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| ARTICLES | June 2009 |
Making the business case for Software as a Service (SaaS)
With an increasing number of ECM suppliers offering, or at least considering, the SaaS model, end users need to evaluate the total cost of ownership when making the business case
I AM often asked how to put together the business case for Software as a Service (SaaS) and if the traditional Return on Investment (ROI) metrics is the correct way to look at SaaS offerings. The question is very relevant as organisations affected by the economy now must leverage the reduced human and capital resources at their disposal. Interestingly, to answer the question of a SaaS solution’s ROI we must first calculate the value of enterprise software and hardware investments, which is called the Total Cost of Ownership (TCO).
TCO
Total Cost of Ownership (TCO) modeling is a tool that systematically accounts for all costs related to an information technology (IT) investment decision. TCO models were initially developed by Gartner Research in 1987 and have been widely adopted. Simply stated, TCO evaluates all direct and indirect costs incurred throughout the life-cycle of an IT asset, including acquisition and procurement, operations and maintenance, and end-of-life management.
TCO contemplates the total cost of:
- hardware acquisition cost and warranty expense,
- software licensing and maintenance costs,
- people costs for development and maintenance, and
- resources required to support a platform over a certain operational time period.
For example, if we looked at the first six years of a software system implementation, we typically would see significant capital costs for acquisition of hardware and software in the first 18 months and then maintenance and support costs over the remaining 54 months.
Surprisingly, the maintenance costs almost always overshadow the initial development estimates as the scope and functionality of the system continues to grow. It is not atypical to see a software project that started with a 25-person development and testing team to retain 20 people to support the platform and enhancements on an ongoing basis. There are also additional hidden costs of hardware upgrades and software platform add-ons, which can easily double the initial licensing estimates.
Recurring support
In my experience, the cost of recurring support of an in-production platform is about 60 per cent of the first year’s capital expense. So the TCO of that system over six years is easily four times the initial investment and can be up to eight times the initial investment if significant upgrades and enhancements are a part of the execution strategy. I don’t think any reasonable business person would want to say: “We agree to pay to develop and upgrade different versions of the same application over the total life at four to eight times the original cost to keep up with user requirements and technology.”
Why not just pay for what you use, when you use it and get all the upgrades and updates as part of the use fee? You get to drive the latest model of the car—not even every year but every quarter as new features are deployed to all users. And all you pay is your annual or monthly fee for use!
This is the fundamental metric for making a decision to implement a SaaS solution. In other words, you must decide how much you will pay to develop and maintain a licensed software product versus what you will pay for a subscription to a SaaS platform.
Time-to-value
Another important metric when considering SaaS solutions is ‘Time to Value’. This metric addresses how long it will realistically take to acquire, customise and deploy an application so that it generates value for the enterprise. Traditionally, a new application requires nine to eighteen months of time to acquire hardware and software. This is the time when the capital is sunk into the project with no return to the enterprise. With the SaaS model, a company not only avoids sunken capital costs but also saves time, since the typical deployment time is a matter of a few weeks to a few months. Thus, the enterprise starts to reap the benefits of this new innovation much more rapidly. When one adds in the opportunity cost and the accelerated business case, the SaaS model become convincing to all levels of the business—not just to the technical executives.
To me, choosing a SaaS model means, “I pay for it when I use it, I get to use it much sooner and I get to use the most up-to-date technology without worrying about outdated hardware, software and human resources.”
To a company considering SaaS versus a traditional software model, the total cost of ownership is reduced more than 66 per cent and there is an immediate time-to-value. Even more, capital dollars can be invested into the core areas of business to create more value for the enterprise. It’s a wonder businesses still buy through the traditional model.
The author Fahim Siddiqui is responsible for overseeing the IntraLinks product platform with responsibility for product management, engineering, quality control and external operations. He has more than 20 years of experience in high-tech industries delivering software and related services. Prior to joining IntraLinks, he served as CEO at Sereniti, a privately held technology company. Previously, he held executive and senior management positions in engineering and information systems with MCI, Time Warner Telecommunications, Voyence, ICG and Sprint. Mr. Siddiqui holds a Bachelor of Science in Computer Engineering from Iowa State University and Masters in Computer Science from The University of Missouri, Kansas City.
