What is SaaS? Software-as-a-Service Definition

SaaS definition

SaaS stands for Software-as-a-Service and is a cloud-based software delivery method that allows users to access an application and data through any web browser – provided there is an internet connection. The service is hosted by a third-party provider who maintains all servers, databases, and software code.

SaaS is one of the three main cloud computing categories which also include IaaS (Infrastructure-as-a-Service) and PaaS (Platform-as-a-Service). Since SaaS comes with many advantages for businesses of all sizes, it has become the default software deployment method across all industries.

The management model of SaaS is based on an on-demand concept, where the vendor provides web-based access to the application that is ready-to-use and doesn't need to be installed on the customer’s hardware.

While the application’s source code is the same for all customers, users usually have the option to up-or downgrade their subscription when it comes to features, storage, and seats.

Types and examples

There are two different types of SaaS and understanding the difference between them is critical for any good business growth strategy.

Horizontal SaaS: Refers to software that is targeted at a broad audience across all industries. In general, this type of software tends to fulfill larger scale business needs more than individual customer ones. The fact that horizontal solutions can be used by almost any business and offer a broad bandwidth of services, means that they hold a much bigger market share compared to vertical solutions.

Examples are QuickBooks for accounting, Salesforce for customer relationship management, and HubSpot for marketing purposes.

Vertical SaaS: This is the opposite of horizontal SaaS as it includes solutions that meet very niche or industry-specific needs. And since it doesn't cover a broad product category, the vertical SaaS model has a smaller market share than its horizontal counterpart. However, the vertical SaaS model is a growing trend in cloud computing as more customers are looking for tailored solutions that address specific needs.

Examples include HotSchedules, management software for restaurants, or Health Insurance Plan, a software for dental care.

History of SaaS

Even though SaaS is a new concept to most businesses and individuals, the model itself has its roots in the 60s and emerged with the rise of the first computers. In fact, it grew out of pure necessity. Back in the day, only very few companies were able to afford their own computers due to the high cost of hardware. So, instead of getting a fully functioning machine for each employee, they relied on a “time-sharing system”.

This marked the beginning of the cloud computing industry and thus, SaaS. The system consisted of multiple terminal keyboards and monitors without CPUs that were connected to a mainframe where all the data was stored. In order to use the system, users would have to enter a command through the terminal that would then be sent to the mainframe. In a second step, the output from the mainframe would then be sent to the terminal monitor. Connecting computers so they are part of one large network also paved the way to what we know today as “the Internet”.

And with the rise of internet broadband connectivity, the demand for centralized computing steadily increased as well. One big reason was the high cost of data storage as well as bloatware that would quickly fill up hard drive space.

But before actual SaaS, ASP – Application Service Provider came. The system largely failed due to difficulties when it came to deployment and upgrades. And this is when SaaS stepped on the scene: In 1998, the first SaaS company Concur started selling software licenses to companies and was then followed by Salesforce who launched the first SaaS platform (CRM) that would become the blueprint of the SaaS delivery model.

Its campaign “The End of Software” rang in the era of Software-as-a-Service and inspired early adopters including Amazon Web Service in 2002 and then Microsoft with Windows Azure in 2009.

Trends & growth

While SaaS had limited flexibility in its early stages, it has now evolved to be the most dominant software delivery model covering broader and industry-specific needs for companies of all sizes. But what do the current SaaS trends and statistics tell us about the future of cloud computing?

SaaS spending

With increased adoption of SaaS comes an increase in SaaS spending. According to Gartner, public cloud end-user spending will grow by 23% by the end of 2021. This results in an increase from $270 billion to $332.3 billion, with SaaS being the largest segment reaching $122.6 billion. In 2023, the overall cloud spend – so IaaS, PaaS, and SaaS altogether – is projected to reach a whopping $500 billion.

SaaS growth

The increased demand in SaaS results in more and more SaaS vendors and providers trying to get a piece of the market share. This doesn’t come as a surprise considering that large companies with more than 1,000 employees companies use 177 SaaS applications on average.

Thus, they heavily rely on application portfolio management tools that help them control and manage apps and vendors. According to Statista, the U.S. alone accounted for 15,000 SaaS companies in 2021 with a number of 14 billion customers around the world.

Largest SaaS companies

But who are the big players when it comes to SaaS? The list below shows the top 10 public SaaS companies based on their market cap value (last updated September 2021).

1. Adobe Inc. ($316,8B)
2. Salesforce.com ($300,8B)
3. Shopify Inc. ($188,5B)
4. Intuit Inc. ($174,3B)
5. ServiceNow, Inc. ($136,6B)
6. Atlassian Corporation Plc ($136,6B)
7. Square, Inc. ($108,1B)
8. Snowflake Inc. ($108,0B)
9. Zoom Video Communications, Inc. ($78,7B)
10. Workday, Inc. ($71,9B)

Benefits and characteristics of SaaS

At this point in time, there’s no way around SaaS if a business wants to stay competitive in a digital market. After all, with their flexibility and scalability, SaaS solutions are designed to quickly respond to an IT environment that is under constant transformation. But that’s not all.

Below are some of the most important benefits and characteristics that make SaaS the superior choice for modern and innovative organizations worldwide.

Lower costs

Initially, SaaS applications were targeted at small businesses and startups who didn’t have the financial resources to invest in their own hardware or hire staff who would manage a complex IT landscape.

But now, organizations of all sizes are benefiting from the fact that SaaS significantly reduces initial setup costs. And since third-party vendors are responsible for the software code, they are also taking care of software updates, maintenance, and support.

On top of that, many providers offer various subscription plans, so customers get to opt for the number of licenses and features that reflect their business needs.

Accessibility

As opposed to on-premise solutions, there is no need to install software on in-house computers and hardware with SaaS. In order to access the software and company data, users simply need an internet connection, a web browser, and their login credentials. This changes the way organizations operate, delegate, and conduct business.

Since employees can work remotely they are given more flexibility when it comes to location and companies can save on office space. This accessibility also makes it easier to collaborate as teams from all over the world use the same software and database to complete their tasks.

High adoption rate

When companies introduce new software solutions to their staff, user adoption is the key to success. If tools are under-utilized or not used in the most efficient way, the value of software decreases and results in unnecessary waste of resources.

SaaS solutions are known for their intuitive and user-friendly interfaces that facilitate usage for non-technical individuals. In addition, many SaaS vendors offer a wealth of training resources like webinars or online courses that increase the adoption rate even more.

Plus, through application portfolio management platforms, IT teams can track user adoption and provide additional support and training if needed.

Customization

In just a few years, SaaS solutions have come a long way in regards to the customization of their functionality and look-and-feel. The vast majority of SaaS products allow their users to change certain parameters within a settings panel, so the software seamlessly integrates into the respective workflow.

Traditionally, this is also known as software configuration – a feature that is more associated with custom-software developed in-house.

Quicker feature delivery

Since the SaaS vendors are in charge of updates and the integration of new features, they are also performing all the necessary tests in the developing stages.

The fact that the provider handles upgrades reduces costs for the customer who gets to use mature software features that have left the beta stage and are ready to be rolled out. And since there is only one single configuration, users don't have to worry about version control.

More often than not, the SaaS vendor is catering to many customers across industries and can analyze user behavior to make necessary improvements.

Open integration

Since SaaS applications are not connected to the internal systems of an enterprise, they use integration protocols or APIs (application programming interfaces). The standardization of API technology has resulted in the development of mashups – web applications that use content from more than one source, combining various services into one lightweight graphical interface.

These mashups make SaaS solutions stand out from traditional on-premise software that is very difficult to integrate into an enterprise’s firewall. On top of that, APIs and programmable interfaces let customers fine-tune their SaaS application for an even smoother integration.

Increased collaboration

Along with better accessibility, SaaS solutions make it much easier for teams to collaborate.

Firstly, all important data is centralized and available even from remote locations. Secondly, many SaaS applications offer features that allow teams to work on documents or files in real-time in order to achieve better version control.

Other features include chats, interactive calendars for better project management and task delegation as well as easy sharing and poll options for bigger decisions that depend on a team vote.

Even though on-premise solutions can have similar collaboration features, they are much more common in SaaS.

Open SaaS

Some SaaS solutions are built on open-source code. One of the best-known examples is WordPress, an open-source content management system. Just like other SaaS products, a third-party vendor hosts, maintains, and supports the Open SaaS application.

However, the open-source element means that a community of users defines the direction in terms of features and product development. This has a positive effect on the product: For one, the quality increases as bugs are quickly reported and fixed.

Furthermore, the app becomes way more flexible and affordable as users can perform customizations and don't have to invest their own financial resources.

Disadvantages and business risks

SaaS offers many benefits to organizations of all sizes, but naturally, it doesn't come without its own risks and disadvantages. And even though the number of benefits usually outweigh the concerns, every business needs to be aware of the following points in order to mitigate or avoid them from start.

• Less control: With SaaS applications, users have very limited control compared to on-premise solutions. This applies to areas like functionality, downtime, and in what way important company data is governed.
  
  
• Limited customization: SaaS users have to be aware that they can customize a SaaS product only to a certain extent. Before you settle on an application, make sure that it offers the adjustable parameters that you need for your business.
  
  
• Incompatibility issues: It might be difficult to incorporate SaaS apps into an already existing system. The SaaS provider can also launch upgrades that could create new vulnerabilities and cause incompatibility issues.
  
  
• Security risks: Since a large amount of sensitive data is stored off-premise, organizations have to make sure that the third-party provider is employing all necessary security controls and that compliance is met. Failing to do so, could lead to data breaches and heavy penalties.
  
  
• Wasted resources: SaaS only cuts costs when it’s properly managed. Companies who pay for various applications with overlapping features or don't have a handle on shadow IT, waste valuable resources and miss out on one of the main benefits that SaaS has to offer.

Security and privacy

As SaaS providers handle software maintenance and updates, they are also responsible for keeping the SaaS platform, applications, systems, and physical infrastructure secure. But that doesn't mean that the customer doesn’t have any responsibility when it comes to security matters.

Vendors are not responsible for protecting their user’s data or managing user access. However, there are providers who offer more security options than others, so organizations should be aware of their security needs—complete a detailed SaaS security assessment, and choose a vendor that meets their requirements.

Every customer is also advised to improve their own SaaS security practices to sufficiently secure the data in their SaaS applications.

Security issues

Knowing what kind of SaaS security issues could arise when adopting cloud-based software helps companies take the right preemptive measures, saving them from future headaches. Below are the most important security threats that should be acknowledged before migrating to the cloud.

• Phishing
• Data theft
• Unauthorized access
• Malware
• Compliance and audits
• Account takeovers

See our SaaS Security guide for a more detailed explanation of each SaaS security threat.

Regulatory compliance

The security threats outlined above include “compliance and audits”. Depending on the industry, there are certain government mandates such as GDPR that need to be followed through proper SaaS compliance management.

If a company using cloud-based services doesn’t comply or fails to leave a proper audit trail according to SOX, it can face hefty penalties that could endanger the business. Below are a few examples of SaaS compliance.

• SOX: The Sarbanes–Oxley Act of 2002 is a US-American law that mandates a set of pre-defined practices when it comes to reporting and financial record-keeping for businesses.
  
  
• GDPR: The General Data Protection Regulation is a law that regulates data protection and privacy in the European Economic Area.
  
  
• ISO/IEC 27001: The International Organization for Standardization and the International Electrotechnical Commission collaborated in order to set standards on information security management.
  
  
• SOC 2: The Service Organization Control 2 is an auditing process that evaluates an enterprise’s information systems and whether they comply with the Trust Service Criteria (TSC) established by the American Institute of Certified Public Accountants (AICPA).
  
  
• PCI DSS: The Payment Card Industry Data Security Standard helps organizations protect customer data when it comes to handling branded credit cards.
  
  
• HIPAA: The Health Insurance Portability and Accountability Act concerns the US health sector and sets standards on how to govern and protect patient health information.

Security solutions

Once you are aware of SaaS security risks, it’s much easier to find the appropriate SaaS security solutions like a SaaS Management Platform that automatically discovers and tracks compliance.

Below are four popular and effective types that are used across all industries.

• CASBs: A cloud access security broker is software that monitors all activity happening between the cloud service users and the cloud applications. A CASB also enforces security policies and reduces the chance of non-compliance.
  
  
• DLP: Data loss prevention software detects suspicious activity and thus, prevents data breaches. It also safeguards intellectual property and lets enterprises define their own data access policies.
  
  
• Malware protection: Thanks to AI, malware protection is constantly improving; advanced technologies use behavioral analytics and real-time threat assessments to detect zero-day attacks or files that could spread through phishing and data hacks.
  
  
• SaaS Management Platforms: Thanks to the automation of SaaS Management Platforms, you can discover and track all SaaS applications used within your organization to ensure they comply with your company and regulatory requirements. 

Distribution

As opposed to on-premise software, SaaS distribution is virtual, not physical. Whereas traditional software is usually sold in the form of perpetual licenses with an upfront cost, an installation fee, and an ongoing fee for technical support, SaaS follows a different pricing model.

The vast majority of SaaS providers charge for their products through a subscription fee that can vary depending on the usage parameters like the number of features and users.

SaaS vs. on-premise

Even though we already established a few differences between SaaS and on-premise solutions, it’s helpful to take a closer look at their characteristics and how they differ from each other in detail. Find the biggest difference below.

Implementation and access: Implementing on-premise software involves the procurement of hardware and needs a lot of planning. SaaS on the other hand is ready-to-use as it’s not hosted in-house. Plus, it can also be accessed from anywhere while on-premise solutions can’t be accessed off company grounds. 

Costs: On-premise software can be very expensive compared to SaaS as an enterprise needs to have the necessary infrastructure and hardware to run the software. While ongoing maintenance costs can be lower, an organization needs to hire competent IT staff that can deal with issues and maintenance. While SaaS doesn’t cost much upfront, users pay a monthly or annual fee to use the product.

Maintenance: As mentioned above, on-premise software relies on in-house staff that is in charge of maintenance, updates, and troubleshooting in case of a bug or security threats. SaaS on the other hand is maintained by the vendor who delivers a fully functional product and the necessary support when it comes to training and fixing any issues related to the software.

Scalability: SaaS applications are pretty easy to scale if business demands increase or decrease. A company can simply opt for fewer seats, less storage, or fewer features before the next subscription renewal cycle. Scaling on-premise solutions is not that simple as it requires a lot of planning and a bigger budget, which is why growing businesses are better off with SaaS.

Security and compliance: Most reputable SaaS vendors make use of top-level technologies to protect client data from data hackers or data loss. Organizations with on-premise solutions have to install their own walls and barriers and need to have expert knowledge about compliance and the newest security threats. Thus, storing data in the cloud can actually be safer than keeping it on-premise.

Agreements and pricing

Understanding the user agreement and different pricing models of SaaS solutions is a prerequisite for maximizing the value they can bring to a company. SaaS optimization is best achieved through a SaaS management platform that notifies owners ahead of time when contracts will be renewed – this allows teams to renegotiate the agreement and price.

Below, find an overview of SaaS pricing models and SaaS agreements.

Pricing models

Flat rate pricing: This is the simplest pricing model as there is only one single plan and price for all customers. While this makes it easy for Finance and procurement to budget cloud spend, it is also a great option for active customers who use all features. However, if the product isn’t fully used, a more finely-grained plan is the way to go.

Price per user: In this scenario, the customer pays per seat, e.g. Microsoft 365 license types. In general, it’s fairly easy to add or remove seats depending on the number of team members. It’s important for SaaS managers to stay on top of who is actually using the software in order to avoid unused licenses that are being paid for.

Price per usage: Similar to the model above, the price is adjusted to individual usage. The more a product is used, the more expensive it becomes. While this might discourage employees from using the product more frequently, a “pay-as-you-go” model is very attractive for growing companies.

Price per feature: This model follows a modular pricing approach, meaning that customers get a basic software version, but can add certain features that enhance the core product. In order to avoid unnecessary cloud spend or security issues, make sure that employees are actually using the extra features and that the latter meet all security standards.

Tiered pricing: Tier-based pricing means that the vendor offers 2-4 different software plans to choose from. Each of them includes a certain amount of features like cloud storage or additional support. While this is a great opportunity to save on cloud spend, procurement needs to know exactly which tier reflects the organization’s needs best.

Free-trial/freemium: While a free trial only covers a certain period of time, it is a great way to get to know a product. This also applies to the freemium model that offers a free, basic software version for an unlimited amount of time. Even though these models help reduce cloud spend, they might lack security features.

Agreements

When it comes to SaaS agreements, organizations typically get to choose between monthly subscriptions and annual contracts.

• Monthly subscriptions: With this contract model, the user pays a monthly fee and can cancel the subscription on a monthly basis. This agreement type offers companies a high level of flexibility but is usually more expensive than annual contracts.
  
  
• Annual contracts: These agreements take less administrative effort, but also lock enterprises into 12-months contract periods. However, they’re more affordable than monthly subscriptions and a good choice if the product is used long-term, e.g. Microsoft enterprise agreement.

Both agreement types tend to have an autorenewal feature, meaning that if not canceled ahead of time, the contract automatically renews for a new cycle. With increased SaaS growth in most companies, solutions like LeanIX SMP help teams track and manage SaaS agreements and cancel or renegotiate renewals in time.

Subscription vs. perpetual license

While SaaS usually follows subscription pricing models, traditional software is still sold through perpetual licenses. Below are the main differences between the two.

• SaaS license: The user is renting software that can be accessed remotely, from any device. Upfront costs are very low, while the total cost of ownership might be more after a couple of years. Due to maintenance performed by the vendor, there is less downtime for updates compared to perpetual licenses, but there’s also no control over when the service goes down.
  
  
• Perpetual license: With this license model, users own the software and can use it indefinitely. Since the software is installed on-premise, it can be used offline, licenses can be transferred and the total cost of ownership goes down with time. However, there are higher upfront costs, new hardware might be required and the user is in charge of backing up the database.

Architecture

Companies that use SaaS don’t necessarily have the same SaaS architecture. In fact, there are two different types that need to be distinguished: Monolithic architecture and microservices architecture. But what makes them so different and which one came first?

Monolithic architecture

This is a traditional unified and single-tiered software or application in which the UI and data access codes are all hosted on a single platform. This means that the SaaS solution consists of one module that can’t be split up into different parts. While this architectural model is easy to monitor, it’s a lot more difficult to scale or customize.

Microservices architecture

This type of architecture is powered by APIs. These Application Programming Interfaces allow users to break down the software into different modules that communicate with each other, but that can be deployed or upgraded independently. This model offers a lot of flexibility and saves time and resources, but it creates a more complex IT landscape.

Deployment

It’s common knowledge that SaaS solutions are accessed through the internet. However, there are different SaaS deployment methods that users should be aware of. By SaaS deployment, we’re referring to the installation and delivery of cloud software. Find the main deployment methods below and learn what their benefits and disadvantages are.

Multi-tenant

The vast majority of SaaS solutions are multi-tenant, which means that the software and its infrastructure are shared by multiple customers. While users rely on one single database, sensitive data is only visible to the respective owner. This deployment method gives users less control but it is very affordable as the users are sharing the environment cost.

Single-tenant

Single-tenant deployment means that every customer has their own database and software instance. Advantages include better customization, security, and dependability, which is valuable for companies with tight security controls. The drawbacks with this method are the higher costs in regards to setup and maintenance.

Private cloud

The private cloud deployment is another way of referring to single-tenant deployment. Both methods imply that the hardware, storage, and network of an application are dedicated to one single user. While single-tenant solutions are managed by the vendor, a private cloud is managed by the buyer, which increases control and maintenance costs.

On-prem datacenter

It’s quite common that large government institutions or banks have an on-premise data center that they want to keep utilizing, while also benefitting from SaaS solutions. This means that SaaS vendors need to offer portable products that can be integrated into existing infrastructure.

Virtualization

This deployment method often gets confused with multi-tenancy. While multi-tenant means that a single instance is shared among multiple users, virtualization means that a SaaS app runs on separate virtual machines. Thus, customers don't share hardware and have their own OS. This minimizes downtime and increases responsiveness and agility.

SaaS adoption

At this point in time, becoming a cloud-based business is an inevitable process for most organizations who want to compete in a highly digitalized market. But investing in the best SaaS applications isn’t enough – companies have to actively foster SaaS adoption to get the most value out of their investments. A lack of training and a SaaS landscape that isn’t managed efficiently results in shadow IT, unused licenses, and thus, waste.

Adoption trends

Cloud-based applications have revolutionized the way businesses operate and perform customer service. And with SaaS transformation rising across the board, there is also a growing need for SaaS management tools.

After all, mismanaged or under-utilized SaaS applications lead to losing out on opportunities and ROI. Thus, monitoring, tracking, and optimizing SaaS is the key to successful SaaS adoption.

Adoption drivers

While modern cloud-based companies are pushing for SaaS adoption, there are also various outside factors that facilitate SaaS adoption in general.

One of them is the availability of broadband Internet that allows employees to successfully use applications remotely. On top of that, digital literacy is increasing among non-IT staff and the work with web-based user interfaces has become the new normal.

Another driving force is the standardization of the HTTPS protocol as well as a growing acceptance of lightweight integration protocols that facilitate a low-cost integration of SaaS with existing internal or other SaaS applications.

Adoption challenges

While SaaS comes with many benefits, it also comes with its own set of challenges. For one, data is stored on external servers, which creates a new need for security and data protection measures.

It’s also important to know that SaaS applications experience more latency than on-premise solutions due to the nature of the cloud environment. A company that is dealing with large data sets that need to be transferred to the vendor’s server usually has a harder time migrating to the cloud.

Last but not least, a SaaS provider could always go out of business which requires companies to have a backup plan before they switch over to cloud-based solutions.

Criticism

In its infancy, SaaS was often criticized for storing data in the cloud – however, these concerns are diminishing as vendors gear up on state-of-the-art technology regarding cyber security.

From a more philosophical standpoint, Richard Stallman of the Free Software Foundation points out that SaaS violates the principles of free software – users are just renting a product and “don’t have the executable file that does their computing”, hence there is a lack of transparency.

Outsourcing software and trusting a third party that caters to many different clients also means that the vendor doesn’t know the exact use case or pain points that each customer could have.