SaaS's Total Cost (& Value) of Ownership

The SIIA put out a white paper called white paper "Software-as-a-Service; A Comprehensive Look at the Total Cost of Ownership of Software Applications" (subscription required), which analyzes total cost of ownership from the customer's point of view.

While thorough in parts of the analysis, the white paper curiously omits or de-emphasizes some key TCO elements in evaluating SaaS versus on-premise infrastructure:

• Platform Software: Costs are broken down into the on-premise software license costs, hardware costs, and personnel costs. But a huge cost is the platform software that sits under the on-premise software - the database software and application server software especially. While open-source can greatly reduce this cost, very few large companies run their CRM or e-Procurement systems on open-source databases or application servers. ["Database" is mentioned once on page 19 under SaaS but not under on-premise.] Oracle and WebLogic/WebSphere licenses cost many times the hardware these days, and the white paper correctly points out that SaaS providers can spread these costs across customers much more effectively than any single customer could.
• Storage: Similarly, storage and backup infrastructure are barely mentioned, and missing from the detail charts. High-performance, high-availability storage is a major cost of any infrastructure, and is even more leverageable across multiple customers than platform software.
• Multiple environments: While the production environment is thoroughly analyzed, completely missing are development and test environments needed for on-premise software, especially for upgrades. No IT shop only has the production environment running, they must also perpetually maintain and invest in development and often multiple test environments.
• Upgrades: Speaking of upgrades, one of the key costs of on-premise software is upgrading to a new major version, which usually requires a big IT project with lots of consultants to migrate the data, re-customize the application, re-integrate with new versions of platform hardware and software, and ensure everything still works as needed through extensive testing. As a result, companies typically upgrade very infrequently, remaining on an old version for years rather than trying to justify the cost of a big upgrade project. So with on-premise software, you can take your pick of two bad options - either wearing the straitjacket of staying on the same version for many years, or regularly paying for costly upgrade projects.
• Quantification: While offering a generic spreadsheet at the end, the report doesn't give any quantitative comparisons. For the IQNavigator application, we've done some comparisons internally that show that a typical large customer would pay about $200,000 dollars per year to host the application, even when leveraging an existing data center infrastructure. A competitor of ours who offered only single-tenant hosting started their hosting pricing at $250,000 per year (they have since left the market).

The net-net is that when these additional costs are included, the SaaS cost advantage is even greater, and SaaS costs are much more all-inclusive and foreseeable than on-premise software costs.

Even though the cost argument is compelling for SaaS, cost is often not the most important factor to the business buyer. While CIOs focus on cost of delivery, the business side focuses on the value delivered by the software and the software-enabled change program, which makes these SaaS value points even more compelling:

• Faster time to value: Weeks instead of months or years
• Ongoing free upgrades: This often-overlooked benefit means that customers gain ever-increasing functionality and value from the software, for no additional cost or effort.
• Top-to-bottom support: The SaaS provider supports the entire application environment, infrastructure and operations, not just their software.
• Cost visibility and predictability: hidden costs are largely eliminated, along with costly upgrade projects

These factors make up the entire customer ownership experience, and could together be called "Total Value of Ownership".

Potential customers need to evaluate which software vendors and delivery models will actually provide these benefits and a high value of ownership, but few do. We wrote a white paper called Why Technology Matters that analyzes all these elements to help software buyers to separate true SaaS from the SaaS pretenders.