Cloud computing is the next generation of SaaS ?

Earlier this week I found an interest article on a blog written by Bruce Richardson of AMR research. Bruce is musing about whether the combination of Compiere, an open source ERP application running on Amazon EC2 could be the next disruptive thing in ERP. The catalyst was a discussion with and an e-mail exchange he had with the Don Klaiss, ex SVP of Oracle Applications and now the CEO of Compiere, who told Bruce:

Cloud computing is the next-generation of software as a service, in which a complete software environment is licensed as a subscription from a software vendor and low-cost, secure, and dependable IT hardware infrastructure is ‘rented’ from a utility-computing provider on demand.

This new definition of cloud computing made me raise at least one eyebrow. Running your applications on the Amazon elastic compute cloud is a bit like virtualization - and I agree with Don that renting hardware in the cloud can be cheaper than installing hardware on premises. I also think it's particularly attractive for prototyping and for bursty applications, but that's for another post. But running applications on virtual hardware in the cloud is just a fraction of what SaaS is all about - and to claim it's the next generation of SaaS just doesn't pass the sniff test.

With SaaS, the vendor takes on the costs and risks of purchasing, maintaining and operating all of the infrastructure required to run the applications. This includes things like Oracle licenses, SOA platforms, security software, and a lot more. The SaaS vendor also operates the system, handling security, tuning, backup, upgrades, maintenance, disaster recovery, etc. SaaS vendors also spend lots of money and resources on operating procedures, SLAs and SAS 70 audits to guarantee things like like uptime, performance, security and quality of service.

There is also a lot of magic in multi-tenancy at the application level - with major associated benefits and economies in scaling and operations. Old single-tenant applications running in a virtual machine in EC2 by definition don't get this - above the hardware level it's still the old single instance, single tenancy, single maintenance model.

If you are running your applications on Amazon EC2, by definition you are doing all of this stuff yourself. Sure you get virtualized hardware and that's good, but buying and maintaining infrastructure is up to you, as is installing, maintaining and operating your applications. There are no SLAs, that's also up to you, and you're also on the hook for backup, disaster recovery, performance tuning, etc.

The way the SaaS business model works is that the vendors are taking all the money they save on sharing multi-tenant infrastructure and operations across thousands of clients and operations and returning it to their customers. SaaS vendors dis-intermediate both hardware and software infrastructure vendors, and are far more efficient at operations than nearly any individual customer could be. All of this savings goes right back into the pockets of SaaS customers. In the model that Don describes, you only achieve these efficiencies at the virtualized hardware level - which is only around 5% of the overall TCO for running a business application.

Even in the old ASP model, the attraction was that your vendor remotely operated your single instance, single tenant applications for you so you could get both hardware and operational scalability.

A TCO analysis would show that for business applications, all of the multi-tenancy and sharing you get with SaaS ends up being far less expensive than the costs of individual companies each running their own applications themselves on EC2. SaaS vendors get scale across everything - sharing infrastucture and operations costs, not just hardware costs, across large numbers of customers. In other words, you've got to consider the other 95% of costs that are not just related to running virtualized hardware.

So don't get me wrong - I think Amazon EC2 is great stuff - But to call putting a single tenant application on EC2 the next generation of SaaS - well I don't think so.