What is Software as a Service?

By Alan Lindsay
Updated: September 05, 2012

With the advent and then explosive growth of companies like Salesforce.com, the concept of Software as a Service changed from being an abstract intellectual concept to a powerful business reality. So what has Software as a Service (SaaS) become? The answer lies in how the concept has evolved over the past ten years or so and draws from changes in technology, in the fabric of the internet and in business cost structures. Essentially IT and software have become a critical part of modern business, especially for medium-sized businesses and up. As they have become critical, so has managing the costs involved. And as costs have become controlled, the advantages of SaaS solutions has grown to a wider range of businesses.

If you look at how people define Saas, it boils down to three things. At the simplest technical level, SaaS is a technique to provide software applications to end users without requiring them to own and run the application on their own computer. To do this, the first thing is that the application itself is managed, delivered and even owned by a remote application provider. The second is that the application is based on common data models and connections that allow many customers of the application provider to use the same software at the same time. The third is that the application is licensed to the customer on a subscription or pay-for-use model.

To put it simply, the end user rents the use of the application from the provider - usually by connecting to it remotely over the internet. They own their account and their data and can access them as long as their account remains in good standing. Reputable vendors also provide tools to let customers import and export data to make startup easier and to allow them to move on if they cease to be customers.

Why the SaaS model makes sense for businesses

1) Control over cost: Using the Software as a Service model allows businesses to have complete control over cost. There are no hidden extras and the costs are clear on a monthly or annual basis and also clear in terms of scalability - as more users get added costs go up.

2) Predictability: In exactly the same way, the SaaS model is predictable. Businesses can plan for the future and those plans can be simple. If they add 1000 new users then the cost is straightforward. By contrast, under more traditional in-house software models, adding 1000 users would have ramifications not just for basic software licenses, but also for additional servers, storage and networking - all of which would be harder to predict.

3) Scalability: SaaS also makes it much easier to scale. Adding (or removing) users doesn't mean hardware capacity planning. Someone else gets to do all that for you.

4) Fast updates/improvements: Under the SaaS model, when the underlying application software is upgraded or improved or fixed, all users immediately get the improvements. No need to upgrade users one-at-a-time.

5) Mobility/remote access: Although a relatively minor issue, SaaS systems are typically accessed through a website or portal and this means that they can usually be accessed from anywhere in the world, making remote access and mobility both much simpler.

Potential downsides

1) Potentially higher cost: While costs can be predictable with a SaaS model they can also be higher, particularly if businesses don't accurately manage the number of active users and particularly in large installations where businesses can make cost savings because of scale.

2) Lack of control: The fact that the control and ownership of the software lies outside the company can be a negative factor for some businesses.

3) Possible regulatory issues: While many SaaS vendors work hard to manage regulatory problems, especially around security, there are industries, particularly in the medical, legal and financial areas where regulatory requirements mean that SaaS solutions cannot be used.

4) Possible security issues: While SaaS vendors have worked hard to make their systems secure, the fact remains that businesses are relying on a third party to keep their data secure.

5) Possible long term survivability issues: When a business is renting critical software from a vendor and that software is outside its control, it leads to some concerns about the long term viability of the vendor - will they still be around in five years? Obviously the level of concern and risk here varies depending on the vendor.

How Saas evolved

The basic concept behind SaaS goes all the way back to the early days of business computing when mainframes from companies like IBM, Honeywell  and DEC were the best computers around. Companies that owned these systems (especially the manufacturers) would rent out the systems and access to them on a time-sharing basis so that businesses could run reports and business operations once a week or so. With the advent of the minicomputer and then the PC and the dramatic drop in cost of computer systems and the dramatic rise in access, business computing evolved into an on-premise model where companies owned their own computer systems, managed them and created far more complex and personalized software. Initially they used a client-server model where PCs or dumb terminals accessed the back-end mainframes or minicomputers.

These applications and systems became dramatically more complex and powerful over time. Then came the internet. Up until then many powerful business applications had continued to run on back end servers or minicomputers because the cost of translating them to run on networked PC systems was just too high. But as networks and the internet in particular became more prevalent, business applications got translated to a client-server model. Initially this was completely on-premise with servers running in the data center and PCs all over the company acting as clients. The internet allowed businesses to host their servers and applications remotely and get cost savings from having everything centrally managed. This model was based around Application Service Providers (ASPs) who hosted the servers and managed business applications on behalf of companies. But they still ran an instance of everything for each business rather than sharing and pooling everything as in the SaaS model.

Most people think of Salesforce.com as the first truly successful SaaS company. It was founded in 1999 specifically to provide sales software on an SaaS model and has become one of the giants of enterprise software companies. But nowadays almost all enterprise software companies provide at least some form of SaaS products and services within their portfolios.