Recently there was news that Freshworks — a Chennai- and Silicon Valley-based Software as a Service (SaaS) provider has filed for IPO in the US. We have all heard of the buzz around SaaS for quite a while now. Software itself is considered as a service industry. So, what is SaaS?

What is it?

SaaS is a way of delivering software applications over the internet when a customer requires them. Earlier, companies would have to install software in their clients’ localised hardware for them to use their applications.

So, this required customers to pay for use of the software upfront, and also for the hardware on which the software would run. Companies also had to invest in manpower/IT teams at their end to ensure successful implementation of the software and its continuous maintenance.

This was fine as long as companies could afford it. And quite a few could, and this is the demand that powered the rise of companies like Oracle and SAP which became famous for their enterprise resource planning (ERP) systems.

However, their dominance has receded with the growth of the internet and cloud ecosystem. SaaS, which started as a concept during the dotcom boom, began to flourish as a business model after the financial crisis of 2007 as companies looked to save costs.

At a personal level, the Microsoft Office 365 suite of products is a good example of SaaS. Instead of purchasing multiple one-time licences at a hefty cost, users can opt for a more affordable monthly subscription of the entire suite based on requirements. Users can also make do with basic hardware, while saving data on the cloud.

One can view SaaS as a subset of cloud computing. Cloud or cloud computing is a broader concept that involves not just delivering software over the internet, but also providing computing and data storage services from a different location (owned or third party). Freshworks itself uses the cloud infrastructure provided by Amazon Web Servcies (AWS) to deliver some of its SaaS applications to its customers.

Why is it important?

The biggest advantage that SaaS enables is innovation. It has basically converted fixed costs of companies into variable costs. When capital is scarce, the SaaS model frees up capital for more high priority requirements. The payment model for SaaS is typically a per seat, per month charge based on usage. This ensures more efficient allocation of capital, especially for early-stage companies. This also implies that the threat for established companies is higher today. If they are not alert, it’s just a matter of time before SaaS-using start-up will outwit them.

Why should I care?

SaaS is fostering innovation at an unprecedented scale. The advent of fintech companies and neo-banks, threatening the established financial giants is just an example. A good tech idea has a more affordable route and thereby better chance of success, thanks to SaaS. SaaS is also turning the tables within the software industry. For example, Salesforce, which would rank as one of the most successful SaaS companies today with a market capitalisation of $250 billion, is now as big as Oracle Corporation, although founded 25 years after Oracle. Salesforce has grown its revenues in the last five years at a CAGR of 26 per cent versus just 2 per cent for Oracle. The advent of SaaS companies has pushed traditional software companies like Oracle and SAP to change their business models and adapt.

SaaS is also opening up newer opportunities for entrepreneurs or students/employees looking for greener pastures in the job market. Finally, the SaaS model is also finding place in other industries. For example, Tesla’s rival in China, Nio, is offering its customers electric cars with ‘battery as a service’ option.

The bottomline

SaaS is an idea whose time has already come and it will impact you. Acknowledge, adapt and make best use of it.

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