Why Enterprises Don't Like SaaS

Bernard Lunn
June 30, 2009 | COMMENTS

At the Enterprise 2.0 Conference, I asked all of the vendors, "SaaS or on premise?" The assumption, because this conference was all about modern 2.0 stuff, was that everyone would say, "SaaS, of course."

Wrong. At least 50% of the vendors were deploying primarily on premise. Even some of the pure SaaS crowd would admit to an occasional on-premise deployment. Anecdotally, even some of those who say they are pure SaaS will deploy on premise quietly. Why are enterprise customers telling vendors that they want on-premise deployment?

On Premise Does Not Mean Old-Fashioned

Some of the vendors selling on-premise solutions are bang-on up to date in the two ways that really matter:

• Low-priced monthly subscription pricing with freemium entry
• Grassroots adoption, one click at a time, based on usability as the core advantage

For example, Atlassian sells only on premise.

Those Old IT Worry-Warts

There are some red herring issues. For example, security. There is no reason that cloud-based systems should be less secure than on-premise ones. But some high-profile lapses by cloud vendors have given enterprise decision-makers sweaty palms. "Having it in our data center just feels more secure, right? No one could hack our data center, could they?" Let people keep their illusions if it makes them happy.

The concern about application integration is a bit more valid. Sure, a cloud vendor could integrate just as easily with in-house apps. But all that data transfer comes with a cost.

It's All about that 6% Utilization

But the figure that really tells the story is 6%. That is the percentage of server utilization in enterprise data centers, according to McKinsey. That is a lot of wasted cycles. It would be much better to use them up with new applications, and to bring in virtualization technology to use them more efficiently.

Why rent more cycles from a SaaS vendor when you are swimming in excess capacity?

Shh, Don't Tell Our Investors

So, why the big fuss? Because customers want on premise, and the customer is always right.

As long as the vendor can deploy the whole solution stack really simply, there is no deployment cost issue.

The problem is that words like "SaaS" and "cloud" loosen investors' wallets. As one entrepreneur put it to me, "The moment I admit to selling on premise, I lose the VC." Anecdotally, even Salesforce.com, which is religious about being pure cloud, has deployed on premise when the customer is big enough. But saying so ruins a good story.

Google is one vendor that seems to be sticking to its pure-cloud approach. It can afford to forego a few mega-enterprise accounts because it makes so much from consumers and small and medium-sized businesses (SMB).

Cloud Is Ideal for SMB

Small companies don't have the scale to run their own data centers. And an awful lot of small companies are out there. Department-wide deals in which the decision maker does not want to "go through IT" will still go with the cloud.

But the really big enterprise-wide deployments seem to be going with on premise.

This article was posted on ReadWriteWeb, a weblog created by Richard McManus that provides Internet technology news, reviews, and analysis covering web applications and social networking. Reprinted with permission.