In House Your SaaS Infrastructure or Outsource It?

By Merrill R. (Rick) Chapman

When Softletter first began running it’s SaaS survey in 2006 the overwhelming majority of SaaS firms told us that they managed their infrastructure in-house (for the purposes of the survey, we ranked colocation as an in-house choice). I don’t have the exact numbers in front of me as I write this, but I think the number was close to 70%.

When I talk to advocates of keeping infrastructure in-house they talk about the cost saving achieved. The best firms have learned to lower infrastructure as % of gross revenues to between 5% to 7%. Things like the cost of electricity are areas they watch closely.

But over the last five years, the trend has steadily swung the other way. Here are the results from the 2011 survey, which closed at the beginning of November (we’re currently working on the 2012 SaaS Report, which is based largely on the results.

Do you maintain your own hardware/software infrastructure (personnel, servers, storage, security, software, etc) for your SaaS system in-house? Or do you outsource your infrastructure operations? For the purposes of this survey, colocation, where you own servers stored at an offsite location, is regarded as an in-house infrastructure model.

In-House 44%
Outsource 56%

This is a dramatic shift over the last two years. The trend is clear; SaaS firms, at least startups, are moving toward offloading their infrastructure.

Interestingly enough, as companies grow, this trend completely reverses and larger firms tend to bring their infrastructure in-house. For companies $50m+, the in-house vs outsource ratio flips to about 70% to 30%. Larger firms apparently have the overhead and bandwidth to focus on bringing down operational overhead; smaller companies are choosing to take the financial hit and focus on building out their businesses and not focusing on infrastructure.

When we’ve discussed this trend, I’ve heard a lot of pushback. Ops guys like Dani Shomron, Founder and CEO of the Israel SaaS Center, and a guy who knows a lot about infrastructure, thinks IaaS firms just aren’t ready to meet the special needs of on demand providers.

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