Shifting from local or physical servers to cloud-based services has changed the way businesses utilize technology and manage their information technology (IT) systems compared to the past. Instead of purchasing software packaged in boxes, businesses end up subscribing to services providing access to applications through the internet, requiring a computer and login credentials for the application they are using.
SaaS provides a means for an organization to get access to an application's functionality without having to maintain and support that application or host the application on servers. All this occurs through a subscription-based pricing method, meaning that businesses can manage their IT budgets more predictably.
In turn, companies bear fewer upfront capital investments when compared to the traditional model of purchasing hardware and software. As such, the shift to SaaS has resulted in a $374 billion global SaaS marketplace.
Understanding the Core Mechanics of SaaS
In order to gain a more complete understanding of how the SaaS delivery model works, we must examine the technical side of the delivery model; the "mechanics" of how application programs are delivered via the internet; the full costs of this delivery model; and the technical architecture associated with providing the functionality of the application through networked servers.
Everything before this point has assumed that the user of the application program is utilizing a local copy of the application on a user's computer. The way cloud software operates cannot be evaluated from that point of view.
Because the application does not exist on the user's computer, it is stored on remote servers, typically operated by a cloud computing service (such as AWS or Oracle). The application program is accessed through web browsers or through mobile applications.
Multitenant Architecture Standard
Multitenancy is what powers the economics of the cloud subscription model. With traditional software delivery, each company had its own individual software operating on its own dedicated hardware. SaaS provides an alternative.
Multitenant architecture means that one software application can serve hundreds (or thousands) of individual customers simultaneously by a single instance of the application.
To illustrate: Think of an apartment building. The building is owned and operated by the provider. The provider is responsible for maintaining the plumbing, the electricity, and the common areas. Each individual tenant has his or her own apartment, and possesses the key to the locked door.
While each tenant has his or her own data securely separated from all other tenants, the tenant shares a common underlying infrastructure with every other tenant. Because of this shared environment, the provider can release a single update that upgrades the software for every customer around the world at once.
High-security providers sometimes offer single-tenant solutions, where a business is provided with its own isolated instance of the application; however, for the majority of SaaS applications, multitenancy is the default standard. It is the only way that vendors can achieve the scale required to keep their subscription fees low.
Shared Responsibility Security Baseline
When a company moves its data to the cloud, it enters into an agreement with the vendor whereby the vendor assumes limited responsibilities associated with the security of the cloud. This is a significant legal and technical boundary.
The vendor is responsible for the physical security of the data center, the network infrastructure, and the core application code. If the vendor's main server farm is hacked, the vendor is liable.
You are responsible for the security of the data within the cloud. Managing who gets an account, the strength of their passwords, and what data they can export has become a critical responsibility for you.
A hacker stealing your customer list because an employee used a weak password is a reflection of your management failure. No cloud platform is good at protecting you from poor internal access control. Therefore, most modern deployments are based on a zero-trust security architecture to ensure that every successful attempt to access a cloud service is verified through strict identity checks.
Cloud Deployment Models: IaaS vs. PaaS vs. SaaS Explained
The IT industry has categorized cloud computing into three separate layers, which will help you better understand where the majority of the management responsibility falls.
Comparing the Cloud Layers
IaaS stands for Infrastructure as a Service. With IaaS, you pay for raw computing power. You will rent virtual servers, storage space, and network connectivity. You must build your own operating system and database and write your own applications. While IaaS allows you maximum control, it also means you must have a lot of technical expertise to be successful.
PaaS stands for Platform as a Service. With PaaS, you have access to a development environment. The provider will handle the servers and operating system. You need only write your application code and manage the application data. PaaS is designed for developers who want to develop custom applications without the need to maintain their own hardware.
SaaS stands for Software as a Service. The SaaS vendor creates the application, operates it on their platform, and is responsible for the underlying infrastructure. As an end-user, you simply provide your company's data and user accounts. This is the primary reason SaaS is the most commonly used cloud model.
Why Subscription Models Outperform On-Premise Infrastructure
The subscription model offers the least technical barrier to entry for a buyer. It also offers a clear financial and operational advantage over traditional on-premises hardware in terms of speed and efficacy.
Average cloud deployments provide an ROI of 214%, and customers have reported an average cost savings of 35% when compared to managing their own on-premises physical servers. Additionally, enterprise subscription tools can be implemented in a fraction of the time it takes for traditional software implementations.
The average time to pay back a modern subscription tool is only 4.7 months. The operational benefits are significant as well. Hundreds of automated workflows, improved employee accessibility through any internet-connected device, and the option for employees to work from home or on a distributed team are all facilitated by subscription tools. Thus, these combined factors provide businesses with a competitive advantage.
SaaS Market Size, Adoption Rates, and Application Sprawl
The size of the subscription software industry is beyond staggering; however, there are numerous inherent operational inefficiencies hidden within many companies because of their rapid and widespread adoption.
Currently, the subscription software industry is estimated to be worth approximately $374 billion worldwide. Industry analysts project that by 2025, the subscription software industry will reach an estimated value of $315.7 billion, with aggressive projections reaching $623 billion by 2027, and $1.13 trillion by 2032.
Furthermore, it is not surprising that such large financial numbers reflect a similar trend in the rate of adoption of subscription software. Of all enterprise organizations today, it is estimated that 92% currently utilize subscription cloud software, and 78% of small and medium-sized businesses currently use subscription cloud software.
Additionally, industry analysts state that 70% of all business applications today are now delivered through the cloud subscription model, with estimates predicting that 85% of all business applications will be delivered through this channel by 2025. Many software companies are chasing after monthly recurring revenue in a rapidly growing marketplace. Currently, over 30,800 different software firms exist around the world.
The Financial Risks of Application Sprawl
As the amount of software purchased increases, so does the possibility of having distortion in your application landscape. When you make it easy to purchase software, you enable companies to purchase more software than they require.
At the moment, the average company manages approximately 130 separate software applications. This represents a massive management load, as 47% of businesses operate with more than 100 different tools.
The use of many different applications causes multiple overlapping functions to exist on a company's budget. This creates confusion with the accounting and purchasing departments, generating unnecessary costs with redundant license fees.
Recent trends have shown that 44% of the software licenses purchased are a complete waste. Many companies are spending monthly licensing fees for software products that employees are not utilizing or logging into with any consistency. With the ease of obtaining software monthly on a subscription basis, many companies lack adequate financial governance, and therefore smart IT professionals are required to continually perform software audits.
Real-World SaaS Applications and Business Workflows
Theoretical frameworks will only go so far in illustrating the impacts of technology on business workflows. To better understand these impacts, it will be necessary to look at specific products within different functional areas (e.g., marketing, operations, finance) and evaluate them across the organization.
Enterprise CRM Workflows and Salesforce
Salesforce has become synonymous with the enterprise cloud model. Prior to Salesforce, the only way to access the information within a company's customer database was through a slow internal computer network.
Today, there are no limitations in accessing your customer data from anywhere via the internet. All tools associated with a company's sales team are able to efficiently manage lead generation, account management, revenue forecasting, and much more in the cloud.
Workspace and Collaboration Tools
In today's workplace, the traditional physical office doesn't exist as many organizations are using tools like Microsoft 365 and Google Workspace to transition their email, document creation, and storage to the cloud.
With the advent of instant messaging programs like Slack and chat channels that have searchable messages on the internet, traditional methods of work communication have been supplanted by a more efficient means of communication that encourages remote workers to use tools for real-time collaboration rather than relying on email.
A new form of video conferencing has emerged thanks to platforms like Zoom, which utilize cloud technology to allow users to attend meetings using nothing more than a browser. Trello has introduced the notion of visual project management by providing users with a way to track their projects visually, giving both the user and project participants an immediate sense of progress.
Development, Creative, and Support Workloads
In every industry, software developers are increasingly turning to cloud technology as the means to create the tools that they use on a daily basis. GitHub is an example of such a service. It has become the central repository for all of a team's code and allows for real-time collaboration between multiple engineers working around the globe to create a common software application.
Zendesk, another type of cloud tool used widely for managing customer support, also eliminates the problems associated with a paper-based approach. DocuSign is yet another tool that allows users to sign and transmit their documents electronically with the same level of validity and reliability as a physical signature.
Adobe Creative Cloud has transformed the graphic design industry and the way that graphic designers use their software. It has eliminated the need for designers to purchase a one-time-only software license for their computer hard drive.
SaaS Pricing Models and Subscription Billing Structures
The pricing and billing structure of a vendor influences how a company utilizes that vendor's product, and therefore can have a significant impact on how an organization utilizes the product they purchase. Vendors now employ several different pricing methods and billing structures to sell their services. There is now a variety of subscription-based pricing plans, including tiered pricing and freemium pricing.
Tiered and Freemium Pricing Plans
The tiered pricing structure is the most widely used method of tiering products. Most vendors use this pricing structure to provide a starting point with limited capabilities to individual users and small teams, and then charge a higher monthly rate to larger companies or organizations with a greater number of features and a need for enhanced security and support.
Freemium pricing is another increasingly popular pricing strategy that many vendors are using to acquire their customers. Freemium pricing is when a vendor offers a basic version of their product at no charge to the customer in exchange for the ability to provide a higher-priced premium version of the product or service later.
Examples of this include Mailchimp's free email sending option for small mailing lists and Dropbox's free storage option for basic file storage. In order to encourage users to continue using the tool, the intention is to create an extreme reliance on the application so that they are prepared to pay when free limits are reached.
Transitioning to a Usage-Based Metrics System
Across many industries, we are beginning the shift toward usage-based payment. Rather than paying a flat rate per user, you now pay based upon what you are actually using.
This could mean paying by the API call, by the gigabytes of storage used, or by the transactions processed. This pricing model links cost directly to the value that is being created for the company; however, it creates a tremendous amount of difficulty for finance teams to forecast budgets accurately. As usage spikes, companies could end up with massive, unexpected monthly statements.
Operational Trade-Offs and IT Security Risks
Every technology you choose will have negative consequences. The cloud subscription model addresses many operational challenges, but it also creates many new critical operational risks.
Vendor Lock-In and Migration Barriers
Once you purchase a subscription, you are giving up some level of control. You will no longer control when updates occur and when they disrupt your internal workflow. In addition, you are now exposed to the risk of vendor lock-in.
When your entire organization relies upon a specific tool for operational support, and the organization's historic data resides on the vendor's servers, it can be painful to exit. Vendors understand this point.
Moving your data off of one vendor's system to another vendor's system and retraining an organization of several hundred employees is going to be costly and slow. These high switching costs keep customers tied to a vendor even if they are dissatisfied.
Access Management and Identity Governance
Having to manage who has access to 130 different applications creates an enormous security risk. Maintaining access to cloud-based applications should be secured by assigning access properly and effectively terminating accounts of users who have resigned as soon as possible.
Failure to terminate access to data from cloud applications can pose significant security risks due to the many data breaches that can occur when users retain access to applications.
It is also important for organizations to invest in identity management systems and single sign-on (SSO) tools. These tools ensure all access to applications ends immediately after an employee quits or leaves.
Data Residency and Compliance Issues
Various data residency laws can create many challenges regarding managing citizen data. Many countries have laws requiring that citizen data reside on physical servers located within their country.
If you utilize a vendor that transports data through servers located in another country, you could be violating regional or state laws. Therefore, it is extremely critical to confirm the physical location of your vendor's data centers before signing any contracts with them.
When the Cloud Is Not the Best Solution
The subscription model for a cloud-based solution is not a one-size-fits-all solution. Businesses operating in a secure, air-gapped environment (an environment in which computers are physically disconnected from the internet for security purposes) cannot utilize cloud-based solutions.
If a business has a very specific and unique core workflow that represents its primary competitive advantage, then renting an off-the-shelf software solution is not the best decision. Businesses with custom workflows require custom software products. Renting a generic product forces you to adapt your business to conform to the product; therefore, you lose the advantage of having a distinct and specialized core workflow.
How SaaS Technology and Cloud Capabilities Are Evolving
While the cloud's infrastructure framework has been stable up to this point, the ways it will be provided (i.e., the features and available methods) are changing quickly. Four major trends are currently reshaping this area within the cloud market.
AI Moves from an Application Area to Expected Features
Though artificial intelligence (AI) was a separate application area ten to twelve years ago, it has now become part of the expected feature set within cloud-based applications.
Based on a recent poll, AI-enabled cloud applications are being adopted by roughly 64% of companies today (though numbers vary from statistical sources as to how many companies currently leverage AI).
Many vendors have embedded machine learning software capabilities into their products to automate data entry, draft emails, and predict customer behavior. If a vendor does not provide smart automation today, the tool will be viewed as obsolete by customers.
Vertical Software Solutions: Moving to Industry-Centric Applications
Horizontal cloud-based tools were the standard solutions for early technology companies. For example, retail stores and hospitals used the same cloud-based accounting tool. Recently, the development and application of vertical software (vertical SaaS) have grown rapidly.
Vertical software solutions are tools designed specifically for a particular industry. For example, medical office software will be equipped to adhere to relevant patient privacy policies as well as bill patients using exact medical billing codes.
Likewise, construction firms will buy software designed specifically for tracking contractor resources and ensuring on-site safety. Because vertical solutions solve highly tailored operational issues, they command a higher price point than generic horizontal tools.
API-First Design Principles and Low-Code Extensibility
Businesses are demanding that their new applications interoperate with their existing tools, so the new trend toward API-first design principles is gaining momentum. With an application programming interface (API), a company can send and receive data between software systems automatically and seamlessly.
APIs are not the only integration tool gaining popularity in today’s business setting. Many API-enabled software solutions are now providing users with access to low-code and no-code tools to build their own custom automated workflows without writing any traditional code.
For example, a marketing department can now automatically connect a web form submitted by a customer directly to the sales database using simple visual logic rules.
The Strategic Realities of Cloud Computing
The data illustrates the significant realities of the cloud operating model. As illustrated, software as a service (SaaS) is no longer a technology of the future; it is the mandatory deployment model of today.
While it promises many benefits associated with lower operational costs, automatic upgrades, and large-scale deployment, it has also been financially proven to yield an average 214% return on investment. Customers can save roughly 35% of their infrastructure costs by eliminating hardware-related capital expenditures through this model.
However, customers will be affected by the shift to SaaS in terms of moving away from traditional governance over in-house server hosting. There are many new compliance issues catalyzed by the need for strict vendor monitoring and control.
The future of cloud computing will see a stiff competitive penalty placed on companies lacking solid digital governance practices in light of the heavy integration of AI and hyper-verticalization.
Although nearly 44% of the licenses purchased by companies today are wasted by organizations trying to manage and maintain hundreds of redundant tools, the companies who benefit most from cloud computing over the next decade will not be those who purchase the most software. The companies who ultimately win will be those who master the ability to audit, integrate, and actively control the applications they rent.
