SaaS, Private Cloud, and Public Cloud Software: What are the Differences, Pros, and Cons?

Written By: Eric Kimberling
Date: October 2, 2023

When embarking on a digital transformation, one of the most critical decisions an organization must make is the type of technology to deploy. The choices often boil down to a Software as a Service (SaaS) cloud solution or a private cloud solution. Understanding the differences between the two, as well as their respective advantages and disadvantages, is essential. This discussion aims to shed light on these aspects.

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When formulating a digital strategy, a paramount decision is the type of technology the organization will deploy. As the majority of software vendors are transitioning to the cloud, the pertinent question is not about moving to the cloud, but rather which cloud solution best aligns with the organization's needs. Within the cloud domain, there are two primary options: Software as a Service (SaaS) and private cloud solutions. It's vital to understand the distinctions between these two, ascertain which is optimal for the organization, and evaluate the advantages and disadvantages of each. This discussion will delve into these considerations.

Overview of SaaS vs Private Cloud

Understanding the distinctions between Software as a Service (SaaS) and private cloud solutions is essential when considering enterprise technology. Broadly, enterprise technology falls into two categories: traditional on-premise systems and cloud-based systems.

Originally, Enterprise Resource Planning (ERP) systems were constructed as on-premise systems. This means they were deployed on-site, with software physically installed on servers within the organization's premises.

Contrastingly, cloud systems involve external hosting of the software, eliminating the need for physical servers within an organization's location. Within the cloud spectrum, there are two subcategories: private cloud and SaaS.

In a private cloud setup, an organization utilizes a unique instance of the software, hosted externally. However, with multi-tenant SaaS solutions, multiple organizations share the same software instance. While each organization can customize and safeguard its data with individual logins, the underlying infrastructure remains shared.

It's pivotal to note that many software vendors are gravitating towards the SaaS or multi-tenant model, primarily because of its profitability and scalability. However, many still offer private cloud solutions, especially for their larger and more complex clients. The ultimate question for organizations is determining which option aligns best with their specific needs.

Advantages and Disadvantages

To make an informed decision between Software as a Service (SaaS) and private cloud options, understanding the respective advantages and disadvantages is crucial. Contrary to what some software vendors might suggest, both models have their strengths and limitations.

Private Cloud: Private cloud is often viewed as a hybrid between on-premise and multi-tenant cloud solutions. This perception arises because, similar to an on-premise solution, you maintain your own instance of the software. The key distinction is that this software is hosted externally. One of the primary benefits of private cloud is its flexibility; like on-premise systems, it can be customized, modified, integrated with other systems, or even broken if mishandled. However, this flexibility can also be a pitfall. Organizations might over-customize or inadvertently damage the software, especially when attempting to adapt it for tasks it wasn't designed for. For businesses with complex or unique operational needs, the adaptability of a private cloud might be paramount.

Software as a Service (SaaS) or Multi-Tenant Cloud: In a SaaS or multi-tenant model, the software is hosted externally and shared among multiple organizations. This implies that customization is limited compared to private cloud options. Such an arrangement is ideal for organizations that either have standard business processes, have minimal customization needs, or are prepared to adapt their processes to align with the SaaS model. However, a limitation of SaaS is its inherent lack of flexibility compared to private cloud.

On the upside, many software vendors are leaning towards the SaaS model, not necessarily because it's superior for users, but due to its profitability and scalability for the software company. Additionally, SaaS solutions often receive regular research and development investments. This ensures users benefit from the latest advancements and innovations. Conversely, private cloud solutions might lag in receiving these updates, especially if the software has been heavily customized, making it incompatible with the latest versions.

In conclusion, both models have their respective merits and challenges. The central task is determining which is best aligned with an organization's needs, a topic that warrants further exploration.

Why SaaS Might Be The Right Fit

Discussing where Software as a Service (SaaS) might be the most suitable choice requires understanding its origin and function in the market. Certain systems were developed as SaaS solutions from inception. For instance, ERP systems like Oracle NetSuite, Salesforce, and Workday were designed as cloud-native, making them more advanced and mature than legacy systems that transitioned from on-premise to cloud-based models. If organizations are seeking mature solutions, these products can be among the top choices.

However, there are more generalized reasons for choosing a SaaS solution:

  1. Standardization of Business Processes: One of the primary attractions of SaaS is the inherent standardization it brings to an organization. Due to its less flexible nature compared to private cloud solutions, SaaS systems inherently drive uniformity and consistency in business processes.
  2. Innovation: Organizations aiming to stay at the forefront of technological advancements might favor SaaS. The continual research and development investments made by software vendors in their products tend to benefit SaaS users more immediately.

On the other hand, there are scenarios where SaaS might not be the optimal choice:

  1. Need for Customization: Organizations with distinct business processes that demand high flexibility might find SaaS limiting. This is especially true for multinational organizations operating across various markets, each with its processes, customer bases, and product lines. Such diversity often necessitates flexibility that might exceed the constraints of a SaaS system.

In conclusion, the decision to adopt a SaaS system should be based on an organization's identity, objectives, and priorities in their digital strategy.

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Why Private Cloud Might Be The Right Fit

Private cloud systems offer a unique balance between the traditional on-premise model and newer cloud systems. These systems grant organizations their instance of the software, ensuring it isn't shared with other entities. This exclusivity results in enhanced flexibility, allowing for more extensive customization and easier integration with third-party technologies.

However, this customization flexibility has its drawbacks. While the ability to modify software to cater to specific business needs is valuable, the prospect often leads to a resistance to change within organizations. They might opt to modify the software to align with existing practices, rather than evolving their processes. In contrast, the standardization of a SaaS model intrinsically pushes businesses towards unified practices.

If organizations decide on a private cloud model, two significant risks to consider are:

  1. Over-customization: Many organizations tend to overly tailor their software. To combat this, it's crucial to have robust project governance and frameworks, ensuring customization remains within reasonable bounds and doesn't stray into unnecessary alterations.
  2. Future Obsolescence: Many software vendors are gravitating towards a multi-tenant SaaS model. While the private cloud model isn't expected to become obsolete in the immediate future, there's a possibility of this over an extended period. If an organization's digital transformation cycles are sparse, they might find themselves with an outdated system in the long run.

Generally, the private cloud model suits many organizations, particularly larger and more complex ones. 

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I would enjoy brainstorming ideas with you if you are looking to strategize an upcoming transformation or are looking at selecting an ERP system, so please feel free to contact me at eric.kimberling@thirdstage-consulting.com. I am happy to be a sounding board as you continue your digital transformation journey.

Be sure to download the newly released 2024 Digital Transformation Report to garner additional industry insight and project best practices.

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Eric Kimberling

Eric is known globally as a thought leader in the ERP consulting space. He has helped hundreds of high-profile enterprises worldwide with their technology initiatives, including Nucor Steel, Fisher and Paykel Healthcare, Kodak, Coors, Boeing, and Duke Energy. He has helped manage ERP implementations and reengineer global supply chains across the world.

Author:
Eric Kimberling
Eric is known globally as a thought leader in the ERP consulting space. He has helped hundreds of high-profile enterprises worldwide with their technology initiatives, including Nucor Steel, Fisher and Paykel Healthcare, Kodak, Coors, Boeing, and Duke Energy. He has helped manage ERP implementations and reengineer global supply chains across the world.
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