The first key issue to consider is that the business model of SaaS vendors exerts a pull towards less customization just as SaaS customers exert a pull towards more customization. The less customization there is, the more profitable the SaaS model becomes, as this strategy indeed reduces aggregate deployment costs overall.

In fact, a high degree of customization decreases the viability and applicability of the SaaS model. Eventually, market dynamics define a zone of equilibrium in which SaaS vendors can sustain a viable business model and SaaS customers see enough advantages in the model to pursue this type of deployment, while understanding and accepting the inherent limitations. On the other hand, the SaaS business model and marketing approach are diametrically opposed to the idea of offering a high degree of customization.

The Customization Balancing Act

Within all SaaS vendor/customer relationships there exists a fine balance between the degree of customization demanded by customers and that provided by the vendor. From an enterprise customer perspective, customer competitive advantage increases with a higher degree of customization, whether an application is delivered under a SaaS model or not.

A high degree of customization allows the enterprise customer to deploy unique applications that would not be available to other players in the market.

For example, a policy underwriting and administration system may be customized to support usage-based insurance, thereby enhancing a carrier's product offering to its clients and prospects, providing competitive advantage in the marketplace.

Top 4 Impacts:

1)    Customization costs – Fundamentally, outside of the zone of equilibrium, customization (which drives competitive advantage) is extremely costly under the SaaS model if not impossible altogether. This is like the old Fram oil filter commercials where the mechanic says, "you can pay me now or you can pay me later", where "later" definitely means it will cost more money.

2)    Remodeling Business Processes – Because customers are driven towards the use of standard applications under the SaaS model, business processes must be remodelled to fit what is being offered. This is generally unavoidable under the SaaS process.

3)    Silo Operational Reporting – True business intelligence for an insurance company requires the integration of multiple data sources, such as claims or finance—not an obvious task in the SaaS world.

4)    Ownership Limitations – Generally, transfer of intellectual property (a long-held practice in the insurance industry) runs counter to the SaaS vendor's business model.