Conventional Wisdom Alert: Multitenancy (part 1)

Software as a service is a phenomenon in part because SAAS changes so many things all at once compared to traditional software - the commercial model between the customer and the provider, the "no-brainer" choice of technologies to build your software from, the sales model, the support model ... it is hard to point to an aspect of the traditional enterprise software model that doesn't change a little or a lot (usually a lot) in the SAAS model.

One aspect of which is, assumptions about the size & shape of your customers compared to your software. In the traditional model, the starting price of your software - the purchase price plus unavoidable related costs like hardware, 3rd party software, human effort to install and configure the system, floor space, rack space, power, sys admin time, backups, disaster recovery, on and on - was usually pretty large. Think of the usual suspects in the ERP, CRM and (dare I say it) enterprise systems management space, and you can find many data points to support this. Analysts will commonly say, the annual cost of owning any enterprise application is between 2X and 4X the initial license price - every year, for as long as you own it.

As a result, the only customers who would consider using that software (the only ones who could form an economic rationale for why the software would provide more gain than pain) were, naturally, big organizations. With a large start up price per customer, and a large annual TCO figure, traditional software only makes economic sense if its costs can be spread over a large number of users, or servers, or whatever the unit of commerce is for that particular kind of software. As a result, almost all of the buyers were big companies.

This led to two unfortunate behaviors:

• Software vendors have come to believe that large enterprises are their natural market, as opposed to just the only market that could afford the current form of their products

• Smaller companies have been underserved, being offered either dopey cut-down versions of the enterprise products (useful features removed) or just special pricing (overlooking the TCO which dominates the cost equation in the long run).
  

This was a lose-lose situation for the software vendors and the potential customers. Very sad because it didn't need to be this way, but perhaps inevitable since the traditional choice of software implementation style made high TCO almost unavoidable.

SAAS changes the equation to a win-win, because the startup cost for a new customer is, zero. This is made possible via a clever but (in my opinion) misuderstood design concept called multi-tenancy. More on why M-T is great, and why it is misunderstood, in Part 2!