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On premise, cloud hosted, and true Software as a Service (SaaS)—what’s the actual difference between these terms when it comes to enterprise-level risk and insurance systems? In this article, we cover why cloud hosting is not equivalent to true SaaS and why some vendors may be (intentionally) using it wrong.
From the dynamics of hardening markets and expanding commercial losses, to the explosion of new competitive insurance products that are leveraging technology to go to market faster than ever before, all sides of the insurance value chain are facing considerable challenges. The choice of software deployment model for critical systems used to manage policy, billing, and claims administration could not only affect your ability to respond to these challenges, but could also limit strategic options in the future.
With some vendors deliberately misusing labels, it can be hard to identify which solution options are actually on-premise, cloud hosted, or true Software as a Service (SaaS). This article will explain the differences (and why they matter) and also show how to expand ROI assessments to more accurately account for costs in each model.
What’s the difference?
The enterprise-level solutions that handle critical risk and insurance functionality generally break down into 3 categories:
- Client provides all required infrastructure and network access for an installed instance
- Software is installed within a cloud provider’s managed environment, but the client is responsible for updates/upgrades, patches, etc.
- Software is managed by the software provider and all clients are on the latest version
These categories not only describe where the software is hosted, but also how it is designed — which determines if IT resources will be required to install, maintain, and support each option.
(For further details on these and other related terms check out our Demystifying InsurTech Jargon guide.)
Why cloud hosted is not the same as true SaaS
While identifying on premise solutions is usually pretty straightforward, many solutions that are actually cloud-hosted solutions are often positioned as being true SaaS. The article How to Identify True SaaS from Fake SaaS vendors addresses this bait and switch:
True SaaS applications allow customers to subscribe to and access software and support using a web browser without installing, managing, or maintaining any software or hardware…To react to increasing demand for SaaS applications, there has been a proliferation of ‘fake SaaS’ solutions. This is when a software provider mounts a web portal into a server hosting their on premise software in an attempt to simulate cloud benefits.
Although these “fake SaaS” (cloud-hosted) solutions do eliminate the need to provide the hosting/networking infrastructure along with the resources to support it, there is no change to the software maintenance requirements or the upgrade process. Without a key component, the benefits of true SaaS will never be realized.
Putting the “True” in True SaaS
It isn’t just using the cloud as a software deployment model that makes a solution SaaS, it also requires multitenancy. Cloudflare provides this definition:
“What is multitenancy? In cloud computing, multitenancy means that multiple customers of a cloud vendor are using the same computing resources. Despite the fact that they share resources, cloud customers aren’t aware of each other, and their data is kept totally separate. Multitenancy is a crucial component of cloud computing; without it, cloud services would be far less practical.” (Emphasis added.)
True SaaS solutions are designed from the ground up to support multitenancy, which means that, from the client perspective, versioning and software maintenance responsibilities are eliminated. With only the current version to support, all of a software provider’s development resources are focused on the same platform and forking issues are eliminated. Additionally, by sharing provisioning across multiple tenants, economies of scale are reached and infrastructure/hosting costs are reduced. These advantages explain why true-SaaS solutions are so popular in the marketplace.
Why true SaaS is booming
According to the report Cloud Computing Market by Service, Deployment Model, Organization Size, Vertical And Region – Global Forecast to 2025, the global cloud computing market is expected to more than double by 2025 with a Compound Annual Growth Rate (CAGR) of 17.5%. This growth can be seen in the proliferation of SaaS applications in use today. In the report, Natalie Robb—referencing the BetterCloud 2020 State of SaaS Ops report—notes, “When we first began researching SaaS adoption in 2015, the average company used just 8 applications. Today, that average has jumped to 80 applications.” For companies with 1,000+ employees that figure grows to 177.
The reasons behind this shift are apparent. Lower initial costs and faster rollouts reduce the barriers to entry. Freeing up IT resources from the burden of software maintenance allows those resources to focus on more strategic needs. True-SaaS solutions, using modern technologies and free of the resource drains that come with supporting multiple versions of a product, tend to follow a more rapid development cycle. This allows clients to benefit from a more responsive, agile development process.
Looking at the big picture
All parts of the insurance industry are undergoing a period of rapid change.The Internet of Things (IoT) is opening the door to new insurance products with very short launch ramps. Underwriting is being influenced by the availability of new types of data and AI capabilities. Clients are demanding digital experiences that mirror those they see everyday in their experiences as consumers. Meanwhile, economic trends are forcing organizations to stretch every dollar as far as possible.
This dynamic environment requires systems that can adapt and allow the enterprise to pivot as conditions change on the ground. On-premise and cloud-hosted solutions can impose a type of “change penalty” through added costs of time, people, and money each time an update is released. Eventually this penalty can be significant enough that an organization may be forced to forego upgrades to critical systems because they cannot budget for the resource drain and disruption necessary to complete the upgrade. Facing a competitive environment that demands rapid responses with systems that discourage updates is a bad combination.
Configuration vs. Customization (and the illusion of ‘having control’)
One of the primary reasons many organizations cite for favoring on-premise or cloud-hosted solutions is the need to heavily customize enterprise software to handle their unique processes and data requirements. This classic Information Week article explains why that may be short-sighted reasoning:
“The difference between customization and configuration boils down to coding and development versus a vendor-supplied menu- or wizard-driven approach. When you develop custom code to change or extend functionality, there’s always a chance the code won’t work when the vendor introduces the next release, so extra validation steps are required. In the case of major upgrades, customization can be just as demanding and time-consuming as migrating to a whole new application, as broken functionality may have to be redeveloped from scratch.”
Configuration options in true-SaaS solutions can provide organizations across the insurance value chain with the ability to adapt the software to meet their specific needs and address the dynamic competitive market without the burdens associated with customization. As soon as custom code is introduced, an organization enters the software development business. This pulls resources away from the core mission.
Finding the “true ROI” for true SaaS
In the same way the costs of customization are often underestimated, traditional methods for evaluating the ROI of systems can distort both costs and benefits when comparing true-SaaS solutions with on-premise or cloud-hosted solutions. A traditional ROI analysis will usually identify hard costs such as servers, storage costs, network and security infrastructure, software licensing, and the like. Softer costs associated with on-premise deployments, however, may not be as easily included.
The article Calculating the TCO: Cloud Versus On Premise Infrastructure highlights a few of these potentially underestimated costs.
- Cost and time related to infrastructure design
- Costs of updates and improvements during the use
- Energy consumption and constant temperature monitoring
- Technical support
- Staff training
- End of life disposal
- Efficiency losses related to the over-dimensioning of the physical environment
Asking a few more questions can make the ROI comparisons more apples-to-apples:
- How often are new features and capabilities from the software provider delivered?
- Is an IT project required to access these features? Will that involve a software or services cost?
- How are bugs fixed in this environment?
- What portion of the customer base is on the same version (which could affect vendor responsiveness)?
- Will software modifications, including integration points, “just work” whenever new versions of the software are released?
To put your organization in the position to make the most informed choice about your options, answering these questions provides a much more balanced perspective on ROI comparisons.
Competitive pressures and a dynamic business environment are contributing to the boom in true SaaS applications. By rethinking the ROI process, identifying the telltale signs of “fake SaaS”, and understanding the tradeoffs between customization and configuration, your organization can choose the deployment method that will serve your organization best today and in the future.
Origami Risk is an insurance industry leader in true-SaaS solutions for managing policy, billing, and claims administration. Talk to us to find out how your organization could apply the benefits of SaaS and create the agile solution you’ll need to navigate tomorrow’s challenges, or just reach out to [email protected]