Saturday, February 17, 2007

SaaS'y Benefits

SaaS or Software-as-a-Service as it is coined is the ability of a external service provider to provision a business service over the internet so that it can be consumed remotely by (mostly) enterprise organizations. The luring drivers for running software as a service stems from its propositions of the ability of a external service provider to apply economy-of-scales for either IT operations or applications to offer better 'benefits' to the consuming organization. benefits such as cheaper costs, high availability and better scalability are promised and seemingly delivered.

Non-SaaSy Enterprise (Business as Usual):
In fact, since IT spend happens to be one of the key drivers which is driving the SaaS adoption, lets take a look at the average IT spend and the proportions of such spend broken down into line-items spread between the CAPEX (Capital Expenditure) and OPEX (Operating Expenditure) of the spend.

Here is a table on the cost breakups as per Gartner's survey on annual IT Staffing and spending:

70% of the IT spend comes from the OPEX per annum while only 22% comes from the CAPEX. Focusing on the OPEX, we can see that 32% of the OPEX is due to Internal Staff (which is also 22.4% of the whole IT spend) and around 21+17+14=52% of the OPEX coming from Hardware, Software and Telecom. here is a pie chart to display the breakdown.

Now this being the BAU (Business As Usual) cost break downs, how would making your business SaaS'y benefit your bottom line?

Benefits offered by SaaS Model
SaaS as defined is a outsourced model which allows services to be accessed through the internet remotely by the consuming organization. Saying this from a 'SaaS providers' perspective what are the benefits a provider can offer and how can the provider achieve the same? Some of the benefits proposed by the SaaS model are as follows:
  • Service at Cheaper Cost
  • Better SLA than internal IT (Scalability, Availability, Performance, Maintenance, Upgrades)
  • Accountability
I would strongly advice the readers to read the Microsoft article titled "Architecture Strategies for Catching the Long Tail" to understand the intricacies on how these benefits are provided.

- Cheaper Cost: the SaaS providers can offer cheaper cost by employing what you call as a 'economy-of-scale'. A SaaS provider (based on the maturity scale he is in) does offer the same service to more than on customer. This allows the SaaS provider to share common utilities across multiple customers. This allows the provider to spread his cost across customers bringing down the overall cost of operation for the provider. The provider eventually passes on such cost reductions to the customer by charging lower for the Service.

- Better SLA: Similarly, the SaaS provider can employ clustering, grid computing or elastic compute cloud that is offered by some of the 'utility computing' enablers to leverage a managed and virtualized infrastructure to bring down the providers overall TCO (Total Cost of Ownership) of running his operations across customers. The economy of scales in virtualization of systems and elastic compute clouds (Amazon EC2) does offer exponential benefits as computing volume increases. This not only results in further reduction in cost of operations but also aids in better SLA offering. SLA's such as Availability, Scalability and Performance are inherent to such utility architectures.

- Accountability: Since SaaS providers play as external vendors, the legal obligations and contracts will implicitly be more stringent than the contracts with the internal IT. Also, Since SaaS providers are 'in business' selling the proposition to be profitable will have genuine interests to make the model equitable (I am not accusing the internal IT here). Saying this, the accountability also comes from the fact that the operational model of SaaS enables the consumer to get a metered/leased billing frequently (at the end of billing period) that allows a detailed break down on the usage of services. The service usage if subscription based is simpler to manage as against a 'transaction pricing' model. The transaction based pricing also refereed to as pay-per-use or pay-by-the-drink requires operational infrastructure available at the SaaS providers end which can enable such metering (more on this on further blogs). Such metered usage allows both 'throttling' of usage both by the consumer as well as the provider. A SRM (Service Relationship Management) office at the providers end will ensure constant support (with support SLAs) probably better than the internal IT (due to economy-of-scale again). All this ensures that "IT as a Business" is more realistic to run by being SaaS'y rather than trying to make the internal IT run there process as business.

Given these benefits, it makes sense to reduce the internal IT spend across the CAPEX and OPEX as shown and start considering IT as a 'service center' instead of a 'cost center'. The benefits of a reduced TCO as well of a higher ROI (being a service center) are seemingly guaranteed (again based on what maturity level of SaaS is being embraced and the overall IT policy). Rationalization of the IT Governance structure as well as obtaining executive sponsorships can be real hurdles for initiating the programs (as these benefits are not been qualitatively demonstrated by many vendors yet).

This said, Enterprise still needs to go through a paradigm shift in their operations to embrace SaaS into their ITEcosystem. Questions such as :
  • Enterprise efficiency and operational changes for SaaS Vendor Management.
  • Enterprise Integration of SaaS systems into strategic systems that are running internally.
  • Integration and collaboration of SaaS systems across SaaS vendors.
  • Enabling business process orchestration that is seamless across the IT Ecosystem.
  • Regulatory Compliance rules for SaaS engagements.
  • Enabling and Tracking of a 'Process Health Matrix' to monitor the overall benefits across enterprise IT ecosystem to see if transforming few LOB applications in to SaaS is not jeopardizing short/medium term goals of the enterprise.
etc... are some of the challenges that still needs to be addressed before getting on to the SaaS bandwagon.


Design for MySpace said...

SaaS offers cost benefits to the CFO. SaaS can be hosted remotely, and primarily cuts down the deployment costs and most importantly workforce is reduced.

Jerald said...

Great thoughts you got there, believe I may possibly try just some of it throughout my daily life.

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