What is SaaS?
April 19, 2021 / Bryan Reynolds
Reading Time: 6 minutes
Software-as-a-service (SaaS) is a model for licensing and delivering software in which the software is centrally hosted and licensed on a subscription basis. These applications are also known by other terms such as on-demand software, web-based software and web-hosted software. SaaS is part of cloud computing, along with the following services that also use this delivery model:
- Datacenter-as-a-Service (DCaaS)
- Desktop-as-a-Service (DaaS)
- Information Technology Management-as-a-Service (ITMaaS)
- Infrastructure-as-a-service (IaaS)
- Managed Software-as-a-Service (MSaaS)
- Mobile Backend-as-a-Service (MBaaS)
- Platform-as-a-Service (PaaS)
Users typically access SaaS applications via a web browser, so their computing devices can be thin clients. This delivery model is common for many business applications, including the following:
- Computer-aided design (CAD)
- Content management (CM)
- Customer relationship management (CRM)
- Database management system (DBMS)
- Enterprise resource planning (ERP)
- Geographic information systems (GIS)
- Human resource management (HRM)
- Management information systems (MIS)
Virtually all leading software enterprises have now incorporated SaaS into their business strategy.
The practice of hosting business applications on a central server dates to the 1960s. Mainframe providers like IBM conducted a service for businesses called time-sharing or utility computing. These services provided clients with more computing resources such as processing and storage than they would otherwise be able to afford. These clients primarily consisted of international banks and other large organizations.
The earliest known use of the term “Software-as-a-Service” occurred in 1985 in the goods and services description of a United States Patent and Trademark Office (USPTO) trademark. The expansion of the internet during the 1990s resulted in the development of a new type centralized computing known as application service providers (ASPs). They offered hosting and managed services for specialized business applications, including centralized administration. Futurelink and USI were two of the largest and most innovative ASPs during this period.
SaaS is an extension of the ASP model, although it’s typically used in more specific environments than ASP. Most ASPs implemented their solutions with an architecture that maintained a separate instance of the application for each business, whereas SaaS solutions typically use a multitenant architecture that serves multiple clients concurrently by partitioning their data from each other.
ASPs generally offered traditional client-server applications that required users to install the software on their own computers. Today’s SaaS solutions are usually accessible through the web, so they only require users to have a web browser. ASPs typically hosted and managed third-party software, but SaaS providers host and manage their own software in most cases.
SaaS is part of the workflow for the significant majority of all businesses in 2021 due to advantages such as accessibility, agility and cost-effectiveness. The trends in SaaS are disrupting the software industry, resulting in many changes. For example, providers are unbundling SaaS solutions, allowing clients to access specific software. New technologies like artificial intelligence (AI) and machine learning (ML) are entering mainstream software, and pricing policies are also changing.
Fig. 1: General Trends in SaaS
Eighty-nine percent of businesses currently use SaaS, compared to 73 percent for IaaS and 69 percent for PaaS. Security is the biggest challenge for 2 out of three of these businesses, more than any other factor. Three out of four businesses expect to run solely on SaaS by 2021, and this level is expected to increase to 86 percent within two years.
The COVID-19 pandemic that began in 2020 has taken its toll on the private market, although not as much as analysts initially predicted. A 2020 survey by OpenView showed that 34 percent of respondents indicated the pandemic reduced their spending on SaaS by 10 to 24 percent compared to their original 2020 budget. Only 27 percent reported a negative impact greater than this, with 18 percent indicating a negative impact of less than 10 percent. The remaining 21 percent of respondents said they increased their SaaS spend from their original 2020 budget.
Fig. 2: Covid Impact on SaaS
Many companies are taking a proactive approach to Covid in an effort to minimize its effect for the second fiscal quarter of 2021. The most common response to Covid cutting discretionary spend, according to 60 percent of respondents. On the other hand, 61 percent of respondents said they planned to address new use cases with SaaS.
The flexible pricing policies of SaaS providers has remained one of the greatest benefits for their clients. However, pricing strategies have started to change in the last few years, as more players enter this space.
Fig. 3: Annual Gross Dollar Churn Rate vs. Contract Length
A 2019 survey by Reply.io shows that the churn rate of companies with month-to-month contracts is 14 percent, which is lower than those with contracts lasting 1 to 1.5 years. Churn rate reaches its lowest level of 8.5 percent at a contract duration of 2.5 years. Data-driven pricing techniques are likely to cause more pricing changes in 2021.
The overwhelming majority of SaaS solutions are based on a multitenant architecture, which uses a single instance of the application for all customers. This architecture means all customers use the same configuration for hardware, network and operating system (OS). These SaaS solutions can support horizontal scalability by installing them on multiple machines. Some environments run a second instance of the application for testing purposes, typically for the purpose of offering selected customers early access to a beta version of the SaaS software. In comparison, a separate copy of traditional software runs on each user’s machine, often resulting in users running different versions of the software at the same time.
Some SaaS solutions don’t use multitenancy, although this architecture is very much an exception at this time. In these cases, the solution is likely to use other mechanisms like virtualization to manage many customers in a cost-effective manner. Multitenancy is therefore not strictly necessary for SaaS.
The following features are some of the most common among SaaS solutions, although not all solutions have all of these features:
- Accelerated feature delivery
- Collaborative functionality
- Open integration protocols
OpenSaas is SaaS software with open-source code, so its user community defines its development rather than a private company. However, a central provider manages upgrades and enhancements. Dries Buytaert, author of the Drupal content management framework, coined the term “OpenSaaS” in 2011.
Andrew Hoppin, former Chief Information Officer (CIO) for the New York State Senate, is a strong proponent of OpenSaaS for government agencies because he believes it will be the source of government innovation. The successes of Why Unified and WordPress show how OpenSaaS can provide customers with the capabilities of commercial SaaS with the flexibility of open-source software. Users can self-host WordPress and begin building their website immediately, customizing it as they please. However, they can also pay WordPress.com to host their website instead of managing it themselves.
Accelerated Feature Delivery
Traditional software is typically updated on a weekly or monthly basis, whereas SaaS applications are usually updated much more frequently. Several factors support the accelerated feature delivery of SaaS such as the fact that only one version of the software exists, eliminating the need for solution providers to spend resources in maintaining earlier versions of the software. Providers are also able to learn about user behavior within the application, typically through the use of web analytics. This capability allows providers to identify the best ways to improve the software.
The use of a central host means that the provider of an SaaS application executes the update, rather than the customer. Furthermore, the provider has access to all of its customer data, which facilitates the design and regression testing of upgrades. This use of a single configuration allows the provider to test upgrades more quickly. Additional factors that reduce the delivery time for SaaS software include the use of agile development methodologies, which provide developers with tools and practices that support frequent releases.
Both SaaS and traditional enterprise software support the configuration of applications, meaning users can set configuration options. These parameters control the software’s functionality as well as its look and feel. Each customer is able to specify their own set of configuration settings, which can result in untested configurations.
For example, many enterprises want an application to have their own branding such as a logo or particular color scheme, requiring the application’s look and feel to be configurable. SaaS solutions can provide this capability through various means such as working directly with the provider’s staff or through a self-service interface. The user may also be able to customize the layout, depending on the application.
Social networking services and the functionality of web 2.0 both have features that allow users to collaborate and share information. The success of these features have encouraged SaaS providers to offer the same in their solutions. For example, many SaaS project management solutions allow users to comment and share documents with other team members in addition to the traditional functionality for project planning. Some of these solutions also allow users to vote on ideas for new features.
On-premises software may also include some functionality related to collaboration, although that functionality may be implicit rather than explicit. However, direct collaboration between different users and customers from within the software is only possible with a centrally-hosted solution.
Open Integration Protocols
SaaS solutions can't directly access a user's internal services, such as databases. As a result, they typically offer application programming interfaces (APIs) or integration protocols that operate over a wide area network (WAN).
The widespread use of SaaS solutions has led to the standardization of their APIs, allowing developers to build mashups. These lightweight applications combine components from multiple services, including data, functionality and presentation. Mashups are therefore a type of compound service that's unavailable with on-premises software, which isn't easy to integrate outside an organization's firewall.
SaaS isn't distributed physically, so it can be deployed almost instantly. This capability eliminates the need for partners and third parties to distribute it, which traditional software requires. Historically, users have paid an upfront fee in exchange for a license to use the software in perpetuity. In some cases, users must also pay an ongoing fee for support.
SaaS providers usually sell their solutions on a subscription basis, meaning the user pays a monthly or annual fee in exchange for access to the software. The upfront cost of using SaaS software is therefore much less than traditional enterprise software. SaaS providers typically base their subscription fee according to some usage parameter like the number of users. However, they can also charge according to some unit of value, such as events or transactions.
The cost of setting up the new customer with SaaS software is much lower than that of traditional software. As a result, some SaaS providers offer their solutions with the freemium model, which allows free access to the software with limitations on functionality or scope. The provider then charges fees for increasing these limitations.
Several major changes in technology and the software market are driving the adoption of SaaS solutions. These include the growing number of applications with web-based interfaces along with associated practices such as web design. This capability has greatly reduced the need for applications with traditional client-server interfaces that require the expense of creating and maintaining fat clients.
The ability of SaaS vendors to offer competitive pricing is also a key driver for the growth of this software. This factor is part of the overall trend towards outsourcing IT services, allowing vendors to apply economies of scale to their services. Vendors can then reduce the per-unit cost for customers with larger operations.
A variety of other factors are also driving the adoption of SaaS. For example, software developers have widely accepted lightweight integration protocols like representational state transfer (REST) and Simple Object Access Protocol (SOAP). This trend allows SaaS applications to be integrated with other SaaS applications and internal applications over WANs at a low cost. The HTTPS protocol is also a well-standardized component of the web stack, providing lightweight security that’s adequate for most web applications. The increasing use of broadband technology has provided most internet users with high-speed access, allowing centrally-hosted applications like SaaS to offer speeds competitive with on-premises software.
A number of factors are also slowing the adoption of SaaS and may even prevent it from being used at all for some applications.
For example, hosting SaaS applications in the cloud often makes them physically distant from end users, increasing latency. SaaS is generally unsuitable for applications that require response times in the millisecond range. This restriction especially includes online transaction processing (OLTP) systems that manage transaction-oriented applications. In addition, data transfer speeds for SaaS software are limited by the client’s internet connection, which is often significantly slower than its internal network. This issue can become particularly problematic if the user needs to transfer the client’s data between SaaS platforms.
For example, SaaS applications often require direct access to current customer data or integration with other applications with access to that data, which can be expensive with large data volume. Access to sensitive data like customers’ personal information also creates a security risk, especially when it involves integrating an SaaS application with remotely-hosted software. Handling sensitive information is also regulated by the government in most cases.
SaaS software customers are also at greater risk from a software vendor going out of business. In the case of on-premises software, the software is still usable when the vendor is no longer available, even though the customer is no longer receiving support or upgrades. However, with SaaS software, customers can suddenly and unexpectedly lose access to their software, which could result in the cessation of business operations.
SaaS vendors push changes to their clients, which can force those clients into using a version of the software they don’t want. Unexpected changes to software can increase the probability of user error and increase training requirements. Furthermore, rolling back software to fix new bugs is more difficult with SaaS because it affects all users.
The multi-tenant architecture itself has some disadvantages for SaaS providers. For example, they drive cost efficiencies for the software, which can increase the cost of customization. As a result, SaaS is often an impractical solution for large clients that require extensive customization of their applications.
Data that’s dynamically stored in an SaaS application may not be protected under search and seizure laws. In these cases, the misuse of this data may only be limited by the honesty of third parties, including government agencies.