers are moving from simple web applications to complex AI systems. AI systems allow for the automation of many tedious tasks and make it possible to use AI agents for advanced decision-making and workflow processes.
Additionally, we are beginning to see a wave of growth in vertical SaaS solutions. Vertical SaaS solutions are industry-specific software applications that cater to one or more highly specialized industries. Examples include application management platforms that exist solely for the dental office or the construction site.
The combination of vertical SaaS and low-code API connectors is likely to create an incredibly automated and highly specialized subscription model solution moving forward.
The Bottom Line for Software Ownership
SaaS has become the de facto standard for how companies operate today. Small businesses can leverage the same powerful tools as large multinational corporations by drastically reducing the threshold for entering the market through a subscription-based service. Although this is a great benefit, it also has its drawbacks.
You are outsourcing a key component of your business when you accept a subscription, meaning you are relinquishing complete control of your business infrastructure. By outsourcing, you are sacrificing complete ownership of your business for complete ease of use and access.
The long-term winners in this market will be those who conduct a complete ten-year cost-of-ownership analysis before selecting vendors and not simply looking at the low starting monthly fee. Once you have committed to a vendor's database for your daily operations, it will be highly difficult to switch to another vendor.
FAQ
How does a vendor's subscription cost increase at a faster rate than actual usage of the vendor's software?
Vendors design their pricing structures to capture more revenue from the company as it grows. To increase revenue from their customers, vendors place user quotas, restrict access to certain features until upgraded to a new tier, and have hidden limits on storage that will force users to upgrade before their operational output has actually doubled.
How does the vendor's multi-tenant architecture affect data security when the vendor's servers fail?
Since thousands of companies share the same core database structure within the vendor's server, each vendor has thousands of customers at risk due to one major code bug in its main software. With a significant server outage, all customers will lose access simultaneously because of the vendor's shared multi-tenant architecture.
What is the tipping point at which an on-premise software package is less expensive than a cloud-based subscription?
The point of convergence between the two is when a company reaches a steady growth rate and there are many predictable employees within their workforce. Paying a large monthly per-user fee for ten thousand fixed employees for five years will be far greater than the initial cost of purchasing a local server and obtaining permanent software licenses.
What does an API failure cause regarding the continuity of an operational process?
An API failure between two major cloud platforms will cause an immediate halt in all connected workflows. When using cloud platforms to communicate with other cloud platforms, an update made by one vendor could disable the link between their databases, thereby losing valuable data until the error is manually identified by an individual.
