Is AI Killing SaaS? Why City Tech Leaders Are Rethinking Procurement

Artificial intelligence is disrupting the traditional software as a service model by making bespoke software cheaper and more accessible. This shift is forcing city leaders to rethink their options. They can buy existing tech solutions, build their own, or outsource development to professionals who create custom tools that meet their exact needs.

From data management and analytics; to geographic information systems and spatial analysis software; city planners and urban transformation leaders have more to consider when they’re selecting software to help optimize operations. Sometimes, creating it in-house makes the most sense and creates the best solution. Hybrid solutions open up even more possibilities.

Today, small and mid-sized enterprises are more capable than ever before and are developing their own tech solutions faster and cheaper than big companies, thanks to the power of AI. For municipalities, this means the approach to procurement is changing, and those who don’t adapt risk being left behind.

The SaaS Model Under Pressure

For years, cities relied on the SaaS model to enable the procurement of scalable solutions. SaaS leveraged economies of scale to provide “close enough” solutions to shared problems. But that model is eroding fast. SaaS products are rarely a perfect fit, unless they’re created with a specific city or region in mind. As AI reshapes how software is built and deployed, city leaders are rethinking their playbooks.

Since AI enables the creation of custom fit software solutions that rival the cost of SaaS solutions with near-perfect customization,” close enough” may not cut it anymore. Why settle for less when AI can get you all the way, at a cheaper price and with less deployment servicing?

What’s Changed: AI Is Rewriting the Rules

Generative AI, application development platforms like Replit, and AI code editors like Cursor have reduced the cost and complexity of building custom software. Small teams can now create domain specific tools more quickly and efficiently than ever before.

AI copilots and low code platforms give internal teams the ability to launch powerful applications without depending on large vendor contracts. Cities are realizing they no longer need to compromise with generic solutions. They can build exactly what they need using tools that align with their goals and timelines.

From One-Size-Fits-All to Made-to-Order

SaaS products enabled economies of scale by offering “one-size-fits-most” solutions that could be sold across hundreds, thousands, or tens of thousands of customers. The model was revolutionary in that it created pathways for solutions that would otherwise have required incredible resource investment in either time, money, or both. Even so, SaaS products were rarely a perfect fit and most required some level of integration to meet specific organizational needs.

This custom integration came at an additional cost and required additional know-how or, the organization would have to design its operations around the product. AI allows cities to flip the script – designing tools that conform to their processes, not the other way around. As AI enables developers, these organizations can avoid the vendor lock in, the costly integration, and the never-ending contract models of SaaS

Tailored solutions can now be developed in-house or with local partners. Whether it’s a public records dashboard or an internal scheduling system, AI enables smarter, faster and more economic builds. 

The Collapse of the “Smart Cities” SaaS Wave

Major players like IBM, Cox and Dell have exited the smart cities space, which signals a broader industry shift toward city leaders taking app and software development into their own hands. Where out-of-the-box SaaS solutions promised affordable scalability, their inflexibility proved difficult for meeting the individual requirements of cities. 

Now, cities are well-poised to adopt AI-enabled solutions because smart city leaders have already been on the hunt for customized features. AI empowers city leaders to break free from the restrictions bigger brands imposed. Scalability remains, while customization enables cities to create the exact tech software that works for them.

The Rise of SMEs and In-House Innovation

Small and mid-sized enterprises, startups and even civic tech teams are stepping in to take ownership over both the software they use in-house and the applications and services they present constituents. With AI, they can offer highly customized solutions, without the overhead of legacy SaaS vendors. 

Cities are exploring partnerships with universities and local developers and even launching internal innovation labs to prototype their own tools. As AI continues to progress, this gives smart city planners and leaders more opportunities for both creating solutions in-house and partnering with other tech experts to develop their own unique apps and software.

Create or Buy? The New Procurement Dilemma

Cities must weigh their internal capacity, urgent requirements and long-term needs when deciding whether to build or buy software and technology tools. Consider the following pros and cons of buying SaaS versus creating technology in-house or via outsourcing to a developer.

Traditional Buying SaaS Pros

In past years, there were some benefits city planners and leaders saw with traditional SaaS models. These may have included:

• Easy implementation: SaaS models typically have teams dedicated to client service, who are available to help cities with implementing the software and, in turn, training their own teams on how to use it.

  
  

• Support and documentation: When city leaders use a SaaS brand, they also typically get dedicated customer support. If there’s a feature question or troubleshooting needed, SaaS companies often offer 24/7 assistance for their clients.

  
  

• Proven performance: Another potential advantage of using a traditional SaaS provider is that city leaders can first compare providers and look at factors like client testimonials and case studies before investing. There is a comparison advantage that allows city leaders to see how a SaaS solution might work for their city before committing to it. Some SaaS providers may even offer free trials. 

  
  

Traditional SaaS Cons

There are also some challenges, as we’ve mentioned, when smart city leaders choose traditional SaaS to meet their region’s unique needs. These include:

• Rigid functionality: SaaS tools may offer a lot of features, but not all the right features. As your region and its requirements grow, you may find that the SaaS provider doesn’t meet your evolving needs.

  
  

• Vendor lock-in: Another potential disadvantage of choosing a SaaS provider is being locked into a contract, or else facing heavy financial penalties for breaking a client agreement. If you find a better SaaS solution or decide to create your own tool, you’ll have to deal with the headache and financial fallout of leaving the vendor agreement. 

  
  

• Slower innovation: SaaS vendors may not be as quick to innovate as smaller-scale, custom solutions. Since they’ll have a larger client base, they may not rely on making fast improvements or developments, which can be a disadvantage to their current clients.

  
  

In-House Tool Creation Pros

Because of the limitations, expenses and restrictions with many SaaS providers, city leaders may look to in-house creation or outsourcing of technology tool development for the following reasons:

• Custom fit: When you’re doing the creation or telling a developer exactly what to feature, you can build a solution that’s customized to your unique needs. That means, you can add features SaaS providers don’t offer, and not have to pay for capabilities you won’t be using.

  
  

• Full control: As the manager of the technology creation, you can also control factors like feature additions, timelines and the developer team you work with. If you’re building a tool in-house, you’ll have constant access to the developer team. With an external developer, you can also work out a communication agreement that’s similar to the 24/7 support a SaaS provider might offer.

  
  

• Cost-efficient over time: Another factor you’re in complete control over when building software in-house is the budget. You can decide an up-front budget, and you don’t risk being locked into a costly contract that makes it hard to leave a SaaS tool you don’t want to keep using. You can introduce features that allow you to scale with the changing needs of your city/region.

  
  

In-House Tool Creation Cons

While developing tech in-house provides advantages like customization, control and potential cost savings, there are also some potential pitfalls to be aware of.

• Technical expertise requirements: While you can save money developing your own custom solution, you could also spend more than you need to if the developer doesn’t have the right expertise to get the job done right, on time. That’s why it’s so important to vet external developers or in-house professionals, so you don’t waste time or money.

  
  

• Maintenance burden: When you have your own tool, maintenance, security and support are your responsibilities. There’s no 24/7 customer support team, unless you supply it. You’ll want to be aware of downtime risks and mitigate those with the right in-house or external support partners.

  
  

• Security/compliance risks: Another essential component of in-house application or software development is ensuring it meets security and compliance standards, to protect constituents and your organization. A data breach that you could have prevented can be costly for reputation management and may put people’s data at risk. There may also be financial penalties and legal action you’ll have to deal with, unless you follow all necessary security and compliance protocols.

  
  

With the varying pros and cons for both traditional SaaS purchasing and developing your own tool in-house, you may also be interested in a hybrid model. Hybrid models combine AI-customized modules with proven vendor solutions. If you have a SaaS vendor you want to partner with, talk about customization options that allow you to create your own unique modules in the tool.

The Cost of Inaction

One risk stands above all: doing nothing. Technology moves quickly, and waiting too long can mean missed opportunities, increased inefficiencies and public frustration. Poor vendor return on investment, lack of communication and aging infrastructure are already draining city resources. Is the technology you’re using doing the same?

The price of inaction is rarely zero – and it’s often higher than experimenting with AI-enabled tools. Consider these risks:

• Cyber threats that could make critical systems unusable and inaccessible, shut down communications, and put citizens at risk

• Less optimized opportunity to share critical information, such as emergency situations

• Inefficient legacy systems that increase maintenance costs and aren’t compatible with new solutions you’re interested in or evolving regulatory compliance

• Loss of constituents who move to smarter cities

• Decreased sentiment among constituents

Your organization’s finances and efficiency, as well as security and constituent safety, rely on using the most up-to-date technology. Whether you explore new features through traditional SaaS vendors or look at how AI capabilities can transform your legacy systems, the time is now to consider new technology for your region. 

Procurement Needs a Rethink

To stay ahead, cities need more flexible, iterative procurement strategies. That means, empowering teams to explore AI tools, supporting small vendor partnerships, and building pathways for modular innovation. 

Whether the future is fully custom, partially bespoke or smartly integrated, one thing is clear: the SaaS era as we know it is over. 

If you’re interested in joining the smart city consortium in Arizona, learn about The Connective’s projects here.