Software as a Service (SaaS) Explained

By NetReturn tech heads

Simple things, like what exactly is Software as a Service solution? And on-demand business software?

Perhaps there are other issues. What about security? Or that the whole "software as a service" idea sounds too good to be true and you know how that always scares you.

I will try and keep the acronyms and technical jargon to a minimum, but there are a few terms that may pop-up. If you get stuck please refer to the glossary.

Well let's do the simple stuff first.

Technically, NetSuite is an ASP (application service provider). That is, the solution is provided as an integrated business applications over the Internet, that customer's access via a web-browser. Microsoft's Internet Explorer is a web-browser, as is Apple Macintosh's Safari browser.

By an application, I'm talking about programs like an accounting package such as MYOB or Quicken, a CRM (customer relationship management - such as ACT, Goldmine or Sage) program or an ERP (enterprise resource planning – such as Great Plains) package. All the stuff you need to run your business.

The present or "standard" way to use business applications is to pay upfront and buy a software license and stack of CD's from a vendor. Often this will mean buying extra hardware just to run the software. Then you are left to run the applications from your server, manage the hardware and software yourself, and panicking whenever an upgrade or patch needs to be made.
Oh, and of course, then you need to integrate the programs. Not much point in taking an order in your CRM program then having to re-enter the information into the accounting software package is there?

With SaaS, all you need to do is pay a per-user rental or subscription fee, log-on to the application and start work.
However the SaaS model is about more than just delivery, the model is in many ways about economies of scale.
SaaS applications have one database on a bank of servers that serve many customers. The SaaS provider manages the hardware and updates the software. The point to be clear on here is that the SaaS solution only needs to update one server - any changes, affect all the customers.

These changes may be as simple as updates to the application or as complex as new accounting requirements, tax rulings and the like.

With standard software, the ratio is at least one server per company, often more if you include desktop applications that need to be managed and maintained.

Every major application that an organisation installs in-house requires a costly hardware infrastructure to run it and people to maintain it. With the SaaS model all the application features are available through a web browser and the service provider takes on the expense of providing the software and hardware infrastructure to deliver the service.

This has some of the benefits but is not the same thing as the SaaS model.

Software as a service is one server to one company, like standard software, just with outsourced management. You may be able to access the application over the Internet.

Whatever you call it the basic tenet remains; SaaS solutions do make business sense.

This isn't to say that the SaaS model doesn’t have its own challenges.

Problems may occur with Web browser settings relative to your network, and there can be issues with your Internet Service Provider (ISP). An ISP is the company that connects you to the Internet.

The number and magnitude of these glitches are much smaller however, and problems are much less complex. The net result: maintenance costs are much lower, and your IT staff can focus on more strategic issues.

Studies estimate that SaaS solutions can save customers at least 50 percent of the cost of an internally hosted application by eliminating the hardware and software infrastructure to run it.

Ok, I'll accept the maintenance economies of an SaaS model. It has to be cheaper to manage one server and application than thousands of them.

But are there any other advantages to the SaaS model?

Yes. With an SaaS solution such as NetSuite, you can access an extremely advanced and deep (that is, offers a lot of functionality) product for significantly less than you could hope to purchase yourself.

Working with a SaaS software solution also means you only use the applications and features that are most relevant for your operation. The customer isn't tied to creeping application complexity that inevitably results as vendors add features in pursuit of supposed competitive advantage. These features add to the cost regardless of whether they are critical to the customer's business.

Ok, but that sounds suspiciously like marketing speak. Why can an SaaS solution offer me more than a standard software company?

Well, firstly, let's look at the software development costs for the vendors, and specifically, getting new features into the hands of users. This helps to explaining why SaaS solutions are such good value.

It typically takes about two years to plan, produce, and deploy a new release of client-server software. By client- server I'm talking about "standard software" applications that you install on a server or desktop for your staff or users to access.

Why?

Well, writing code is only a small part of the overall process. What most users don't know is that testing and debugging takes about twice as long as writing the application code.

A standard application has to work with hundreds of different hardware/software combinations. Just think of how many versions of Microsoft Windows there are still out there, excluding other operating systems and software combinations.

For instance, Microsoft Corp, spends about two hours testing for each hour of code that is written. Even with this testing some problems fall through the cracks. That's why Microsoft distributes downloadable software patches to deal with various problems.

Which is sort of fine in theory, but actually upgrading the software and applying the patches (which don't always sit well with other software on your computer) is, as we all know, a complicated hassle.

Most businesses don't intend to become IT professionals, but that is what you need to be with the complexity of most business software.

SaaS solutions don't have these hardware/software testing and debugging tasks in their development path.

When an addition to the SaaS application is written, it is tested on the SaaS solution providers development servers (which mirror the actual hosted site). The average is five to ten minutes of testing for each hour of code written. When everything checks out, it is loaded on the hosted site and all users have immediate access to it.

Another problem for standard software is supporting multiple versions of the same application. It is time-consuming and costly for both the vendors and for clients. The vendor needs capable tech support staff to deal with the old release and the new release. You may have experienced first hand how frustrating it can be to get a new release working on your PC.

Another key benefit of the SaaS model is probably one of the most important but least understood: SaaS solution users get new feature upgrades all the time.

Based on all of the factors above, we estimate that it costs about five times as much to get the same feature set on a client-server platform as it does in a SaaS environment.

This huge competitive advantage in terms of delivering more and better features more quickly - at a fundamentally lower cost structure - spells trouble for client-server applications over the next few years.

Lew Hollerbach, a managing director at Aberdeen Group said: "Many SaaS solutions are gaining sales traction via strong Return on Investment (ROI) sales messages. With IT departments experiencing serious capital constraint, the SaaS value proposition has never been more alluring."

So far we have had a look at why SaaS solutions can offer an advantage over standard software. But, well, what else is in it for you?

We have discussed that by supplying customers with their business applications online there is no software to be installed nor managed. All of the applications work and data is stored on the host company's secure server.

No back-ups to remember.

I worked for a company who relied on back-ups to the system which kept all of their financial and customer data. They invested $20,000 on a back-up server as a just-in-case measure should something go wrong with server number 1. Unfortunately one night both servers died and the person responsible for making back-ups had forgotten to do so for at least 2 months - a huge nightmare!!

And you can use the application from any computer, located anywhere with an Internet connection. No matter where you are you can check in, or run the business exactly as you would sitting at your desk.

The Internet acts as the ultimate network.

Ok, that all seems pretty reasonable and logical. But what about security? Why should I trust a SaaS provider with my data?

Because all of your business data will be stored on the hosting company's server.

That's not the answer I was looking for. Why is my data safer with someone else than on my computer in my office?

Simply, a good SaaS solution provider will guard your data much better than you could ever hope to. It is the business.

NetSuite guards your data in a data centre that is protected, secured and fire resistant. This is even to the extent that should a fire start, gases are pumped into data room that extinguish the fire, but don't affect the storage servers. And even in the worst case, all of your data is backed up and mirrored in another data centre.

Let's look at it from another angle.

Anything valuable that you have, you give to someone else to mind. Cash goes into the bank, you don't keep it at home, that would be asking for trouble. Why should your data be any different?

Ok, so SaaS solutions are a very good idea (actually just upgrade your software once, and SaaS solutions become a brilliant idea), however weren't SaaS solution (better known as ASP’s) all the rage a few years ago and never really went anywhere?

Well it is true that SaaS solutions haven't always had such a smooth ride.

In the late 1990s, the birth of the SaaS (ASP) industry was marked by newcomers touting a radical, alternative software business model: selling the use of applications in a "pay-as-you-go", a la carte model. Most of the applications sold by these SaaS (ASP) providers hadn't been built to run on the Internet; they had simply been adapted to it. There are a myriad of differences.

Three-to-four years ago, at the peak of the dot-com boom, more than a thousand SaaS (ASP) providers set out to change the IT world. Then, reality set in.

Vendors, exposed as being more hype than substance, were focused on growth rather than profit. And the quick signing of dot-com customers, which drove the financials of many early SaaS solutions (ASPs), proved to be the undoing of many service providers as the Internet bubble burst. By 2002/2003, the ASP market seemed all but dead, with a whopping 90 percent failure rate, according to industry analysts.

SaaS solutions (ASP) also weren't helped by a lack of widespread broadband Internet. SaaS (ASP) adoption was slowed because ISP's introducing broadband Internet tried to re-coup their costs too quickly. As a result broadband Internet was comparatively expensive to present prices.

Despite the doom, a handful of players survived, because the basic software-as-a-service concept is good, despite poor execution by the early players.

We are in the second phase of SaaS solutions. The good vendors are smarter and better. The present range of SaaS applications have been built to run over the Internet, hardware has improved immeasurably as have processing speeds.

Added to this is the ever-expanding Internet access and faster broadband connections. Every day there seems to be a newer, cheaper, broadband deal on offer. This is not to mention the ever increasing range of wireless and mobile broadband products in the market. It may not be the case today, but it won't be long before you can get broadband Internet access wherever you are in the world.

Browser-based user interfaces have also come a long way in the past three years. Sophisticated Javascript and DHTML loads quickly and caches locally meaning that NetSuite offers client functionality that looks and feels as good as any "standard" application.

Another change with the second wave of SaaS solutions is that they have learnt that even small businesses want custom solutions. NetSuite have engineered the products so that users can readily customise every aspect of how they view and work with information.

In NetSuite, each user can set up their own multiple views of the data they need to work with, including custom queries, tables and forms. All of this is performed using familiar tabbed screens, forms, pull-down menus and drag-and-drop layouts, so there's no technical know-how required. If you know how to use eBay, Amazon or online banking, you'll get the hang of this in no time at all. You just need to know how your business works and what you want to know about how it's functioning.

Since all of this is happening on a state-of-the-art Oracle/Linux server cluster, there's no reason for compromising on timeliness of information. There are no out-of-date reports based on stale information: everything you see is what's happening now in your business.

Conventional software vendors will make you pay extra for a portal server to get that kind of real-time access, but NetSuite includes a dashboard for no extra cost as a standard part of the product (and an eCommerce website engine as well, for that matter).

NetSuite has recognised that the only business information that's worth having is information that's delivered to you as it happens, on demand, and that's built into the products right from the get-go.

Ok, I know it has been a long haul, but we are almost at the end now.

The only possible reason you might have for passing up on all of this flexibility and power is the sneaking suspicion that the SaaS might go bust one day, and then where would that leave your business?

SaaS providers have been listening to that objection for long enough now to have all the answers lined up.

NetSuite offers the ability to export data in standard data files such as CSV (comma separated values) files. It has also created an smbXML interface that allows online integration with other systems, and which can also be used to export data to a separate system of your own choosing.

SaaS providers are so sensitive to user concerns on this point that it's probably easier in most cases to get your data out of a SaaS system than it is out of most conventional installed business systems. But in truth, there's a much greater risk of someone breaking into your own premises and walking off with your server under their arm than there is of your unexpectedly losing access to business data running on a SaaS system.

Oh, and there is the simple matter that NetSuite is part owned by Larry Ellison. Which should be enough evidence of sustainability.
And of course we have all the other major companies getting into hosted applications. Microsoft, SAP, Salesforce.com you name them, the big boys are lining up to play. Hosted applications aren't going anywhere they are only going to become more prevalent, and perhaps, one-day, dominant.

Don’t just believe us – see what the experts in the industry are saying:

• IDC predicts that SaaS will make up 30 percent of the software market by 2007 and will be worth $10.7 billion by 2009.

• Software as a service (SaaS) represented approximately 5 percent of business software revenue in 2005 and, by 2011, 25 percent of new business software will be delivered as SaaS, according to Gartner, Inc.

Despite all of these advantages, some business will remain skeptical. SaaS seem too good to be true.

You can't help wondering what the catch is. The answer is that this stuff is still new and evolving; companies that move to a SaaS solution are part of the future. It will take firm decisions from management to move from yesterday’s model to the tomorrow’s model. It is often easier to stick with what you know.

For all companies, I recommend doing your research; don't just trust everything I say, check for yourself. We are very confident that businesses that fully examine their options will move to the NetSuite SaaS model.