Originally posted on on the e-Sourcing Forum [WayBackMachine] on February 12th, 2008.

Author’s Note: This is a joint effort with David Bush.

A lot of vendors these days are claiming to offer SaaS, because that’s the buzzword of the day and people are realizing that unless they are an IT company with their own high reliability, fault-tolerant, data center with redundant Internet connectivity and power providers, it’s usually better to have a technology company manage the software and data center. (And even if they are an IT company with a modern data center, sometimes it’s cheaper to have certain applications hosted and managed by a third party.)

However, just because a vendor offers you an application “on-demand”, this does not mean it’s true “Software as a Service”, or SaaS if you will. If you look beneath the covers, it’s often just a traditional hosted ASP model relabeled as “on-demand” or “SaaS” because either the provider doesn’t know the difference between ASP and true SaaS, or the provider is hoping that you
don’t know and will thus perceive their offering to be better than it really is.

True SaaS requires multi-tenant. To understand this, we’ll review three major advantages of SaaS in detail which you will NOT realize if you just go hosted ASP. (Many of these are described in the “On-Demand” wiki paper).

Instant Deployment

A hosted ASP vendor might be able to get you up fast, but not instantly. A hosted ASP vendor will have to build a new machine, install their software, and put it on their network. If they are really efficient, they will used standard configurations and have a ghost image that they can flash onto a new machine in an hour or two, but this is not instant. And if the network guy is sick that day, it might be a few days before they can get around to the flash and get the new machine tested and in their data center.

A true multi-tenant SaaS offering only requires the creation of a new customer account, and it’s good to go on the current platform with no installs, no customizations, and no new hardware. It should literally take the vendor longer to log the request and collect your information than to make you live.

Instant Upgrades

A hosted ASP vendor needs to update every customer’s machine to upgrade their offering. If they have 200 customers, they have to do 200 upgrades. Could be a few weeks before you see your upgrade, depending on where you fall on their priority list.

With a true multi-tenant SaaS offering, only the main instance is updated and every customer is updated simultaneously. You see the update as soon as its ready.

Economies of Scale

The real benefit of SaaS is the considerable cost savings it allows. An ASP provider has to maintain separate hardware for every customer, which, most of the time, won’t even come close to maximum utilization, and has to maintain a large team of network professionals to maintain all those
machines.

A true multi-tenant SaaS application can use heavy duty multi-core servers and support 10, 20, or 100 customers (using an IBM or Sun rack configuration) on a single hardware platform with built in virtualization and fail-over. With only one machine and one software instance to update,
only a small team of network people is required – this represents a considerable salary cost savings that can be passed on to their customers. Furthermore, because hardware only has to be added occasionally, and because virtualization allows processors to be powered down when utilization is low, the vendor that has a true multi-tenant SaaS application also saves on hardware and energy costs, and can pass this savings onto its customers as well.

Furthermore, the following advantages will not be realized to their full potential if you just go with a traditional hosted ASP solution:

Pay as You Go

The provider will need a substantial set-up fee up front, or will have to jack up your price to cover the set-up costs.

Single Instance

You’re a large organization that has more users than a large server can handle? Too bad. You’ll find your users split across multiple instances. This will be particularly problematic when one instance fails while another stays up.

Free Upgrades

Since an ASP provider has to install each patch separately for each customer, you’ll be paying a large maintenance fee, whether you know it or not. (Some providers will hide it in the monthly fee, but you’re still paying it.)

The customer has the leverage.

Due to the large set-up costs, these providers will insist that you sign long-term hosting contracts. A real SaaS provider will go for a contract as short as three to six months, although you won’t get a discount unless you sign up for at least a year or two.

Regular Automated Data Backup

An ASP provider will claim to do this … and they will buy a separate backup drive for you machine … and all will seem well until your server fails and you realize that they haven’t tested your backup drive in over 2 months (since it takes them a long time to cycle through the testing
rotation) and the last good backup was a month ago.

Built for Change

To an ASP provider, change is great … as long as you don’t do it more than once a year. Just trust us on this one.

Plus, as my pointed out here on Sourcing Innovation in “the doctor gives you a very important reason to go green, ASP is just not as green as SaaS.