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| ARTICLES | December 2009 - January 2010 |
The economics of SaaS versus on-premises ECM applications
IN THE first article in this series, Why SaaS is the fix for what’s broken in ECM, I explored how ECM SaaS not only delivers ECM at a lower cost and more rapid time to value, but also how, by pre-integrating a broad set of technologies—from capture through document and business process management, and through to fax, e-mail, and print on demand—SaaS ECM transforms the effectiveness of ECM for companies and departments of all sizes. In our second article I shared Five tests to determine whether an on-demand ECM platform is right for your organisation—easy-to-apply filters that can help you to identify projects that are best served by SaaS ECM.
If you are now at the point where you can see how SaaS-based ECM can bring many advantages to your organisation, then the next logical question you may be asking is, How do the economics of SaaS solutions differ from that of the traditional on-premises software model?
The financial differences
When Information Week surveyed 374 business technology managers about the biggest challenges they face with on-premises software, it was not surprising that the top three challenges reported dealt with cost. Specifically, the cost of IT support staff to support and manage systems and applications, the cost of upgrades, and the cost of ongoing maintenance. Further, when Forrester Research asked a survey audience to list their most important reasons for adopting SaaS, the number-one choice (79 per cent of respondents) was to lower overall costs.
SaaS transforms every aspect of the financial profile of your project. From the procurement process to how you upgrade and everything in between, SaaS impacts the finances of ECM—start with a pilot, not a specification, get going for a fraction of the cost in a fraction of the time, with lower operating costs and a greater ability to adapt as your business changes—it is no wonder that SaaS adoption is increasing. Let’s explore each of the financial differences between SaaS and typical on premise ECM software:
Capital versus operating expense On-premise software is almost always a capital expenditure and, given the magnitude of the expense, often requires complex budgeting, justification, and approval. By contrast, SaaS is usually treated as an operating expense, which is then paid for from the ongoing budget. As a result, the approval process is simpler and SaaS projects can start any time without getting held up in end-of-year planning and approval cycles.
High up-front cost versus 90 per cent less When you purchase an on-premises software package, you usually pay license fees, hardware purchase costs, set up costs, and customisation costs well before you know your project’s degree of success or gain any benefit from that investment. In contrast, SaaS first-year subscription fees and set-up costs can be as little as one quarter the initial cost of on-premise alternatives, leading to very fast ROI—weeks or months instead of years.
Typical time frame versus fast deployment As they say, time is money. SaaS projects are up and running quickly—often in days or weeks—and that means faster business impact and greater savings. Easy-to-use software and a common user interface between applications also increase user adoption and satisfaction.
High versus moderate professional services cost Due to the programming required to customise typical on-premise software, it can come with high professional services costs that can run as much as several times the cost of the initial software user licenses. SaaS systems are configured, leading to lower fees for services.
Extensive versus minimal IT involvement On-premise systems require a lot of time and attention from your IT staff—to set up software and hardware, backup systems, and integrate and administer applications. All of these tasks are not needed when you use a SaaS content management application.
To illustrate the differences, the two diagrams that follow provide an overview of the financial implications of the two ECM models in the short term, as well as over time. As you can see, the greatest difference is in the initial period, with SaaS costing only ten to twenty-five per cent of installed software. In subsequent years, the differential is less although still substantial. Remember that with SaaS, you are only paying the fees for the service (pay as you go), and not for items such as maintenance, infrastructure management, upgrades, and so forth.
Initial Cost Comparison
Subsequent Years Cost Comparison
The end result is in the ROI and payback period Just do the math—start with the equation for ROI, take the initial project costs and divide by four and you will see that any project ROI goes up four-fold.
It’s not magic. SaaS delivers these financial advantages because the costs of the technology, integrations, infrastructure, and administration, are amortised over all clients. You benefit from economies of scale not only when you first begin using SaaS for ECM, but also every time you are automatically upgraded to each new release (with useful new features) every ten to twelve weeks. The benefits are even greater when you utilise a single SaaS ECM platform because you are leveraging a single environment where multiple applications can be configured or licensed as pre-existing templates.
Standardising on a single SaaS platform, assuming it is robust enough to address most of your organisation’s needs, reduces operating costs when compared with licensing individual point applications from different vendors through:
- standardisation on a single service level agreement (SLA)
- only one (versus several) vendor data centre operation to vet
- simplified vendor relationship management
- standardisation on a single set of Web services to simplify integration
- common user interface to reduce training costs
- single, secure repository to reduce the cost of records management and e-discovery
A SaaS ECM platform can span a broader footprint, increasing your ability to address multiple departmental applications
(enlarge graphic)
With all these financial benefits, it is of little wonder that Cutter Consortium reported SaaS adoption rates doubled between 2007 and 2008, or that Gartner Group named SaaS as one of ‘Top 5 tactical content management actions for 2009’. Use of a SaaS ECM platform allows you to declare your independence from:
- big up-front payments
- long projects timelines and high financial risk
- upgrade and maintenance fees
- high operating costs
- inflexible solutions
Perhaps the greatest reward that SaaS ECM delivers—even more important than the financial benefits outlined above—is peace of mind. Your company, or public sector organisation, was created to supply a needed product or service, not to manage a bunch of hardware and software. SaaS ECM frees you to focus on your primary goal—gaining competitive and sustainable competitive advantage for your organisation.
The author Prior to joining SpringCM, Dan Carmel was an executive in residence at Foundation Capital, a leading Silicon Valley venture capital firm. Before joining Foundation Capital, Dan served as president and CEO of Itemfield, which was acquired by Informatica in 2005. Earlier, he served as vice president and general manager of the legal / professional services business unit for ECM supplier Interwoven. Dan joined Interwoven as part of the successful merger between Interwoven and iManage, where he was vice president of marketing and business development. Dan’s career includes executive positions at several start-ups where he was instrumental in guiding new ventures to become market leaders in CRM (Vantive), Internet commerce (Selectica) and international payments (Sonnet Financial). Dan holds a BS and MS in mechanical engineering and applied mechanics from the University of Pennsylvania and an MBA from the Stanford Graduate School of Business.
