On the Evolution of Software as a Service (SaaS)

“The most profound technologies are those that disappear. They weave themselves into the fabric of everyday life until they are indistinguishable from it.” — Mark Weiser

SaaS Defined: Exploring the Concept and its Benefits

Software as a service, commonly referred to as ‘SaaS’, is defined as:

A method of software delivery and licensing in which software is accessed online via a subscription, rather than bought and installed on individual computers.

In today’s fast-paced digital world, a majority of businesses and consumers use SaaS, sometimes without even realizing it. Websites and services such as Gmail, Zoom, and Slack all operate on SaaS delivery models. SaaS has become increasingly popular due to several inherent advantages it offers to both users and providers, including:

• Cost-Effectiveness: SaaS eliminates the need for users to purchase, install, and maintain software on their own computers or servers. Instead, they can access the software via a subscription, which generally comes with a lower upfront cost. This allows businesses to save on hardware expenses, maintenance, and IT staffing.
• Scalability and Flexibility: SaaS solutions enable businesses to scale their usage up or down based on their needs. Users can easily add or remove features, making it simple to adapt to changes in requirements or business growth.
• Accessibility: SaaS applications can be accessed from any device with an internet connection, providing users with the flexibility to work from anywhere at any time. This feature is particularly valuable for remote teams or businesses with employees spread across different locations.
• Automatic Updates: SaaS providers manage software updates and security patches, ensuring that users always have access to the latest features and improvements without needing to worry about time-consuming manual updates.
• Ease of Integration: Many SaaS applications are designed to integrate with other software solutions, making it easier for businesses to create a cohesive technology ecosystem. This enables seamless data sharing and streamlined workflows across various platforms.
• Faster Deployment: SaaS solutions are often quicker to deploy compared to traditional on-premise software. As the software is already installed and configured on the provider’s servers, businesses can start using it immediately after subscribing.

Over the years, as more companies and individuals have recognized the benefits of SaaS, its adoption has rapidly grown across various industries. The simplicity, cost-effectiveness, and flexibility of SaaS make it an attractive option for businesses looking to optimize their software usage and streamline their operations. In this post we’ll explore the history of SaaS; where it originated, and where its headed.

Foundation Building: SaaS Origins

Software applications began to be adopted in the 1960’s for commercial applications, primarily catering to large organizations such as corporations, governments, airlines and banks. The focus of these early applications was largely on logistical processes like inventory management, payroll, and the organization of customer data. These applications were primarily used by internal employees and the volumes of data they handled were minimal by todays standards, with most usage taking place during work hours and consisting of low frequency tasks like generating reports.

It wasn’t until late in the 1960’s that the foundations of SaaS as we know it today began to take shape, with IBM offering ‘time-shared’ computing access to their hulking mainframe systems.

Given their size and cost, the idea of enabling networked access to these systems was a logical solution to the barriers of accessibility. This provided only a faint glimpse of the potential for SaaS as we know it today however, as most organizations with time-share compute access still chose to develop their own software in-house to meet their specific use cases.

Time-sharing grew in popularity throughout the 1970’s, until the market began to see a shift brought about by the rise of ‘personal computers’ (PC’s). It wasn't until the 1980’s however that the concept of general purpose software would come to fruition in the form of the first ever Customer Relationship Management (CRM) offering named ‘ACT!’, followed by accounting software startup Great Plains, and the travel expenses startup Concur. The latter being acquired by SAP in what was at the time the largest ever SaaS acquisition, at $8.3B.

It wasn’t until the dawn of the 1990’s and the dot-com boom that we really began to see modern SaaS offerings as we know them today. The complexities brought about by burgeoning infrastructure and workloads called for a streamlining of processes, and ensuring interoperability across multiple systems concurrently.

Application Service Providers (ASP’s) arrived to provide on-demand access to businesses for a fee, but the problem with these solutions was that they required far more legwork from vendors to onboard new customers. Additionally, many ASP’s suffered from poor product quality and a lack of customizability, leading their larger customers to ponder the actual benefits of ASP’s vs in-house software that offered more purpose-built experiences.

The solutions to these problems began to come full-circle as the concepts of time-sharing were re-visited for software, vis-a-vis hosting on a single system and allowing for streams of access from end users. Finally, by the early 1990’s, some of the SaaS giants that we know today began to take shape, with names like NetSuite, Intacct, and of course, Salesforce.

Of all the early SaaS providers, it was Salesforce that was truly ahead of its time in its execution and service delivery. Unlike other competitors (Oracle, Microsoft, Lotus, Concur etc.) Salesforce never wasted time experimenting with physical products or ASP type infrastructure. Mark Benioff immediately went with a delivery model based purely on internet and browser based access. In retrospect it can be understood why they stood alone in this regard, as bandwidth and internet access in the 1990’s was a far cry from what it is today. Be that as it were however, Benioff accurately saw the trends in computing and networking and built a foundation that still stands strong almost 30-years later.

By delivering through a browser based model, Salesforce did away with the need for complexity across systems. Gone were the worries of what version and operating system you were running on, the need for upgrades, migrations of data etc. All of these were hosted and managed by Salesforce, who in turn provided a seamless user experience.

Now we fast forward to the early 2000’s, with Amazon’s Jeff Bezos pondering how best to meet the compute demands of a rapidly growing company with highly variable workloads. The team at Amazon had already begun to build data centers to meet these needs, but the problem with this was that, with the exception of a few peak shopping days each year such as Prime Day and Black Friday, a majority of these servers would often sit idle. Ever the savvy businessman that Bezos is/was, he realized that he could rent out Amazon’s excess compute capacity when it was not in use, making use of virtualization technology to sub-divide his systems in a flexible and dynamic manner. Thus, in 2006 Amazon’s AWS had its ‘Hello World’ moment, offering up cheap compute underpinned by commodity hardware and Amazon’s second to none economies of scale, to the masses.

On the periphery, in a California valley not far away, a would-be fruit company launched the first iPhone in 2007, effectively putting computers in reach of everyones pockets. This would catapult internet usage as people no longer needed to be at home to be ‘online’. This in turn generated a tidal wave of demand for new applications.

A year later in 2008, Google followed Amazon’s lead with the launch of ‘App Engine’, a precursor to what we know today as GCP. App Engine provided tooling that allowed developers to create and host web applications on Google’s infrastructure. And finally in 2010, Bill Gates awoke from hibernation and quickly directed Microsoft’s efforts at bootstrapping a customer base for a competing cloud platform dubbed ‘Azure’ off of Microsofts enormous office productivity install base.

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A handful of other tech incumbents launched competing Infrastructure as a service (IaaS) and Platform as a Service (PaaS) offerings in subsequent years, but first mover advantages have kept AWS, Azure, and GCP firmly ahead of the pack since their inception.

And thus, where SaaS was just a budding trend before the advent of cloud platforms and the iPhone, their development initiated a Cambrian explosion in the space. These platforms significantly increased demand, while lowering barriers to entry for entrepreneurs, freeing them from the constraints of needing to physically acquire the hardware in order to bring their software to market.

Current market growth rates average in at around 18%, with analysts estimating SaaS adoption by enterprises at 99% and small to medium businesses at 75%+.

Open Source as a Catalyst for Growth

Which brings us to the subject of open source software. Open Source software is software with source code (code that defines how a piece of software functions) that anyone can inspect, modify, and enhance. Typically you will find open source software hosted on code repositories like Github, Gitlab or BitBucket etc. You can think of code repositories as archives of code that are being worked on, either by a private group/entity, or in the case of Open Source, an open community of developers.

In the past, open source software has often been viewed as a non-commercial, community-driven model. However, in recent years, many SaaS companies have begun to build successful businesses by leveraging open source software. In fact, open source has become a key driver for the growth and innovation in the SaaS space.

Open source allows developers and businesses to access and collaborate on building software (applications, services, tools etc.), enabling them to modify and improve it as needed. This collaborative model results in higher quality software and faster innovation, as a global community of developers works together to contribute to the project.

The monetizing of open source software, a subject that is sometimes seen as controversial, can be achieved in a variety of ways:

Open Core Model: In this model, companies offer a core open source product for free, while charging for premium features, services, or support. This approach allows them to attract a large user base and convert a portion of them into paying customers. Examples of successful open core SaaS companies include GitLab, Elastic, MongoDB and Confluent.

Managed Services: Some companies offer managed services built on top of open source software. They provide support, maintenance, and additional features to customers in exchange for a subscription fee. This approach allows businesses to benefit from the open source technology while offloading the operational burden to the service provider. Examples include Databricks (built on Apache Spark) and MongoDB Atlas.

Hybrid Models: Companies can also combine open source with proprietary software, creating a unique offering that leverages the best of both worlds. This allows them to benefit from the collaborative innovation of open source while retaining control over the development and monetization of their proprietary components. An example of this approach is Red Hat, which offers both open source and proprietary products.

The important takeaway here as it relates to the relationship between SaaS and OSS, is that the introduction of a meritocratic, community centric approach to software development has created a virtuous flywheel effect on the SaaS space, bringing gains in productivity, innovation and security that would not have been otherwise possible in closed systems.

The Future of SaaS

As we move into the mid and late 2020's, the SaaS landscape will continue to evolve, driven by advances in technology, geopolitics, ever evolving business needs, and the growing adoption of open source and AI/ML. Some of the key trends likely to define this space in the coming years include:

1. AI/ML Taking Center Stage: Artificial Intelligence and Machine Learning will revolutionize SaaS, enabling more intelligent and personalized user experiences, improved analytics, and the automation of various processes. In the near future, expect AI-powered SaaS applications to become the norm, making data-driven decisions and predictive analytics essential components of any software solution. Furthermore, LLM based chat bots like ChatGPT have proven to be powerful coding assistant, even in their early incarnations. We can likely expect AI based coding assistants to meaningfully lower the barriers to entry for building SaaS solutions.
2. Foundation Models as a Service: While this category might not quite be SaaS as we classically know it, it’s potentially the most important prediction on this list. Organizations of all sorts will soon look to tune existing LLM models to suit their own needs, and they will only be able to do so if they can tune these models in a secure and private manner. The recent release of Amazon Bedrock is an indication of where things are headed, as organizations begin to gain access to secure, private copies of pre-existing ML models that they can tune with their own data for a number of purposes, such as advanced customer support bots, internal productivity bots, coding assistants etc.
3. Mobile First Interfaces: Much of the world engages with computers and the internet via mobile devices first and foremost. This trend is not new and is likely to take some time to play out, but the net of it is that, for most new applications being built, mobile interfaces are not just a nice to have, but a necessity.
4. The API Economy Taking Flight: Application Programming Interfaces (APIs) are how applications communicate and integrate with one another. The increasing importance of APIs will lead to more interconnected and interoperable SaaS applications, enabling businesses to build customized solutions by integrating various services. The rise of the API economy will bring about a new era of collaboration and innovation, fueling a vibrant ecosystem of interconnected SaaS solutions.
5. SaaS Going to the Edge: With the rise of IoT and 5G, edge computing will become more critical, allowing SaaS applications to be processed closer to the data source, improving performance and reducing latency for users and service providers alike. This shift will pave the way for a new generation of SaaS solutions designed for the edge, bringing real-time insights and intelligence to a wide range of industries and applications.
6. Vertical SaaS Maturing: As the SaaS market grows, we will see more specialized, industry-specific solutions emerge, catering to the unique needs of different sectors. These vertical SaaS solutions will disrupt traditional industries, offering unparalleled agility, customization, and efficiency, especially when we consider the potential applications of AI for such use cases. From healthcare to manufacturing, no sector will remain untouched by the vertical SaaS revolution.
7. Democratization of SaaS via Low/No-Code: Over the last few years we’ve seen services like Bubble arise that offer non developers a way to bring their ideas to life without the need for much (if any) coding skills. These solutions are still in the early days, and mostly focused on more basic web applications such as Direct to Consumer (DTC) or homepages for brick and mortars, but I expect these tools to mature in the coming years and to allow for orchestrating much more complex and nuanced use cases. Another good example of an innovator in this regard is Retool, which allows businesses to build internal applications via a low-code platform. Expect services like these to further lower the barrier to entry for entrepreneurs with a passion for bringing their ideas to reality.
8. Renewed Focus on Security & Compliance: As more businesses rely on SaaS solutions, security and compliance will remain top concerns. SaaS providers will need to prioritize these aspects to win the trust of their customers. The rise of autonomous AI systems like AutoGPT are not mature enough yet to pose real threats, but they give an indications of where things are headed. One might imagine an autonomous white/black hat AI agent turned loose to find security vulnerabilities on all manner of software. As such, expect to see a rise in privacy-centric SaaS solutions, along with increased demand for advanced security features and certifications.

The evolution of SaaS has been a transformative force in the software industry. From its humble beginnings as time-shared mainframe access, to the cutting-edge technologies powering today’s cloud-based applications, SaaS has come a long way. By continuing to innovate and adapt to market demands, SaaS will undoubtedly remain a driving force in the world of software for years to come, opening doors to untapped possibilities and redefining the way we interact with technology.

*ChatGPT was used in the editing and revision of this post