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Febuary 9, 2009.
By Mark Hadfield & Kent Langley
A 50% reduction in costs with an associated ten fold increase in available capacity has been
achieved by various SaaS vendors migrating their infrastructure to Amazon Web Services and
those of other cloud vendors. The competitive advantage of an impact of this magnitude on the
business model is ignored by SaaS providers at their peril. Moreover the barriers to entry for new
SaaS companies continues to drop, with new entrants finding significant efficiencies in not having
to invest in or manage their own infrastructure. They are instead able to focus all of their resources
on customer acquisition and solving business problems for their customers, while their more
established competition is spending precious resource on inflexible service contracts, legacy
infrastructure and additional personnel.
Many Software as a Service (SaaS) providers promote themselves as cloud service providers; and
from the perspective of their customers this is true. Less understood are the significant benefits
available to SaaS providers by moving their own infrastructure to that of cloud providers.
This white paper will explore the metrics and benefits of SaaS vendors migrating their own
infrastructures to those of cloud service providers.
New SaaS start-up companies have a very different set of business challenges to face in 2009.
Customer success is critical to SaaS companies because the barriers to customer adoption and
customer attrition are both lower than traditional software. Any SaaS company with annual attrition
rates of more than 5% is on the wrong side of this equation. When you compare the (similar)
costs of customer acquisition between SaaS and tradition models, with no perpetual upfront fee
for a SaaS customer, it becomes clear that attrition of existing customers can have a devastating
effect on the business.
Uptime is fundamental for customers who are relying on their SaaS provider for mission critical
business systems. Any prolonged or intermittent service outages can erode customer confidence
very rapidly.
Variations in demand for SaaS means that capacity provisioning is typically designed and built
to deliver more than the peak demand expected. The downside to this is that most often when
demand is not at peak levels, there is excess capacity being paid for, but not utilized.
These SaaS market dynamics work together to make the business case for SaaS in the cloud
Most public cloud providers do not require long term commitments or service contracts. For
SaaS providers that are experiencing rapid growth, this flexibility allows revenue to closely follow
costs. In a sense the SaaS provider becomes a ‘cost plus’ vendor; with variable hosting costs,
limited fixed costs and no capital costs.
Leading cloud providers (like Google, Amazon and Salesforce) have grown out of years of
investment and refinement of infrastructure to support their own similarly failure intolerant
business models. This has made them particularly good at what they do and are generally
considered to be amongst the most reliable services on the Internet. The likelihood of service
failure between any new start-up providing its own infrastructure, and mature, stable, market
tested platforms, is self apparent.
1. Our SaaS vendor is considering whether to invest either in a Collocation Facility, Managed
Services provider or a Cloud Services provider. (assuming that creating their own independent
datacenter was already eliminated as a viable option.)
2. The typical demand shows peaks from 6am EST to 6pm EST which are 400% greater than
demand experienced during the night and at weekends.
-Servers are Dell 2950 rack mounted, medium spec. @ $5,000 each
-O.S, database licenses etc. Cloud hosting uses enterprise class fabric management.
-Cost of capital calculated at 9%
-Cloud hosting has no committed pre-purchase. Bandwidth estimated at $0.1 per GB.
-Co-lo is 3 data center people, Man Svs. one SYS Admin and Cloud better skilled Sys. Admin
-10% equipment replacement every year
-Man. Svs. $900 per server / month. Cloud $0.8 per hour / server instance.
-Weekends 104 days at 25% capacity
-261 business nights excluding weekends at 25% capacity
Conclusion
The cost advantages to cloud services are compelling, given the assumed environment above.
While Managed Services provides a modest 4% cost saving over Co-Locating, the Cloud Hosting
option, before considering the ability to adjust capacity with demand, shows itself to be 33% cheaper
than Co-Locating. Once you add the ability to adjust capacity to meet fluctuating and repetitive
demand swings, the savings really start to become game changing at 53% over Co-Lo.
If two companies are competing head to head in the same industry, and one of them is able to
deliver the same technical service at 47% the cost, they will be able to channel the difference into
other business functions like R&D, marketing, customer service or channel sales margins with
partners. This reallocation of capital into more efficient areas is a disruptive force brought about
by cloud computing that will affect every company over the coming years.
The price differential of cloud services are not the only benefits. Under the cloud model,
new servers can be provisioned in a matter of hours (not days or weeks), there are few long term
commitments or pre-buy requirements and redundancy and resilience to failure is improved
(due to the distributed nature of large cloud providers).
About nScaled
nScaled helps companies reduce costs and increase capacity through the adoption of flexible,
on-demand cloud computing services. Our products and services ease the adoption and
management of virtualized cloud services on platforms such as Amazon Web Services, Joyent,
Rackspace Slicehost, GoGrid and others.
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