Retaining clients is critical in the success of a Software as a Service (SaaS) company and retention is often determined by how well the software company can ensure uptime and availability of their software to the end user. This raises the question of whether Independent Software Vendors (ISV’s) should outsource the critical hosting infrastructure component of their business or keep it in house?

To decide on the best approach for your company you have to consider both cost against risk. Without a doubt hosting your own software can be expensive, and requires a different set of skill than is required for developing software applications. At a high level, all SaaS companies need to have software to solve the customer’s needs, hardware to run the software on, power to keep the hardware on, and an internet connection so people can access your software and hardware remotely. Unlike with the traditional software model where the customer owns the software, hardware, and infrastructure, in a SaaS model, the customer does not have access to fix a problem should something happen with any of these key components. For example, the SaaS customer does not have access to fix a broken hard drive, turn on a generator for backup power, or reboot the software if it were to “freeze”. These four crucial areas (software, hardware, power, and internet connection) now become the sole responsibility of the SaaS ISV. Along with this responsibility comes the high cost of keeping this complex operation running smoothly.

As a result of a large shift of responsibility from the customer to the ISV and the need for availability, many clients will require that the software company provide Service Level Agreements (SLA’s). SLA’s ensure the client that there will be a controlled amount of downtime. Each SLA will define what the customer will receive in terms of compensation if there is an interruption to the availability of the software that is now the responsibility of the ISV. SaaS ISV’s need to be responsible not only for ensuring the software is bug-free but also that the application is available constantly to meet the SLA’s agreed to by the client. If SLA’s are not kept, there are penalties or even worse, clients could leave.

Many traditional On-Premise companies also comply with SLA’s but generally these SLA’s are for fixing bugs within the software only. The customer who purchases On-Premise software is most likely always responsible for the hardware that runs the software, the power, and the network that the software and hardware run on. Many ISV’s find that developing software and providing software delivery and uptime services are different businesses altogether and require different skill sets. Therefore a vast majority of small and medium businesses (SMB) software companies recognize that it can be nearly impossible to manufacture software and provide application delivery (hosting) as well. With the onset of datacenters taking advantage of economies of scale, it can be very cost prohibitive for an ISV to have a secure location with redundant power and internet connection not to mention having staff available 24x7 to attend to software and hardware. Datacenters can provide these services much more economically by spreading the costs over many customers (similar to how the expenses of a SaaS company are spread out to clients). For this reason, many software companies (especially ISV’s in the SMB market) choose to outsource the delivery of their application to datacenter facilities.

Datacenters began with early computing. Computers and the infrastructure (cabling, etc.) required to keep them connected were very large and expensive. The computer equipment required a lot of power and constant environmental controls (such as temperature to avoid overheating) were critical. Over the years, with advances in technology, datacenters and their infrastructure have been able to scale to support many more clients and advances in technology. Data centers saw huge growth during the dot-com bubble. Then, as like today, datacenters began to look for ways to differentiate because customers began to view datacenters as a commodity.

So, what are the some of the key differentiators you should consider when looking for a datacenter to host your SaaS application?

•	Does the datacenter specialize in co-location, dedicated, or managed hosting?
•	Does the provider have experience in application hosting for software companies?
•	What level of support do they provide from the Network Operations Center (NOC)?
•	What rating or level of service does the provider offer?
•	Does the provider offer a platform with specialized services such as analytics or billing? These services may be able to get you to market faster.
•	Is the hosting company SAS70 certified? Is that important for your application?
•	Where is the datacenter located?

With all these choices, what is best provider for your SaaS company? Each of these considerations will impact cost and profitability of your company. Making the wrong decisions can cost more than monthly recurring revenue that these providers collect, it can cost losing customers.