SaaS is fundamentally more efficient than the traditional mode of software product delivery in virtually every way. SaaS is more efficient to build, more efficient to operate, more efficient to maintain, and more efficient to support.

The opportunity to reduce costs in literally every facet of the value chain for software is unprecedented. Rarely is an industry presented with an evolution that can literally reshape literally every aspect of its operations.

But is SaaS really more efficient? Or are costs simply being moved from the customer to the service provider?

Two key concepts provide a partial answer: Environment-centric software; and Shared Resources.

• SaaS provides an opportunity to build environment-centric software (software design and built to run in a specific delivery environment in terms of OS, datbase, application server, etc), and represents a cost-saving opportunity for the SaaS provider because there is simply less software to write. This means more efficient development, and more efficient software maintenance.
• The concept of shared resources provides the rest of the answer. With SaaS, virtually every resource that would have otherwise been isolated to a specific customer is now shared across multiple customers – shared servers, shared storage systems, shared network, shared IT staff.

When these resources are dedicated to specific customers, the result is an internal fragmentation of resources – the resources don’t get fully utilized.

With SaaS, resources such as servers, network, storage, and people are more fully utilized and therefore the overall cost of delivery is simply less. As grid-related technologies become more prevalent to build SaaS offerings, this efficiency of resource utilization will increase further.

Two additional factors are highly relevant as well: Purchasing costs and brand loyalty/awreness.

• The opportunity to "try before you buy" means that SaaS is likely more efficient from a purchasing perspective as well. And going forward, I suspect that the switching costs associated with many SaaS offerings will be very low also.
• With SaaS, the only brand that is important to the customer is that of the SaaS provider. Customers want to know that the service is always available – but they don’t really care what kind of hardware, operating systems, or database software is used to provide the service. This allows the SaaS provider to be brand-agnostic in designing the service delivery environment, and potentially taking a “Google-like” approach that uses low-cost hardware and open source software such as Linux to reduce costs while still delivering the required level of service to the customer.

The bottom line is that SaaS is fundamentally more efficient, and that makes SaaS an economic evolution, not a technical one.