BusinessWeek has an article up about one small business that is using SaaS (software as a service) to cut costs and be more efficient.  By itself, that is not a new idea.  But what I found striking about the story is that the business laid off three-fourths of its staff, and turned itself around from being $500,000 in debt, to becoming profitable.

At the heart of the story is how the business adopted a couple of online software services that they credit with making it possible to achieve profitability:

After three months of meetings with accountants, consultants, sales experts, and a mentor, co-founder Bret Starr made the painful decision to cut 75% of his staff. “We had a big sales team that was not providing value,” he says. Since sales and marketing would now be managed by just one person, Starr’s advisers suggested two hosted software applications to make that job easier.

Hosted software, or software-as-a-service (SaaS), has been around for about a decade. It’s software delivered via the Web rather than residing on a company’s own servers. Companies pay a monthly fee instead of buying the software outright, and don’t have to worry about software licenses, server maintenance, or IT staff to manage complex programs. Robert Mahowald, director of SaaS and on-demand research at Framingham (Mass.) researchers IDC, says hosted software can bring cost savings of 25% to 60% if maintenance and IT staff are factored in.

Here’s what I think is so significant about this example:  it’s the out-sized leverage that software as a service can bring to small businesses.  Imagine a large enterprise being able to lay off 75% of its staff and actually becoming a stronger company, rather than dying a slow death.  It’s nearly impossible for me to imagine that.

I’m not suggesting that it is somehow a good goal to lay off staff — not at all.  But if it comes to down to survival, and you have no choice but to shed expenses, SaaS apps might help save some small businesses during these recessionary times.

In addition to helping small businesses cut expenses, here are 3 other advantages small businesses can gain from SaaS:

(1) Growth without adding staff – SaaS can help you grow a small business without adding extra staff along the way.  During recessions, when credit is tight, positive cash flow is the difference between surviving and going under.  Some businesses slowly strangle to death, because they need more revenue, but get caught in a catch-22 because they don’t have the free cash flows to hire and pay more people to grow the top line.  If you want to grow without hurting your cash flow, some well-placed, inexpensive software services could help.

(2)  Automating existing functions to become more efficient and better serve customers — As a small business grows you can quickly get mired down in business processes that are primarily manual, that have never been automated.  Small businesses tend to grow in a way that isn’t necessarily organized or pretty.   Often you’re moving so fast there isn’t time to even think about automation.  The harried business owner thinks, “Just handle it — we’ll worry about automation later.”  Early on this makes sense, because your volume in a small business is low and in the beginning it doesn’t make much difference.  But manual activities don’t scale well.  Soon the business can’t get out of its own way.  It can stumble badly with customers.  If small business owners look around, there’s often a lot of low hanging fruit to pluck — activities that can be automated to enable more growth, more throughput, faster cycle times, better customer service.

(3) Free up the business owner to lead — SaaS can help the small business owner live a better life and be a better leader. Most small businesses start out with the owner doing everything.  Often the business owner is the nerve center of the business, running too many functions and activities.  It can get to be overwhelming for business owners.  Not only does the business owner end up working all the time, with no down time, but it diverts his or her focus from strategic issues to daily minutae — and he or she ends up working in the business instead of on the business.