Enterprise software buyers learned over and over again that buying on-premise software is just the first step on a long and winding road to actually improving business results via the software. While the on-premise software vendor can recognize revenue for the entire up-front license fee, declare victory to Wall Street and send its salespeople to Hawaii, the customer is just starting the multi-month/year effort of paying the implementation consultants, assembling and configuring the technology stack, and learning how to operate the on-premise software and its supporting technologies.
With SaaS, of course, the reverse is true - the SaaS vendor is responsible for making the software work to the customer's liking and the software's adoption and business results, while the customer is freed of all the worries of on-premise software ownership. In a previous post, I outlined some things that SaaS customers no longer need to worry about, including:
- Upgrading the software and technology stack
- Becoming orphaned on an old software version
- Solving infrastructure software incompatibilities
- Operating the infrastructure and software
- Maintaining multiple non-production environments
- Diagnosing technical issues
- Building technical expertise for the software
- Enduring cost surprises
Since then I've collected even more unhappy elements of the on-premise ownership experience from various analyst reports and articles and blogs, and as a summary, here are some additional things that SaaS customers no longer need to worry about:
Shelfware, with Maintenance Fees for Unused Software: Companies end up with shelfware when 1) they pre-buy more licenses than they need in return for a higher up-front discount, or 2) the software doesn't go live as broadly as anticipated. Customers typically still pay for maintenance each year on these licenses, even though the licenses aren't being used.
This is a big painpoint for CIOs, as they have to send cash each year to vendors for software that is not even being used. On-premise license contracts are engineered to make sure that maintenance costs "ratchet up" with additional licenses, even if some licenses on other modules aren't in use. At one point, Gartner estimated that almost half of CRM licenses were not implemented - is it any wonder that Salesforce.com was the first breakout SaaS company?
Even worse, although you've committed to the vendor and bought more up-front than you needed, it turns out that the vendor will ignore you if you have significant shelfware (subscription required). If there is no up-sell opportunity then you can't get the attention of the salespeople for information, access or support assistance. Counter-intuitively, the vendor will be much more attentive if they sell less up-front and have the opportunity to sell you more.
With SaaS, of course, the vendor and customer are much more aligned - the customer only pays for the capacity that is being used, and since more users mean more revenue for the SaaS vendor, SaaS vendors are motivated to provide great service and ensure you are getting the benefits that you need from their software in order to drive expanded usage.
Platform Changes When Upgrading: It's expensive and disruptive to upgrade on-premise software, so upgrades are done very infrequently. And upgrading doesn't just mean a new version of the on-premise software, it often means upgrading the entire technology stack - the database, the servers, the operating system, the system integrations, etc. So everything the customer has learned about operating, performance-tuning, and maintaining the on-premise software now has to be re-learned... another hidden cost of on-premise software.
Aging Software: Many on-premise software customers decide not to upgrade because the upgrade project cost is too high or the innovation too low from their on-premise providers (see also "The Oracle Syndrome"), because the on-premise vendors are swamped by supporting a bazillion software versions and infrastructure components. These customers now have to worry about further issues with "aging software", or being charged more for support, or even being abandoned with no support and old formats you can't read any more. SaaS, on the other hand, delivers ever-green software, with innovations and improvements delivered continuously to all customers.
Licensing Shenanigans: Buying on-premise software involves many frustrations when trying to figure out how many processor licenses to buy, how to license for development and test and failover and disaster recovery environments, how to coordinate with different licensing semantics for the database/application server/operating system, what flavor of maintenance and support to get for every component, etc. In addition, on-premise licenses don't tend to be transferable or flexible if the customer wants to use the licenses in a sister company or overseas, etc. While SaaS doesn't solve all of these problems (and some SaaS providers seem to want to keep complex licensing), the basic SaaS pricing unit (a user or a usage transaction) includes everything, no shenanigans or Excel spreadsheets required.
Multiple Instances and Versions: In many companies, ERPs and other on-premise software couldn't immediately handle the flexibility and configurability and scalability needed to support the entire organization, so the implementation consultants installed multiple "instances" of the software, multiplying the costs to operate the software. For example, some of our customers have dozens, even hundreds, of instances of their financial software.
Not only do multiple instances and versions multiply the costs of on-premise software (see below), it greatly complicates getting consolidated enterprise-wide information. Expensive data warehouses are constructed to overcome this issue, which adds further costs and delays to getting consolidated data from on-premise software. These days, of course, the implementation consultants are selling huge "instance consolidation" projects - yet another additional cost of ownership for on-premise solutions.
Internal Support Staff Costs: I read a fascinating study on ERP staffing ratios by Computer Economics, which underscored just how much big companies are paying in personnel costs to support on-premise software operations, upgrades, customizations, and testing. For each ERP user who used any module, the top-quartile performance had one support person for every 50 users, which represents close to $200 monthly support costs per user. Notably, while ERP systems have much more broad-ranging functionality than most process-focused SaaS solutions, support costs actually did not change based on scope of functionality implemented, as different users typically used different ERP modules - so the HR module had about the same support costs as the sales module, financial module, etc., and these support costs were linear by module. With SaaS solutions, almost all of these customer-incurred support costs go away.
In addition, the study found that on-premise support costs increased dramatically based on the amount of customization, the number of instances installed, and the number of versions installed. True SaaS solutions don't have any of these cost-multiplying elements, which further leverages the vendor's support efforts and reduces the total cost of ownership for the customer.
Performance Tuning: Keeping the system humming is a key part of operations, especially as usage and data volumes grow, and as new capabilities and use-cases are utilized. Every application architecture performs differently and requires different and often abstruse skillsets to tune. For example, why should customers have to become experts in a Java virtual machine's thread management or garbage-collection schemes in order to scale some purchased software?
SaaS providers offload performance tuning and system scaling efforts from customers, including stress-testing, capacity planning, system refactoring, and proactively tuning every element in the infrastructure. In addition, SaaS providers can tune much more efficiently and effectively than any one customer, because the provider's efforts and knowledge are leveraged across many clients. Since performance is a key part of the user experience, SaaS providers are highly motivated and focused on keeping performance high so usage growth and customer retention are high.
Waiting for Quality: The fact of life for on-premise software is that the vendor doesn't really know how customers are actually using the software, so they have to wait until the first version is installed by customers use before they start getting accurate feedback on software issues. So a new functional release can have an unacceptable number of bugs, which has led to the conventional wisdom in many IT shops is to wait for the service pack or dot-release before upgrading to a new on-premise software version. The separation between on-premise software providers and their customers' installations means that the providers simply do not have the information needed to test the software effectively.
By contrast, SaaS providers know every customer's data, configuration, and usage patterns, and as a result they know exactly what tests to run to ensure software quality. Since SaaS providers get immediately feedback on any quality issues and their future revenues depend on today's user satisfaction with the software, SaaS providers are again highly motivated to ensure that every new release is of high quality. Customers, in turn, also gain the benefits of new features and innovations right away, rather than having to wait for the bug-fixing service pack before upgrading.
The common factor is that a SaaS vendor's motivations are much better aligned with the customer, since the SaaS vendor's revenue is tied to the customer's satisfaction, retention, and software usage.
By contrast, on-premise licensed software vendors are motivated to "take the money and run", and actually prefer that the customer never installs or uses the software - the vendor already has the license fees, and now would rather not get any costly support calls. While the customer wants to gain value from their purchase, their on-premise vendor is secretly hoping they don't - one more thing that on-premise customers have to worry about.
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