SaaS vs Legacy: Why Businesses Opt for Software as a Service?

Understanding the evolution of software delivery models. It’s time to gauge business opportunities in SaaS industry


A business is synonymous with a solution; something that solves a problem. For instance, an organization such as Hindustan Unilever offers a plethora of products to solve domestic chores for homemakers. On the other hand, a consulting company such as PwC offers expertise in a variety of areas solving business problems to C-suit executives and business leaders. But who solves business challenges (such as driving revenue, reducing cost, etc.) of these organizations? From legacy system to cloud based SaaS (Software as a Service) solutions, all enterprises depend on technology solutions.

What Is Legacy System?

Traditionally large organizations have been using IT and software solutions for solving their day-to-day business challenges and offer superior customer experiences in order to stay competitive in the selected market. These large companies had access to required resources and finances to build and deploy IT solutions that augment their competitive positioning in the market. 

Let us have a closer look at the architecture of such a solution. 

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Traditionally large organizations have been using IT and software solutions for solving their day-to-day business challenges and offer superior customer experiences in order to stay competitive.

How Legacy System Addressed The Need For A Tech Solution?

Assume that we are running a retail store in a local marketplace. In order to manage this business, we have to consider answering few questions under the following five broad areas:

What problem are we solving?

A local retail store solves the problem of accessing daily household products like snacks, grocery, dairy, toiletries etc to busy homemakers.

What solution do we offer? What are we selling? 

Apart from the products available at our store, what else can we offer? We might also accept orders on call, on WhatsApp, or online. There might be facilities for credit, payment options ranging from cash to credit card or e-wallets. There might also be an option for home delivery free of charge if the order value crosses some amount. All these ‘other’ things that we offer at the store, makes the buying from this store a convenient or even pleasurable ‘experience’ for the end customer. 

How do we acquire, retain and grow our customer base?

Who are our target customers? How much do we need to know about them? Why would they buy from us? Is it convenience, is it price, is it quality? What are we promising to our customers?

How are we going to live up to our promises to our customers?

How much inventory should we stock a tour store so that a buyer will never go empty handed? How many employees do I need? How do we manage conflicts with customers? How do we manage returns, refunds, disputes? If we can deliver what we promised every time we build a strong ‘trust’ factor with our customers. This is called brand equity. Brand equity helps us retain and grow the customer base.

Are we making money by doing what we are doing?

We need to know whether our costs and revenue structure can hold up a positive unit economics. It simply means when we spend a rupee in our business do, we earn more than a rupee or not. 

This brings us to the requirements of tracking revenue (through sales, account receivables and cash flow) and cost factors (such as inventory positions, account payables such as salaries, rent, tax liabilities, travel and admin expenses, marketing & promotions, etc.) in our business. 

We can categorize the above questions into following broad areas:

      1. Product management
      2. Branding and Marketing
      3. Sourcing and Supply Chain Management (SCM)
      4. Customer Relationship Management (CRM)
      5. Sales & Revenue Management (SRM)
      6. Human Resource Management (HRM)
      7. Finance and Treasury Management
      8. Reporting and Insights
      9. Strategy, and finally
      10. Technology/IT

Large companies would put together an IT infrastructure on premise to address some of these questions. There are two dimensions to such a solution:

Process standardization and automation

It is implemented using an IT system. The outcome could be a fail-safe business process optimized for time and quality. 

Data

This is generated through the use of the system. Depending on the nature of the transactions, the volume, velocity and variety of data could be significantly large requiring proper handling and care. In the above example of managing a retail store, such data can constitute information related to customers, products, sales transactions, stock and employees to name a few. It is not unusual for businesses to generate gigabytes to terabytes of data on a daily basis.

These mandate the organizations to build and maintain an IT infrastructure with adequate data security, and privacy compliance. This not only leads to significant additional cost but also building IT capabilities. Most of the times these required new skills fall outside the core competencies of the organization.

So, what choice do these companies have?

In early days of the IT trade, large software companies would build the solutions for these companies through signing large annual contracts. Besides paying to the software services companies, these organizations had to invest in IT infrastructure (server, storage). This is called a legacy solution. Though it was costly but the companies would keep control of their own data (customer, transaction, employees, vendors etc) with themselves.

Why Software As A Service Wins Over Legacy System?

Since the year 2000, with the development of cloud infrastructure technologies, a new breed of companies has popped up in the market. They would invest into the cloud infrastructure and provide a standardized solution to specific business areas such as payment, storage, ordering, invoicing, human resource, etc. Their customers would only pay per use of the features built into a product that is accessed through APIs (Application Programming Interface) and/or a cloud-based application. This model of software delivery is called Software as a Service (SaaS).

SaaS is a software delivery and distribution model wherein a consumer (b2b or b2c) can access a specific service on-demand over the internet through an application built by a third-party solution provider and hosted on the cloud.

There are some robust benefits of the Software as a Service model:

    1. Lower cost: pay-per-use
    2. No hardware installations required: auto updates over the internet
    3. No upfront investment into infrastructure
    4. Plug and play solution: no technical knowledge required
    5. Encourage collaboration amongst players: Build your solution on top of existing SaaS solutions through APIs
    6. Quicker time-to-market

However, to be a successful Software as a Service company, the enterprise needs to ensure:

    1. Data security: Since data security is in the hands of the SaaS company, one should ensure their information security measures are reliable.
    2. System reliability: The SaaS enterprise must make sure that their processes are robust.
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The primary challenge for Indian SaaS companies is to penetrate the segment is marketing.

Types Of SaaS Products

Horizontal SaaS 

A horizontal SaaS is relevant to multiple industries for the same function or use case. For example, a payment SaaS such as Paytm or PhonePe facilitates online payments for merchants across several industries such as restaurants, grocery, retail, etc. Other examples of horizontal SaaS could be human resource information system or HRIS that manages HR and people related functions across industries (e.g., SumHR), a Customer Relationship Management (CRM) SaaS that manages customer concerns across industries (e.g., Zoho CRM), a video conferencing SaaS such as Zoom, a productivity and collaboration SaaS such as Slack and so on.

Vertical SaaS 

A vertical SaaS offers solutions for a particular industry in multiple functions. For example, Shopify, an ecommerce SaaS platform offers end-to-end functions from hosting the website, designs, cataloguing, pricing, ordering and payment for e-commerce business. Few other examples are Katerra for the construction industry, Veeva for life sciences and Guidewire for the insurance sector.

How Far Along Has Software As A Service Come?

The total addressable market (TAM) for SaaS products globally would be $400Bn by 2025. In the past 20 years, Software as a Service has become a real phenomenon across the tech world.

Currently, the Americans lead with 60% market share whereas Indian SaaS companies have 6% of the global SaaS market. There are hundred plus SaaS unicorns (Annual Recurring Revenue, ARR>$1Bn) across the world, six of those are Indian. 

In the past ten years 400+ Indian SaaS companies have attracted over $10 Bn in Venture Capital funding. According to NASSCOM report 2020, 38 of these have an ARR of over $1Mn. Indian software engineers cost a fifth to those in the US. India has a wide variety of untested use cases that can be a breeding ground for innovation.

Software as a Service is a successful business model across the world including in emerging markets such as India. NASSCOM 2020 report on SaaS indicates that there is a significant adaptation of SaaS by Indian SMBs (Small and Medium Businesses) in recent past. The total addressable market within Indian SMB is estimated to be US $5-10Bn by 2025.

What Does It Mean For Small And Medium Businesses (SMB) In India?

      • SMBs who would adapt quickly to SaaS technologies are more likely to have a robust, reliable, efficient product and service offerings to their customers.
      • Embracing technology would modernize the traditional businesses with higher likelihood of creating superior customer experience.
      • SMBs and traditional businesses would be better prepared to face and even fend off emerging competition from VC backed, well-funded, burn-based business models often deployed by start-ups.
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What Does It Mean For Indian SaaS Companies?

      • The Indian SMB opportunity is too large to ignore.
      • The primary challenge to penetrate this segment is marketing. It is pertinent we address the traditional mindsets of SMB owners while pitching our solution because the demand in embracing Software as a Service is not only about spending money but also a deep-rooted behavioural change.
Avijit Dutta
Avijit Dutta
Avijit is a seasoned industry expert and a sharp strategist. Alumnus of Jadavpur University and IIM Bangalore he writes on innovation and entrepreneurship.

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