- Multi-tenant architecture: True SaaS vendors use the same production environment to support multiple customers, allowing the software vendor to spread infrastructure and operations costs across many customers. With single-tenant software, a new installation will require purchasing servers, database software and other expensive infrastructure, but with a well-designed multi-tenant architecture, a new customer is simply "turned on" within the existing infrastructure, incurring no incremental costs.
Even when operated by the software vendor, single-tenant software still requires significant operations effort and costs each year estimated to be 43 to 57 cents per year for each dollar spent on software. With multi-tenant SaaS offerings, maintenance activities such as applying security patches have to be performed only once for all customers, greatly reducing both costs and risks of error.
One helpful side-effect is that SaaS vendors are motivated to make their software run as efficiently as possible within their data center, significantly lowering internal operations costs over time. The SaaS vendor is also able to invest in shared infrastructure capabilities that no single customer could ever justify, such as real-time monitoring, continual backups, system failover and redundancy, and disaster recovery capabilities providing world-class reliability and performance as part of the base service.
As mentioned earlier, a multi-tenant environment also means that true SaaS solutions are architected to be extremely configurable to avoid customizations. Thus, customization costs and implementation delays that customers incur are completely eliminated, both during initial implementation and with each upgrade, removing another significant cost of ownership for customers.
- Single platform: Legacy application software was designed to be installed at each customer's site, using each customer's particular database software, servers and other infrastructure. Legacy software providers used to compete on how many different types of infrastructure components their software ran on, which required them to spend significant time "porting" every version of their software to all the various infrastructure components. This effort, which can take 30 to 40 percent of a firm's development resources, is completely obviated by the SaaS approach, which is built to run efficiently on a single infrastructure.
Also, legacy software providers typically build and maintain "abstraction" software modules to allow their software to run on many databases and operating systems, but because SaaS offerings run on a single infrastructure, these software layers are unnecessary and thus eliminated. By avoiding this wasted effort, SaaS providers are able to dedicate much more effort to adding value and functionality to their software, rather than building non-value-add infrastructure layers.
- Single production version: Similarly, legacy application software providers must maintain all the old software versions that their customers run, while true SaaS solution providers only operate and maintain the most current version. Together with the porting effort described above, the total "maintenance" effort can take as much as 70 to 90 percent of development capacity for legacy software providers, according to estimates by The Economist. True SaaS providers eliminate all this wasted effort, greatly increasing the development efforts that they apply to additional functionality and new value to customers, as shown in Figure 1 below:
Figure 1: Technology Investment comparison between Legacy and True SaaS Software Providers
- Agile software development approach: True SaaS solutions typically release new versions every few months to deliver new value to customers and the market, especially as new customers can need a specific feature to go live. Instead of customizing the software, this requires a fast-moving, business-focused development organization that delivers frequent releases. Fortunately, a next-generation development methodology called "Agile software development" has emerged that incorporates practices to deliver business value quickly, frequently and efficiently. True SaaS vendors have migrated to this approach because it meets the need for quick implementations with new features, and fast-moving ongoing software development.
- Operational excellence: True SaaS vendors must not only build best-of-breed functional software, they must also create superior operational processes to deliver a consistently high-value SaaS solution to customers over the Internet. Successful SaaS vendors have invested significantly, ahead of customer demand, in technical and personnel capabilities around system monitoring, proactive issue resolution, capacity planning and investment, high-availability and disaster recovery, performance tuning, and system integration.
- Designed for efficient operations: Since SaaS providers both design and operate their own software, they build it for efficient operations, with features like active monitoring, performance tracking, and easy diagnosing of issues. With SaaS, the provider performs all operations and maintenance rather than customers so the provider is motivated to minimize operations activities, reducing costs for them and cost of ownership for their customers.
A similar result can be observed from the automotive industry. Until the mid-90's, BMW owners used to pay for all service activities on their cars, and BMW recommended a 1,200-mile service check-up and oil changes every 3,000 miles. Now that BMW pays for service the first few years, they have redesigned their oil system and other high-maintenance systems to eliminate the 1,200-mile service check-up and require oil changes every 15,000 miles. Simply because BMW now provides the ongoing maintenance for the cars they design, they were motivated to design their cars to make servicing as efficient as possible, and they were able to reduce the service cost of a BMW by more than 80 percent. Similarly, in the next-generation enterprise software industry, true SaaS providers design their software for easy operations and low cost of ownership, since they incur all operations costs.
- Pre-packaged solution, not "some assembly required": Legacy application software requires customers to become technical experts in the software how to install it, get it to work in their infrastructure, integrate it with other software, customize it with new programming, diagnose issues, and upgrade it. Owning legacy application software as a result involves significant training, ramp-up time for a technical project team, and paying for a large IT staff indefinitely. With SaaS, the customer doesn't have to learn anything about the technology, but can rather focus on how to use it effectively to improve their business processes, eliminating all the customer-incurred technical personnel and upkeep costs.
- Full solution support: If a customer finds a software bug in installed legacy enterprise software, the software vendor must replicate the customer's unique environment (database, operating system, etc.) with the exact software product version, and then try to reproduce the issue often an impossible task due to the customizations in the customer installation or the customer's specific data. This can take weeks of work by the software vendor, and even then often the answer will come back: "We can't fix the issue because it is 1) due to a customization or 2) it's the responsibility of another software component (such as the database), or 3) you're running a version of our software that is too old." Even if a fix can eventually be provided, the customer must dedicate IT staff time to testing it, implementing it and validating it in production creating substantial cost and hassle for the customer. With true SaaS solutions, reproducing the issue is trivial there is only one version of software, the vendor has direct access to the customer's configuration and data, and well-designed SaaS solutions will even have notified the support team that an error occurred with diagnostic information. Just as importantly, the SaaS vendor is responsible for the entire solution, so there is no "pointing the finger" at other technology components as being responsible for the issue. The total time from reported issue to an implemented fix is typically within a few days, or even faster for mission-critical issues all for free and with no IT cost or time for the customer. As industry expert Amy Wohl has noted, "In the SaaS world, service needs to be impeccable." True SaaS providers must follow this principle in order to keep their customers and their monthly revenue.
- Business process improvement: Along with providing a complete pre-packaged software solution, in order to ensure that customers implement quickly and achieve business benefits from their solution, true SaaS vendors also usually provide full-service implementation services, best-practices guidelines and templates for maximizing benefits from their software, and business process expertise to design, implement and continually improve a world-class process around the software. With legacy enterprise software, on the other hand, the customer must hire an implementation consultant and generate much of this knowledge internally through a protracted implementation project. True SaaS vendors not only provide higher-value software for far lower cost, they deliver improved business processes for better business results.
- Recurring revenue business model: As a result of providing ongoing value and continual improvement to customers, true SaaS vendors increase their revenue every quarter, as customers more broadly adopt their solution and their solution is utilized more. Greater customer adoption and usage leads to higher subscription revenues every month. Legacy software providers, by contrast, rely on large up-front licenses to finance their business, and must be always hunting for the next customer to keep the business running.
As a result, true SaaS solutions significantly reduce cost of ownership for customers, in most cases to a small fraction of the cost for the customer to buy, install, customize and operate legacy application software. These activities generated considerable costs for customers of the prior generation of software, but the efforts turned out to be wasted, non-value-add tasks in deriving business value from the software, and are completely eliminated by SaaS solutions.
Signs That You Are Talking
To a Legacy Software Provider in Disguise
- Reluctance to pilot their solution: For a legacy software provider, performing a pilot implementation of its software for a customer is a huge investment that they avoid if at all possible. SaaS offerings, on the other hand, are built to pilot no installation or up-front investment, just log on and get started.
- "Elephant hunting" sales approach: Legacy software providers try to enlarge the deal as much as possible to maximize their revenue before you discover the true benefit/cost ratio of owning their software. This has resulted in huge amounts of "shelfware" being purchased by legacy enterprise software customers. In fact, AMR Research has found that, as a result, 46 percent of Enterprise Resource Planning (ERP) license seats are unused! Because SaaS delivers real value very quickly, SaaS providers are very willing to start small and grow as their software solution proves its value at each step.
Try asking the software vendor, "what would happen to your profitability if you had no new customers over the coming 12 months?" Legacy software providers cannot survive long without new license payments, their recurring revenue doesn't cover their business costs, and they would have to downsize substantially. True SaaS providers, on the other hand, will have their revenues continue to grow as they further penetrate existing customers, and while their growth rate would slow down, their business would continue to grow and thrive.
- Little new functionality: While talking with customer references, find out how much new functionality and innovation was made available in the last twelve months; legacy software providers who have more than a few dozen customers will find the majority of their development resources are tied up in maintenance, not creating new functionality. Also, make sure that the hosted software version doesn't "lag" new product releases with true SaaS vendors, new versions will be immediately implemented and available for all hosted customers.
- Upgrade decisions: With true SaaS, upgrades are free, automatic, and invisible there is no need to plan or pay for upgrade projects, data migrations, or test environments, because all this is automatically and efficiently handled by the SaaS provider for all customers. With legacy-style enterprise software, however, upgrades are a difficult topic because every customer must decide when to incur the pain and cost of upgrading, or face being left behind. Behind the scenes, moreover, the legacy software provider must support multiple versions and upgrade customers one at a time in custom projects, leaving the provider with far fewer resources to add functionality and new value to the product.
- Multiple instances: An "instance" of the software is a separately installed copy, and some software requires multiple instances to handle multiple languages, different business units, or different business processes. As you might imagine, this correspondingly multiplies the customer's cost of ownership and, more importantly, fails to provide rollup reporting or a consistent global solution. Some large companies are running dozens or even hundreds of instances of ERP software, and as a result cannot get a global or company-wide view of their processes or metrics. This has led to the next generation of ERP mega-projects for "instance consolidation," costing tens of millions of dollars. Many smaller software providers also have devolved into supporting multiple instances and multiple versions of their software, eroding their ability to provide additional value and full support over time to all customers. As you explore the flexibility and configurability of any enterprise software, look out for multiple instances in disguise.
- Inflexible pricing: Legacy software providers will lock in revenue through committed payments, either up-front or over time, to match their high-cost business model. In particular, high and inflexible hosting costs indicate that the software provider will create a copy of their data center infrastructure just for you, locking in high costs and inflexibility over time.
- Long implementations: While they may promise quick implementation during a sales meeting, find out through customer references how long it takes in practice until business benefits start to be achieved.
- Software customizations: If the software vendor (or its implementation partner) ever professes to customize the software to add needed functionality, this indicates that the installation will be single-tenant, without free upgrades a legacy software provider in disguise, with all the inherent high costs and low flexibility. True SaaS providers implement all software changes within the core software product, enabling ongoing free upgrades and multi-tenant operations.
- Internal integration challenges: Many legacy enterprise software offerings have grown through acquisition and by building separate product lines, resulting in multiple modules that must be integrated during the implementation project. More importantly, having many products with multiple databases, even from the same vendor, makes it much more difficult to extract consistent information on business activities, metrics and performance. Often, the hidden integration requirements do not come to light until implementation, when the process design uncovers the need to write custom software to integrate multiple modules. Ironically, some legacy software vendors even provide hosting services as a way to hide their internal complexity and integration challenges from customers. With true SaaS, there are no technical implementation surprises, there are no internal integrations to support the end-to-end business process, and all data is in a consistent global data model for straightforward access and analysis.
- End-of-contract unknowns: Finally, customers who examine the options at the end of the contract term can uncover hidden costs and uncertainties, as repurposed legacy enterprise software may require upgrading or software customizations must be rewritten into the new product version, all at the customer's cost. With true SaaS offerings, the software is always running the latest version along with all other customers, so there are no hidden upgrade costs when renewing.