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Two Reasons Why Software as a Service Is a Bad Business Model

By Wayan Vota on June 7, 2013

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Looking around the tech world and you would think Software as a Service (SaaS) is a godsend. All the cool Google services (search, GMail, Docs) are SaaS and the likes of Microsoft and Adobe are jumping on fast. Why? It has much going for it for software companies. They can upgrade everyone at once, control the user experience, and keep piracy at bay. Of course those regular software payments make life easy too.

But what does SaaS look like in the developing countries? Is it a good business model to support small businesses, entrepreneurs, and the general public? Garikai Dzoma at TechZim brings forth two good points why SaaS isn’t right for Zimbabwe:

Recurring Payments

Garikai Dzoma writes that those recurring payments are actually harmful to small businesses where cash is king and every dollar counts:

A person would have to pay in order to continue to use the software whether they want to or not. With the traditional model you paid for your current version for example Office XP and could use it indefinitely until you had enough money to upgrade. I know some typists in town who still use Office 2003. Sometimes not upgrading is not even money about at all. Plenty of times a person has become so used to a particular version there are simply unwilling to upgrade and go through the learning curve again.

Internet Access

Garikai Dzoma notes that even if you can pay for the service, money cannot buy you quality Internet access and the constant power to ensure connectivity from undersea cable to your office.

Despite all the strides that have been made in this country, broadband is still expensive, data caps are very real and downtime not at all unusual. Yet an internet connection is an essential part of the cloud and subscription model. Imagine if your connection was to go down during year-end financial statements and you had an accounting suite in the cloud. The subscription model increases the total cost of ownership by requiring a constant internet connection which might not be desirable or possible with a startups and SMEs.

So before you get too excited about using or selling SaaS, give a long hard thought to what it means to pay every month for a service that you can’t access every day in a month.

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Written by
Wayan Vota co-founded ICTworks and is the Digital Health Director at IntraHealth International. He also co-founded Technology Salon, MERL Tech, ICTforAg, ICT4Djobs, ICT4Drinks, JadedAid, Kurante, OLPC News and a few other things. Opinions expressed here are his own and do not reflect the position of IntraHealth International or other ICTWorks sponsors.
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12 Comments to “Two Reasons Why Software as a Service Is a Bad Business Model”

  1. Matt Berg says:

    Wayan – you might want to change the title to why SAAS might struggle in certain markets. SAAS in general I think is a good biz model and offers a lot of advantages in the long run in Africa.

    Ability to pay – ie) have access to a credit card is still a major challenge in many markets (but that’s starting to change). Very few popular SAAS services offer local payment options. Telerivet is one that allows local payment in certain markets it targets and I think that’s a great thing.

    On recurring payments – it’s hard to compete with pirated software. Long term hopefully SAAS pricing models will be offered in emerging markets that reflect local ability to pay. This might required segmented / tiered pricing schemes based on your IP. I’m not sure if anyone is doing this yet. I think it would be interesting to find out.

    Bandwidth is still a killer. You don’t see a lot of SAAS services that offer async webservices/apps. With HTML5 that might change but the current big players probably don’t have the market incentive to do so. This is why it would be nice to see more SAAS services coming out Africa and what that are better adapted to the challenges listed above.

    I think you’ll actually find in a lot of markets where connectivity is more reliable then power (this trend is only going to increase) access SAAS services over mobile will make a lot more sense then trying to support local computer infrastructure. This is why SAAS in my opinion is ultimately the right model for Africa and will only continue to grow. There is still a lot of space for innovation though to address many of the challenges above. Hopefully, we’ll start to see more African tech startups realize this and step up to the challenge.

  2. John Hawker says:

    Hi,

    I’ve never been a SaaS admirer, however a few points spring to mind.

    1 – SaaS may not be good for African businesses to use, but it could be a great model for African entrepreneurs to offer FROM Africa. Try and follow the Indian market and station yourself where some of the large fibre pipes enter Africa.

    2 – While I do agree that while low regular payments may be easier for a small business, the question of Open Source isn’t ever considered for SaaS, pretty much every company I know that uses SaaS is a large one that could afford software, or go doen the Open Source path

    3 – Bandwidth, yes we have some great connections in Africa, if only those boats would stop dropping their anchors on the cables! And it really doesn’t go inland that far yet.

    Which makes me think about a whole new topic that we could discuss here.

    “IS THE COULD GOOD FOR DEVELOPING MARKTES”

    I HATE (no I don’t still have caps lock on) the Cloud!

    As a friend said about the “Cloud”

    Just when they built a bridge over the digital divide, they place everything in the clouds to high for me to reach.

    The idea that people are told they must rely upon their content being in the cloud makes me remember when I saw in Kenya some school students getting very angry in a internet shop, their school assignment was “In the Cloud” and the internet connection had dropped.
    A far better excuse than the “Dog ate my homework” but one that I fully see as an issue,
    DON’T trust the cloud if your in a marginal area.

    but thats another discussion that relates to this one.

  3. Mary says:

    Perhaps this post should have been titled: “Tesla or Edison: who is right?”. The premise of the cloud is taken from the power grid. Telsa’s model is that every business, school, home should have its own power generation. Edison’s model recognized the cost efficiencies of the power grid. If you look at reports on the cost efficiencies for computing power cloud offers about a 8-10% savings over DIY models.

    I believe the larger issue is network connectivity and capacity. Social equity drivers should increase support of Internet growth for low-middle income countries. in today’s society libraries have moved knowledge into digital formats – not a question of Open Source, but Open Access. Is the Internet the great equalizer in today’s society? When (not if) will we see amazing innovative SaaS coming from resource limited countries — perhaps when there is more bandwidth and more computers to provide the resources to make such innovation possible.

    • John Hawker says:

      When we have great internet access, then we can discuss the merits of a Cloud or SaaS solution, but until that happens, then not having 24×7 quality access to the internet makes the point mute.

      THAT SAID, I do know some great roll outs happening in Africa, but it’s not Pan Africa.

  4. Jaime Chang says:

    What is or would be the niche of different SaaS products? Aspects such as costs, connectivity, hardware requirements, intensity of use, volume of data to be managed, need for “real-time” access, etc, must be considered.
    In many cases, probably in most for the time being, portability (i.e. being able to use the application and data in your device) is a factor heavier than connectivity. My take is that for a context in which there is limited connectivity (because of price and/or service availability) a successful SaaS would be a low cost, smart combination of portability and connectivity.
    An additional consideration is the type of computing device we are thinking about. For personal purposes and most small business, a tablet or large screen smartphone with a memory card reader would suffice. Hence it is probably also much about mobile applications. In a low access to connectivity market, a mobile application based model offering some “cloud based support” would probably be more succesful than a conventional fee based SaaS.

  5. Excellent points by all.

    Another element is that SaaS services replace the hardware/software infrastructure that most businesses use to maintain their offices. Moving from paper based records to digital tools is a big part of capacity building for small businesses – but many don’t have – or want to pay for – the IT infrastructure support they need (not just laptops, but buying and maintaining the servers, internal networks, monitoring security, backups, etc).

    SaaS often offers these elements as part of the purchase price. While some businesses may choose to forgo those costs by not paying for updates or maintenance, they put themselves at a disadvantage both in terms of competitiveness and risk mitigation (ever have a server hard drive crash due to a security breach and the backups don’t work? Ugly).

    Cloud based business infrastructure also makes businesses non-location dependent. If I lose my laptop or even my entire office, I have no disruption to business. If my stuff is cloud-based – I can also leave the country and I still have my business infrastructure intact. For risk mitigation, SaaS is pretty amazing.

    Bandwidth is STILL a huge barrier, so I don’t think that SaaS – as currently designed – is the solution everywhere right now However, it offers many many benefits for small businesses everywhere.

    I do see a huge need for asynchronous SaaS – no longer dumb-browser based services but back to the app model which offers the ability to work “offline” with autosync either in batched formats (for low bandwidth) or as needed connectivity.

    The technology is there (remember the 90s?), but the current SaaS market doesn’t support it often because the software companies cannot easily conceive of a situation where there is no bandwidth… This is an area for African software developers to exploit, in my mind.

  6. John Hawker says:

    Very well said,

    I use “Salesforce” for my work, not my choice, I have too, it contains all my contacts, records of what they want to buy, have bought, where orders are etc.

    And it is totally cloud based which I think is a MAJOR failure.

    Even if I lived in a world with great daily internet access, what happens when I am on a ‘plane and want to see what my customers and partners are doing?

    I can’t access the data,

    This is the major fail with nearly all SaaS services, they leave NOTHING on your machines, that’s done on purpose, and I think the long term will show it as a bad business move

    • Dennis Onyango says:

      John, Salesforce has an offline functionality. Very seamless and intuitive.
      That said, I feel the disparity between legacy users and web technology users will continue, as frustrating as both sides feel. Broadband and business models not withstanding.

  7. Aaron says:

    Like others have mentioned here, the question seems to be less about SaaS and more about connectivity. There are pros and cons to SaaS. The pros including low cost to deploy, constant updates and data persistence. The main con is unavailability in certain situations.

    One of the things I’ve found is that SaaS simplifies support issues. Instead of having to have specific hardware with different versions of installed programs across different operating systems – oh and where did that portable HD go? – you need to solve one problem: where is my connectivity. Connectivity may be a huge challenge, but it’s only one.

    The real question you need to ask is “Do I have to fix my internet connection more than I have to fix my local equipment issues?”

    If the answer is no, then SaaS may make a lot of sense.

  8. Jack Parsons says:

    Another problem that nobody has talked about is mass business instability. If everyone is on the cloud, and a brownout cripples many B2B providers, the ripple effects to other business customers can cause more and more instability in the entire computer-based business ecosystem. It’s one thing for Netflix Streaming to stop sending you movies, it’s quite another for your trucking and inventory control software and call centers to go off-line at the same time.

    This mass instability scenario mirrors what happened to the financial system in 2007/2008: too many mutual obligations cause system instability when enough of them turned sour.

  9. Neil Cavanagh says:

    With any choice, there are pros and cons; yes the effects of losing internet connectivity when all your data and applications are in the cloud is a big problem, but I believe that in time with better internet connectivity from mobile and fixed lines, these issues will start to become less apparent.

    Computers really only exist to run applications and you need to weigh up the effort involved in hosting your own services including, backup, license management, updates and cost before deciding which alternative is best for you.

    For many small businesses the cost of not paying out for servers and IT support contracts is often attractive.

  10. J.P. says:

    I agree with regards to internet connectivity, but I am not in total agreement with recurring payments. Recurring payments still affect other countries where Paypal and other payment processors may not be accessible, but I think people who see benefit in the service and don’t have to worry about maintenance and up keep on their end are willing to pay even if there is a small inconvenience every now again (i.e. can’t access data in flight).