Every time my grandkids see a commercial about “moving to the cloud,” they want Grandpa to take them there. The National Institute of Science and Technology defines cloud computing as the delivery of computing as a service rather than a product, whereby shared resources, software, and information are provided to computers and other devices as a utility (like the electricity grid) over a network (typically the Internet). Whether an application is hosted or a Software as a Service (SaaS) model, they are still accessed through the cloud. 

Comparing Models
Hosted applications and SaaS cloud computing models both offer benefits, but which one is right for your organization and application? It can be confusing to understand what a SaaS application does and how it differs from a hosted application environment. It doesn’t help that every application company is marketing their on-premise solution as a SaaS application when, in reality, it is an Application Service Provider (ASP) model. The solution is still the vendor’s on-premise solution running as a single instance in its own virtual server environment, just not in your data center. This can be very misleading and confusing to someone who doesn’t understand the differences between a hosted application and a SaaS application. 

Simply put, a SaaS model creates a service-oriented experience with dedicated teams who understand the software, hardware, and infrastructure needs of the application, and who can therefore provide support at all levels. Typically, with hosted solutions, the support team has limited knowledge about the server and the architecture involved since all of that is managed by the application provider. However, we are seeing more non-SaaS application companies setting up their own hosting facilities. Another advantage to SaaS applications is that upgrades are instantaneous and experienced by all users at once because of the multi-tenant design. For hosted solutions, upgrading is often handled on a per-customer basis and the latest software version may require costly license upgrade costs and customization fees. In short, with fewer organizations to deal with and a more dedicated focus from the provider, SaaS offers a more streamlined and efficient way to go. 

In a nutshell, the difference between SaaS applications and hosted applications is that the first is a service that you use, and the other is a product that you own. Thus, you could argue that all SaaS services are hosted, but not all hosted applications are SaaS.

Before you make a large investment in any application, you need to have a clear and concise understanding of the difference between the two platforms. Although both platforms offer up the application to the end user and the functionality is similar, there are some pretty significant advantages of one over the other.

Benefits to Consider
First, it’s important to know that virtually all applications can be served up through the Internet or the cloud. However, an application that is served up through the Internet is not automatically a SaaS application. The Internet is merely a medium of service delivery. SaaS applications are served up through the Internet and reside within the software development’s hosted IT infrastructure, with secure multi-tenant architecture. This architecture allows all customers to use a single instance of the software without sacrificing their brand (often referred to as a distinct skin), workflow or functional requirements, data model, or access controls. With a multi-tenant architecture, a software application is designed to virtually partition its data and configuration, and each client organization works with a customized virtual application instance. A hosted solution provides the application off-premise and requires each company to run their own instance of the software, which can provide you with a great redundant SSAE-16 compliant data center. But, in many cases, you end up incurring additional costs and require additional processing if your company is in high growth mode.

From a CIO’s perspective, many back office applications and services have already been transitioned to a hosted or SaaS model. Good examples of this include e-mail, backup services and help desk. Still, many have been hesitant to move their mission critical applications to a SaaS model, even though there are clear efficiencies and cost savings. Some CIOs are stuck with an older application that has been in place for years and customized as many times as Joan Rivers gets a face lift, except less documentation exists. This leaves CIOs to face the daunting and expensive task of implementing an entirely new solution that the company may not be prepared to undertake. Many CIOs who are bound by compliancy (Sox-404, HIPAA, PCI, etc.) are reluctant to go to a SaaS model because of security concerns or because it is not physically tangible. Most SaaS applications providers today have built their application with compliancy in mind and even provide tools that make it easier for a CIO to achieve compliancy. It’s my opinion that many of the early concerns about the security of SaaS applications have largely been resolved. Detailed logging, access controls (user rights, password expiration, etc.), redundancy, and secure partitioning of data are all measures that have been taken to ensure security. 

Cost Savings
Let’s examine how productivity and savings differ between the two options. With a SaaS model, the IT infrastructure is highly scalable and built to support high transaction volumes. They can dynamically provide the additional resources, usually at no additional cost or at a minimal cost. In addition, there are savings through the elimination of software and hardware maintenance fees, upgrade costs, programming, IT support staff, and data center costs. All of this allows the CIO to focus on the business and not just the technology operations. However, even with all the benefits of moving to a SaaS model, it all comes down to whether or not your business environment can support making that move.

As a former CIO of a large distribution and 3PL company, my biggest challenge with moving to a SaaS or hosted model had little to do with security and everything to do with the warehouse requirements and the integrations between all of the different platforms. Specifically, we were concerned with high-speed conveyors (with PLCs), in-line scales, pick-to-light integration, RFID, scanners, sorters, and several other programs requiring fast response times. Our systems required millisecond response times. As a result, our number one concern was bandwidth, which was outside of our control. In the distribution and 3PL business, every millisecond counts. This is especially true when packages are flying down the conveyor, requiring constant communications with the WMS for scales, diversion, and other high response tasks. No CIO wants the operations manager complaining about productivity losses due to technology. However, we were able to use a SaaS model for non-high response functions, such as TMS, without impacting productivity within the warehouse.

The Right Direction for Your Company
What is the right direction for your company? First, before deciding whether or not a SaaS WMS is right for your environment, determine the amount of risk you can tolerate by moving to this type of system. Based upon your business requirements, you may not even have an option. Or, maybe a provider does not exist that will guarantee the service levels required to support your environment. Regardless, let’s assume you are ready and able to make a move from an on-premise to an off-premise solution. The CIO needs to be on board since he or she will ultimately be responsible for supporting the environment. A strategic CIO will look at all of the reasons why the company should move to a SaaS or hosted solution to achieve business gain. For example, maybe the CIO wants to shift some of the IT budget from capital expense to operational expense or has limited resources to deploy or maintain the environment on premise or, maybe the company is trying to lower expenses associated with software acquisitions. Once the CIO has determined the reasons for moving off-premise, he or she needs to work with the business to determine the right application.

Things to Remember
-Make sure a SaaS solution has all the features the business requires. 
-Look for the ability to customize or configure the application for your environment. Not all SaaS providers allow configuration. 
-Compare the up-front cost savings to long-term subscription fees. 
-Look for ways to improve your business. For example, in a SaaS application, you can usually implement features more quickly. 
-Look for service-oriented architectures (SOA), web services standards, and web application frameworks, as they are easier to integrate. 
-Make sure application can support your compliance requirements and that you own all data. 
-Do your homework and check references to ensure the vendor is meeting all of your expectations and service levels. 

In the end, hosted and SaaS applications are both viable platforms for organizations. Remember to determine what the business requires and decide which option will provide the greatest financial and productivity return.

Dan Taylor is a Managing Partner at Appnuity, a division of enVista. He has over 25 years of experience helping organizations across all industries realize the value of information technology. Dan can be contacted at dtaylor@appnuity.net.

Download the PDF to see, in chart format, the differences between the two systems.

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