Software as a Service (SaaS)

Term Definition
SaaS is an emerging new business model for software delivery. The software vendor hosts the application, provides and services the entire IT infrastructure including all hardware and software (or uses a Platform as a Service provider, PAS to accomplish this), maintains backups and a business continuity plan, transparently updates and upgrades the application as new releases are available.  The customers’ users access the secure hosted facility directly through their client browser to connect to and use the software. Salesforce.com is often referred to as the pioneer or the first major SaaS success story. The SaaS business model offers many advantages for the software company/service provider:

• Predictable revenue stream
• Longer term and more intimate customer relationship
• Control over quality of service

But it also offers a number of challenges:

• No customer lock-in: customers can and will migrate away due to poor service levels or lack of innovation
• Vendor is responsible for a full turnkey solution and has to make considerable  investments in infrastructure expertise, technologies and certifications
• Revenue recognition is a challenge because customers are often invoiced and pay for a term subscription. The company can only recognize revenue from such sales over the period of the contract. As a result SaaS companies often have substantial Deferred Revenue (services invoices but not yet rendered) as a liability on their balance sheets.

Area of Application
Revenue Recognition

Related Terms
Deferred Revenue
Delivery
Upgrade Right
Vendor Specific Objective Evidence (VSOE)

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