The concept of software as a service (SaaS) took hold at a time when IT executives were getting supremely fed up with the ballooning costs of packaged enterprise software. Not only did they have to shell out thousands of dollars just for the licenses, but they also had to spend tens if not hundreds of thousands more to implement the software. There were the consulting fees. And the training costs. And the extra infrastructure that was required to run the software in addition to ongoing maintenance fees. Thus, SaaS emerged from the wreckage of botched multimillion-dollar ERP and CRM implementations as a radical alternative to traditional software licensing models. SaaS promised easier, speedier and cheaper implementations. The value proposition was hard to ignore, but so were the risks. To this day, SaaS remains an intriguing option for many enterprises, and for that reason, we offer the following answers to explain what SaaS is and to help you determine whether it’s right for your organization.

• What is SaaS?
• How is SaaS different from an ASP (application software provider)?
• I’ve heard that SaaS is cheaper than traditional packaged software. Can it save my business money?
• What other business benefits does SaaS offer?
• Is SaaS secure?
• How do I decide whether SaaS is right for my organization?

What is SaaS?
Generally speaking, it’s software that’s developed and hosted by the SaaS vendor and which the end user customer accesses over the Internet. Unlike traditional packaged applications that users install on their computers or servers, the SaaS vendor owns the software and runs it on computers in its data center. The customer does not own the software but effectively rents it, usually for a monthly fee. SaaS is sometimes also known as hosted software or by its more marketing-friendly cousin, “on-demand.”

How is SaaS different from an ASP?
SaaS evolved from the application service provider (ASP) model. When ASPs sprang up in the 1990s, they offered essentially the same thing SaaS vendors offer today: hosted applications delivered over the Internet. The problem ASPs ran into (well, actually, they ran into many problems, not the least of which was the venture capital money that dried up in the 2000-2001 time frame) was that they tried to be all things to all people, and they buckled under the weight of their own infrastructure. In trying to serve the unique needs of each of their customers, ASPs lost the economies of scale that were necessary for them to provide their services in a cost-effective manner.

Today’s successful SaaS vendors, such as Salesforce.com, LeanLogistics and Ketera, have solved the scalability and reliability problems that dogged the ASPs and ultimately led to their downfall. (Of course, Salesforce.com did suffer some debilitating outages in December 2005 and January 2006 caused by problems in its database cluster.) Instead of trying to be all things to all people, they offer one-size-fits-all solutions. That is, all customers of a SaaS vendor use the same software. The underlying code is the same for all customers and cannot be customized. Any features or functionality that the SaaS vendor adds to the software based on a customer’s feedback becomes available to all customers. This multi-tenancy approach differentiates SaaS vendors from the original ASPs and from other vendors of hosted, “on-demand” software and gives SaaS vendors the economies of scale they need to offer their software cost-effectively—and make upgrading their customers to new versions of the software a relative cinch.