SaaS and the Hosting Provider

By Zvi Grauer, PEER 1 Contributor

In a previous article, we explored the coming of age of software as a service (SaaS), web based applications used through a browser. The SaaS market is growing at a pace of 20% a year, and SaaS start-ups are attracting a large proportion of venture capital funding, putting them well on their way to take on traditional, on-premises software. The consensus among the experts is that SaaS market share will reach 30% of the global software market, with sales of over $10B by the end of the decade.

In this article we explore the hosting aspects of SaaS, the opportunities and the challenges that SaaS brings to hosting providers.


The New Paradigm

SaaS is markedly different from traditional on-premise software. It is owned, hosted, delivered, and managed remotely by a provider (an Independent Software Vendor or ISV). The hosting is not the customer’s premises, and payment for the software is by a usage or a subscription model. From the ISV perspective, SaaS is a multi-tenant system – a single instance of the software is shared by all the customers, as opposed to traditional software, which is often highly customized for each individual client.

To maximize the economy of scale, tenants (customers) share the web server, database, and work-flow engine. As the business grows, the number of customers multiplies and the ISV is required to scale up both hardware and bandwidth to maintain performance levels.

SaaS ISVs have to operate differently from traditional software vendors. They have to manage hosted software, as well as the server farm it requires, without the help of customers' IT staffs. Instead of closing few large sales, they must focus on continuing customer satisfaction. Instead of relying on customers' IT departments for configuration, maintenance and upgrades, they provide these services. They have to handle usage based billing, web based marketing, customer acquisition and retention. What's more, to be competitive, ISVs must do all that at a minimal cost and under a tough SLAs.

Many ISVs lack the expertise, the resources, or the interest to manage server farms. Traditionally, ISVs delegated these responsibilities to the customers’ IT organizations and provided a second line of support only. The move to SaaS thus presents ISVs with new challenges, and hosting providers have an opportunity to provide value added services to the ISVs and their tenants (customers). The following section lists areas of opportunity for hosting providers in the SaaS ecosphere. The next one deals with the requirements hosting providers have to meet in order to be competitive in SaaS hosting.


Datacenter Opportunities

SaaS hosting: In addition to the traditional tasks of coding and maintaining the application engine, SaaS uses web servers to furnish applications to clients’ browsers. The ISV has to manage and maintain web servers, database servers and auxiliary services (authentication, encryption, etc.). Hosting providers can take care of the hosting infrastructure for the SaaS ISVs. Working together, they can customize a solution that fits the application-hosting environment, deploy it at the datacenter and maintain its components.

Connectivity: SaaS is all about application delivery and availability. Web hosts can provision the SaaS ISV with redundant backbone connectivity, using high volume data pipes to take care of peak demand, immediately and at a cost advantage due to economy of scale.

Sales and marketing support: ISVs need to minimize expensive human intervention to maintain profitability. For example, eliminating direct sales and relying instead on web advertising and viral marketing. Hosting providers already have the experience, resources and methodology to manage web marketing and customer acquisition, common practices in the hosting universe. Offering these services to ISVs is a simple extension of these capabilities.

First level support services: Another way that ISV's can cut costs and maintain focus on core competencies is to delegate new user account provisioning and accounts customization. One option is to move the responsibility to the tenants. In such cases, the hosting providers can dispense end-user configuration help and first level technical support to the tenants, on behalf of the ISV. Alternatively, the hosting provider staff can be trained to do the provisioning and customization tasks for the tenants. In addition, cooperation between vendor and host can integrates the respective support staffs to create a seamless client offering, with the host providing 24x7x365 first line support and trouble shooting, while the ISV handles only the more complex support issues.

Billing Services: Hosting providers are equipped to handle multilevel billing (for example, dedicated hosting customers and shared hosting customers, which are the equivalent of SaaS tenants and end users), from many sources (credit cards, Paypal, cash transfers, and checks) in many countries. They can leverage these capabilities as an outsourced solution to ISVs that wish to farm out their billing operations to reduce costs.

Administration Services: The hosting provider can manage services such as user authentication, security (server hardening, integrity monitoring and DOS prevention), availability and reliability management (design of redundant system and upgrading hardware/bandwidth according to usage metrics), backup and recovery.
Monitoring services: Monitoring can include application usage (total bandwidth and number of unique users), servers' system events, network usage, CPU utilization, disk space, memory and swap usage. Advanced services include SLA monitoring using custom scripts for application performance, per-tenant and per-user usage, as well as SLA enforcement.


Datacenter Requirements

The key point to remember is that SaaS targets businesses (mostly small and medium ones, but also large enterprises in some markets) with mission-critical applications. The tenants' competitiveness and profitability are tied to performance and availability of the application. Moreover, the ISVs are bound to tough SLAs, and glitches can result in refunds and penalties paid to the customers, with additional costs due to attrition and customer acquisition. To the extent possible, datacenters should help maximize the application delivery for its SaaS partners, which means that to benefit from SaaS hosting, the datacenter must have proper resources.

Hosting hardware: Most web hosts carry several grades of equipment. For SaaS hosting, high quality hardware is desirable - fault tolerant servers, preferably with redundant, hot swappable components. High Availability clusters in load balancing configurations should help with availability and scale up. 

Connectivity: The quality, number and size of the backbone data pipes is important. Two (preferably three) high quality backbone providers are a condition for a reliable application delivery. Additional, especially low cost, connections coupled with smart routing technology can reduce costs to the datacenter while maintaining good connectivity.  To support peak demand, the hosting provider must have excess capacity or upstream connections that allow bursting.

Sales and marketing support: To provide web advertising and viral marketing support to partners, hosting providers must be willing to 'loan' their web marketing specialists, either to act as consultants and advisers, or to actually run the campaigns. As many hosts do not have full time web marketer, the ability to provide this service is limited to those providers who either have the available personnel, or are willing to hire and dedicate staff for these functions.

First level support services: To run provisioning and customization of new users accounts, web hosts must have the available human resources, or be willing to hire additional staff, and to receive training from the ISV. Proficiency in the SaaS environment is another requirement. This includes the operating systems, the databases and possibly the programming languages used by the applications. The allocation of time and personnel for training may put a burden on the hosting provider, but the payoff is substantial, as such services can command a premium. Providing joint integrated support services requires coordination and communication with the ISV as well as extra staff to manage the cooperation and conflict resolution.

Billing Services: Like sales and marketing support, sharing billing expertise requires sharing of existing resources, including billing staff, payment gateways and accounting software. The hosting provider can act in an advisory role, set up parallel systems to handle the ISV's billing, or share its current systems with the ISV (requiring complicated logistics). As most businesses do not considered billing a profit center, and do not have available personnel, the advisory route may be the best option.

Administration Services: The aforementioned administrative services require top notch technical staff. Most (authentication, security, backup and recovery) are part of the services offered by quality hosts. However, it must be stressed that with SaaS SLAs with teeth will be par for the course, and it is in the host's best interest not to promise more than can be delivered. In addition, staff and systems (for example, back up and recovery) quality and availability must meet or exceed the SLA requirements.

Monitoring services: Monitoring hardware and training must be top notch, to avoid triggering the SLA. Advanced monitoring and (tenants) SLA enforcement require cooperation with the ISV and ongoing coordination. The reward is the premium rates that can be charged for such support, whose main competition will be large and expensive technical organizations.


Conculsion

SaaS gives hosting providers many opportunities to leverage their existing competencies and offer lucrative support to SaaS ISVs and their tenants. The potential to move the datacenter from the commodity market into high end hosting, while providing a financial windfall in the process, is real. The cost of added staff and advanced training pale in comparison. However, in a performance driven business, failure to meet and exceed the SLA requirements can be costly. As in evolution, only the fittest will survive to enjoy the fruit of success.