In the last few weeks I have been asked many times what the value proposition of SaaS (for the buyer) is.
On way of looking at the value proposition is to look at (as a buyer) where the money spent goes. In a typical on premise setting, for every dollar you spend on software you need to spend additional dollars on hardware running the software and on people deploying and management the system. (top left pie chart below)
In a SaaS environment, the amount spend on software represent a much bigger chunk of the pie, as the hardware required to run the software and the people required to deploy and manage the system are at the provider site. (top right pie chart below)
One could say that this is slightly misleading. The provider needs to buy the specific hardware and pay the people to deploy and run the software provided to you. So part of the “software” cost that you pay, actually includes the hardware and people cost of the provider, making a zero sum game (whether you run in on premise or as a service, the actual software/hardware/people ratio is the same).
Well, this is exactly where the value proposition of SaaS kicks in. Because the provider is now offering the software to many different organizations, the provider can benefit of much better economy of scale that you would individually (think Walmart). The idea is that the server you would need to buy to run the software would cost you more than the fraction of the cluster of servers that is serving your app. The IT Pro you would hire to maintain your software would be more costly to you that the fraction of IT Pro staff (on provider’s payroll) maintaining your app, as the same staff would maintain thousands of installation.
In summary, it is true that part of your “software” cost is paying for hardware and people at the provider site to run and operate your software, but because of economy of scale, the amount charged to you is smaller than what it would cost you to operate it yourself.
The ratio of software cost over hardware and people cost are in your favor in a SaaS environment (bottom figure below)
Note that there are 2 assumptions here:
a) The value is the software (not hardware or people maintaining it) so the higher the software ratio, the better.
b) You are not a multi-mega site yourself which could obtain similar economy of scale than the SaaS provider itself.