Monday, October 09, 2006

Reducing SaaS Operational Costs

"Say, Tom, let me whitewash a little." (Tom Sawyer, Mark Twain)

Remember that quote of Ben from the timeless Tom Sawyer, who gladly gave up his apple to have the opportunity to do Tom’s work?

Cute, but how does that relate to reducing operational costs in a SaaS house? Well, at least fifty percent of the magic formula “Automate and Delegate”

In my numerous interactions with pure SaaS startups as well as with established ISVs transitioning to on-demand, I have encountered time and again the lack of planning for a robust Operations Support System (OSS).
Whenever I bring up the potential hazard of non-scalability I hear the same response “we wish that were our problem” or “we’ll deal with it when that becomes an issue”, secretly wishing that it will become an issue fast enough.
The logic being - let’s make sure our software works as a service and that we get traction. When we’ll have more customers than we can currently support efficiently that would be a success milestone.

I’m sorry to break the news but when that happens you might find yourself with a catastrophe waiting to happen (see Chronicle of a Death Foretold).

The profitable SaaS operation utilizes economies of scale when the cost of deploying, say, 100 customers is just marginally more expensive than a single customer. In an ideal world, the hardware and software infrastructures costs should remain the same; bandwidth utilization should not change dramatically; storage needs will expand more or less proportionally to the number of new customers, while the support staff should remain steady and perhaps increase slightly.

So what costs are involved with the growing SaaS business? There is the hardware, bandwidth, software licenses (e.g. databases), customer care, and the inevitable marketing and sales. Human resources are still the greatest expenditure for a software vendor.

Careful planning – ‘doing things right the first time around’ can make the difference between a profitable operation and one that is bleeding the company.

In order to maximize your margins, you must reduce human intervention in every aspect possible. There are two strategies, that when applied in concert, can do just that. They are Automate and Delegate.
Automate means let technology do whatever task that would otherwise require manual work.
Delegate means enable your customer to do whatever task that would otherwise require your team to handle. Remember Tom Sawyer?
Obviously these stategies will necessitate a technological infrastructure to support it.
By carefully planning your application and operational environment you may achieve a high level of automation and delegation.

In my next post, I will review the areas in which these principles can play a major role.

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