The Software as a Services (SaaS) vendor marker reached $100B in 2019 and covered around 20% of the enterprise software market. The expectation for the next few years is that the demand for SaaS vendors to grow. Even so, with the COVIT-19 crises, it is interesting to see how the SaaS solutions are impacted and how some of them will need to change the way how they do business.
Vendor types
There are three main types of vendors that are offering SaaS services. The first one is the traditional software vendors like SAP, Oracle and Microsoft. In most of the cases, they are reinventing themselves by migrating their offers and portfolio to SaaS-based solution, build around consumption model. The best example here is Microsoft with Office 365 that changed the way how we consume and buy Office products. The second type of vendors is large IT vendors that want to expand their footprint in SaaS. Cisco, together with their collaboration apps, is an excellent example of such a vendor. The 3rd ones are newborns that grow in the cloud and are offering extraordinary services. Atlassian, ServiceNow or Splunk are just a few of them.
Many SaaS newborns are much smaller, but with a high impact on the business and market. In the last three years, there was an explosion of new software products and services offered as SaaS. The small and medium SaaS vendors are offering excellent software products out of the box. Most of them are running on top of a cloud provider like AWS, Azure or GCP. Their solutions are optimised on specific business cases offering services that cannot be matched by any other canonical service vendor.
A good example is one vendor that is offering forecast capabilities related to accruals using a custom machine learning algorithm. The accurateness is very close to reality, and they are the best on the market; nevertheless, it is the only service that they are offering. For revenue or expense tracking, you need to use other solutions available on the market.
Advantages
There are many benefits of using a SaaS vendor in comparison with an on-premises solution like:
• Hardware, licensing and operation cost
• Ongoing maintenance responsibilities
• High upfront cost version pay as you go
• Upgrades costs
From the business value point of view, SaaS providers are cheap with a high impact on the business with fixed costs that can be easily calculated and forecasted. A pricing model where you pay per users or consumptions provides an easy way for how customers can scale dynamically and keep the cost transparent. Easy to scale up or down depending on how the business goes. The perfect solution for any type of business or company size.
SaaS services vendors have good SLA and strong quality attributes, with no management and operation costs. Global distribution of cloud providers enables SaaS vendors to cover the local regulations and country restrictions.
Their services are covering the full spectrum from the data store and backup to data processing, analytics and reporting. Even so, clients don’t have direct access to the data or backups. They need to request special access if they want to access it. It is not unusual to find out that the format of the data is in a property format that cannot be used reused without data transformation. SaaS vendors are offering migration mechanisms to their own systems but not the other way around. In most of the cases, you are stuck with data in a vendor without having the ability to do a smooth migration.
This kind of vendors is relying on 1-2 strategic clients, with which they have to build the SaaS solution. The rest of their clients are small or medium companies that are using their services. In general, the primary profit margin is from that strategic clients. The vendors usually hope that the rest of the customer will grow and will start to consume more and more of their services. In many situations, they even offer free tiers for small companies hoping that once the business grows the free tier customers will become premium ones.
The risks
In the current global context, we see the current crisis hits industries like car rental, ride-sharing, travel or automotive. In this context, many of them will decide to reduce and limit spending on non-essential services. We should expect a lot of 3rd party vendors, that are offering SaaS services to be directly impacted by this.
This will have a direct impact on the way how we might consume SaaS services, especially from small vendors, that have a custom implementation. Many companies rely on these providers from the data perspective, without data replication on their own systems. It means that if a SaaS vendor that manage invoices would have financial issues, there is a risk to lose the invoice history or to receive a backup in a property format that cannot be used as-is.
The struggles
Two main areas affect customers when a SaaS vendor has issues. The first one is related to data access. As we have seen above, by having the data stored outside the organisation, there is a risk to have issues related to data access. Even if contractually, in the case of a bankrupt the vendor needs to provide a backup of the data or access to the data for a period of time, there is no too much that you can do when the data format is a property one. Additional cost related to data transformation and processing is required. This makes data unavailable for a period, during the business can be directly impacted.
The second area where customers are impacted is related to business continuity, especially when the business is relying on the insights offered by the SaaS vendor. The main difference between having a license of a product and using a pure SaaS vendor is what is happening once the vendor cannot offer you service continuity. When you use a SaaS vendor that also provides on-premises deployments, you can easily buy a license and run the solution in a location which is under your control. In this way, you can continue to run the products as long as you need.
If we come back to the SaaS vendor that is offering forecast capabilities related to accruals, his main challenge is to offer an on-premises system. If he already builds the solution on top of Azure ML Studio, it will be challenging in a short period of time to offer an on-premises version that also protects his intellectual property. It is not impossible, but new challenges need to be overcome.
What we should consider
There are some things that you should consider at the moment when you select a SaaS vendor for your business. Below, there is a list of questions that you should ask yourself during the vendor selection process.
1. How critical are the services provided by the SaaS vendor?
2. What is the typology of their customers?
3. Do I have the ability to run their solution in my environment? What is the license cost related to it?
4. Are the data stored in a property format? Do they use open data format?
5. Do they have connectors to migrate data outside their platform?
6. What are their backup and retention policy?
7. Do I have access to the backup anytime? Can I schedule a data backup to my systems?
The below diagrams covered the main thing that we need to take into account to manage the lock-in risks.
Source: https://www.researchgate.net/figure/A-Lifecycle-for-Managing-Vendor-Lock-in-Risks-in-Cloud-SaaS-Migration_fig3_318880729
Final thoughts
As final thoughts, SaaS vendors will not disappear, and their services will still exist on the marker. Some of the small vendors might struggle or even disappear because of the current economic situations. This will trigger a shift related to SaaS vendor selection, that would take into account the possibility to access the data and run their services on customer infrastructure when needed. Besides this, companies might prefer canonical software vendors that are also offering SaaS option because most of them have an on-premises tier available, and during a crisis, the chances to go bankrupt are much lower.
Nowadays, SaaS vendors need to ensure that they have a solution that allows customers to run their product on-premises and the ability to provide customers access to their backups. Offering services that would enable data migration to other vendors or using open data format is a significant advantage.
Vendor types
There are three main types of vendors that are offering SaaS services. The first one is the traditional software vendors like SAP, Oracle and Microsoft. In most of the cases, they are reinventing themselves by migrating their offers and portfolio to SaaS-based solution, build around consumption model. The best example here is Microsoft with Office 365 that changed the way how we consume and buy Office products. The second type of vendors is large IT vendors that want to expand their footprint in SaaS. Cisco, together with their collaboration apps, is an excellent example of such a vendor. The 3rd ones are newborns that grow in the cloud and are offering extraordinary services. Atlassian, ServiceNow or Splunk are just a few of them.
Many SaaS newborns are much smaller, but with a high impact on the business and market. In the last three years, there was an explosion of new software products and services offered as SaaS. The small and medium SaaS vendors are offering excellent software products out of the box. Most of them are running on top of a cloud provider like AWS, Azure or GCP. Their solutions are optimised on specific business cases offering services that cannot be matched by any other canonical service vendor.
A good example is one vendor that is offering forecast capabilities related to accruals using a custom machine learning algorithm. The accurateness is very close to reality, and they are the best on the market; nevertheless, it is the only service that they are offering. For revenue or expense tracking, you need to use other solutions available on the market.
Advantages
There are many benefits of using a SaaS vendor in comparison with an on-premises solution like:
• Hardware, licensing and operation cost
• Ongoing maintenance responsibilities
• High upfront cost version pay as you go
• Upgrades costs
From the business value point of view, SaaS providers are cheap with a high impact on the business with fixed costs that can be easily calculated and forecasted. A pricing model where you pay per users or consumptions provides an easy way for how customers can scale dynamically and keep the cost transparent. Easy to scale up or down depending on how the business goes. The perfect solution for any type of business or company size.
SaaS services vendors have good SLA and strong quality attributes, with no management and operation costs. Global distribution of cloud providers enables SaaS vendors to cover the local regulations and country restrictions.
Their services are covering the full spectrum from the data store and backup to data processing, analytics and reporting. Even so, clients don’t have direct access to the data or backups. They need to request special access if they want to access it. It is not unusual to find out that the format of the data is in a property format that cannot be used reused without data transformation. SaaS vendors are offering migration mechanisms to their own systems but not the other way around. In most of the cases, you are stuck with data in a vendor without having the ability to do a smooth migration.
This kind of vendors is relying on 1-2 strategic clients, with which they have to build the SaaS solution. The rest of their clients are small or medium companies that are using their services. In general, the primary profit margin is from that strategic clients. The vendors usually hope that the rest of the customer will grow and will start to consume more and more of their services. In many situations, they even offer free tiers for small companies hoping that once the business grows the free tier customers will become premium ones.
The risks
In the current global context, we see the current crisis hits industries like car rental, ride-sharing, travel or automotive. In this context, many of them will decide to reduce and limit spending on non-essential services. We should expect a lot of 3rd party vendors, that are offering SaaS services to be directly impacted by this.
This will have a direct impact on the way how we might consume SaaS services, especially from small vendors, that have a custom implementation. Many companies rely on these providers from the data perspective, without data replication on their own systems. It means that if a SaaS vendor that manage invoices would have financial issues, there is a risk to lose the invoice history or to receive a backup in a property format that cannot be used as-is.
The struggles
Two main areas affect customers when a SaaS vendor has issues. The first one is related to data access. As we have seen above, by having the data stored outside the organisation, there is a risk to have issues related to data access. Even if contractually, in the case of a bankrupt the vendor needs to provide a backup of the data or access to the data for a period of time, there is no too much that you can do when the data format is a property one. Additional cost related to data transformation and processing is required. This makes data unavailable for a period, during the business can be directly impacted.
The second area where customers are impacted is related to business continuity, especially when the business is relying on the insights offered by the SaaS vendor. The main difference between having a license of a product and using a pure SaaS vendor is what is happening once the vendor cannot offer you service continuity. When you use a SaaS vendor that also provides on-premises deployments, you can easily buy a license and run the solution in a location which is under your control. In this way, you can continue to run the products as long as you need.
If we come back to the SaaS vendor that is offering forecast capabilities related to accruals, his main challenge is to offer an on-premises system. If he already builds the solution on top of Azure ML Studio, it will be challenging in a short period of time to offer an on-premises version that also protects his intellectual property. It is not impossible, but new challenges need to be overcome.
What we should consider
There are some things that you should consider at the moment when you select a SaaS vendor for your business. Below, there is a list of questions that you should ask yourself during the vendor selection process.
1. How critical are the services provided by the SaaS vendor?
2. What is the typology of their customers?
3. Do I have the ability to run their solution in my environment? What is the license cost related to it?
4. Are the data stored in a property format? Do they use open data format?
5. Do they have connectors to migrate data outside their platform?
6. What are their backup and retention policy?
7. Do I have access to the backup anytime? Can I schedule a data backup to my systems?
The below diagrams covered the main thing that we need to take into account to manage the lock-in risks.
Source: https://www.researchgate.net/figure/A-Lifecycle-for-Managing-Vendor-Lock-in-Risks-in-Cloud-SaaS-Migration_fig3_318880729
Final thoughts
As final thoughts, SaaS vendors will not disappear, and their services will still exist on the marker. Some of the small vendors might struggle or even disappear because of the current economic situations. This will trigger a shift related to SaaS vendor selection, that would take into account the possibility to access the data and run their services on customer infrastructure when needed. Besides this, companies might prefer canonical software vendors that are also offering SaaS option because most of them have an on-premises tier available, and during a crisis, the chances to go bankrupt are much lower.
Nowadays, SaaS vendors need to ensure that they have a solution that allows customers to run their product on-premises and the ability to provide customers access to their backups. Offering services that would enable data migration to other vendors or using open data format is a significant advantage.
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