Managing software installations is a challenging task, even for big businesses with IT departments manned by armies of IT professionals. For small businesses, whose owners often wear the IT manager’s hat, the task is daunting. Just protecting Windows and essential applications – such as office suites, e-mail clients, and browsers – from intruders, and keeping them updated and free of viruses, is a handful. But that is a cakewalk as compared to installing and maintaining business applications for contact management, sales force automation (SFA), customer relationship management (CRM), book-keeping and accounting, payroll and taxes.

The first innovation that promised entrepreneurs freedom from this drudgery came in the form of Application Service Providers (ASPs). As hardware became cheaper in the late ’90s, and networks more reliable, the ASPs opened massive data centers to host their clients’ applications for a (relatively) small fee. Small businesses jumped on the bandwagon because the prospect of not having to worry about computer failure, network outages, software upgrades, and data back-ups was simply irresistible.

For the most part, ASPs addressed these issues quite well. But other key issues remained unaddressed. The ASPs knew nothing about the applications that ran on their servers; they merely installed applications and ran backups. The businesses still had to figure out when and how to upgrade the applications and what to do about integrating them with other applications. Most applications popular at the time had their roots in the client-server architecture. In the race to migrate them to the ASP model, their vendors simply wrapped them in makeshift web-based front-ends which were not always suitable for their users. These applications were heavily customized for clients and required frequent fixes and upgrades. Managing the changes became a major headache for both the ASPs and their clients. This state of affairs was not sustainable and, barring a few exceptions such as web hosting, the ASP model more-or-less crumbled with the dot-com bust.

Some application vendors, though, spotted an opportunity to deliver managed, end-to-end applications to clients, and Software-as-a-Service (SaaS) model was born. SaaS is different from ASP in three ways. First, a single vendor creates and maintains the application throughout its life cycle. The vendor hosts the application, manages functionality upgrades, ensures data security, manages integration with external applications, and performs maintenance tasks such as back-ups, restores, and configuration changes. Second, under the ASP model, a client paid two distinct service charges–one to the ASP to host and maintain the application, another to the software vendor for licensing the software. SaaS lumps these charges into a single, seat-per-month charge. Third, the vendor delivers the same application to multiple clients. Not only can each client increase or decrease the application’s usage depending on business conditions, he can customize the application to suit his business process work-flow as well. Unlike the ASP model, these customizations are data driven and don’t cause problems in application upgrades.

SaaS model has several advantages that appeal to small businesses. First, the start-up costs are low. You can sign-up for fewer seats to begin with and increase (or, even decrease) the number if your needs change with time. You don’t have to commit to hefty license fees or the maximum expected number of users licenses, as you would have to with licensed software.  Second, pricing is simple – a single, seat-per-month charge. There are no long-term contracts and no complex, per CPU licensing fees. You just pay for what you use. Third, you don’t have to worry about upgrades. The vendor just adds functionality which appears in the interface one fine morning. Making sure that the transition to the new functionality is smooth, is the vendor’s responsibility. Users always get the current version. And fourth, SaaS levels the playing field for big businesses and small. A single-person small business can use the same cutting-edge software that General Electric uses by paying for a single license; it doesn’t have to settle for something inferior just because it doesn’t have the kind of money GE has.

Of course, not everything is hunky-dory with the SaaS model. Although, it levels the playing field, the software may still be out of reach of small businesses. If an application costs $200 per seat per month, GE may be willing to pay it for 5000 users, but the price may be prohibitive for a small business that wants five licenses. Then there is the question of what to do with all the existing data if you decide to change vendors – the answer may not be straight forward.

But for small businesses, such objections are often hypothetical. Few require very high end functionality that would make subscriptions unaffordable – in fact, several vendors offer entry level licenses free of charge. And small business owners are likely to find in-house data migrations quite imposing anyway. For the most part, SaaS suits small businesses, especially Very Small Businesses (VSBs), quite well.

Let us take an example. Say, a one-person business has two computers, a desktop and a laptop. The owner needs intrusion and malware protection for his computers. He also needs a simple web site, a document repository, reliable e-mail for that is accessible on mobile devices, an accounting package with a single user license that allows him to share his accounting data with his accountant online, and a single user license for a sales force automation package. Pretty reasonable requirements, right?

Here is what he can do, as an example:

So all this will cost roughly fifty-five dollars a month. If you consider the cost of comparable desktop software, upgrades, patches, new versions, installations, trips to CompUSA, the hardware needed to support these applications, and the time required to install and manage them, fifty-five dollars a month is quite reasonable. As a bonus, hardware problems don’t jeopardize the data and it is accessible from any computer at any time.

Does this mean that you should throw away all your boxed software tonight and move to SaaS? Not really. Depending on the business you are in, the level of functionality you require, and the work-flow you desire, some SaaS offerings may not be suitable for you. But more and more vendors, including big boys like Microsoft and Google, are jumping on the SaaS bandwagon. Over time, you may find their offerings increasingly compelling.