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Phil Wainewright

Comparing the Cost of SaaS

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Many of the calculations routinely used to compare the cost of SaaS to conventional software are based on completely bogus assumptions. This isn't an act of deliberate deception, it's simply a case of people shoehorning SaaS into the same criteria framework they'd use to compare two competing licensed software products.

The most egregious consequence of this sort of false calculation is to grossly understate the long-term costs of owning and running conventionally licensed on-premise software. All too often, I see people taking the cost to acquire a conventional application system, dividing it by three, four or five years and then simply comparing that figure to the annual subscription cost of a SaaS equivalent. Such calculations seem reasonable enough until one considers that they miss out one of the SaaS model's most significant benefits of all: the elimination of the upgrade disruption that occurs whenever a conventional software product goes through a major release. SaaS products have a completely different approach, with frequent, non-disruptive upgrades, both to the underlying infrastructure and to the top-level application functionality. To end the lifetime cost-of-ownership comparison at precisely the point when the benefits of that different approach really kicks in is to stack the comparison heavily in favor of conventional licensed software — and that's why I use the strongly loaded term 'bogus' to describe such cost-of-ownership calculations.

A blog post this week by Dan Druker, SVP of SaaS vendor Intacct (disclosure: a recent client) discusses a number of ways in which TCO comparisons should be structured to ensure that SaaS is compared equitably against conventionally licensed alternatives. He sets out a checklist of components that are often overlooked when totting up the true cost of implementing and operating on-premise applications. I've selected below the ones that I feel are most often overlooked:

  • Infrastructure stack software "... Client Access Licenses, Windows Servers, Application and Database Servers, Middleware, SharePoint, Citrix servers and VPN's for remote access."

  • Development and test systems "... most buyers will need two sets of systems for development / test and production."

  • Hardware replacement costs "... Servers, storage and other hardware components wear out and need to be replaced ..."

  • Faster problem resolution "... The customer doesn't have to describe the problem to the support rep anymore — the both can look at it at the same time. The ongoing support savings are significant." I would add that total system downtime is generally far lower for SaaS, both planned and unplanned.

  • Re-implementation costs in years 3 to 5 (As mentioned above) "Most TCO models miss the need in the on-premises software world to re-implement and upgrade to new versions of either the applications or the underlying infrastructure stack ..."

  • Higher worker productivity "... Because workers can access the system anytime and from anywhere, they typically get more done than if they can only use the system in the office ..."

The other benefit I would add that I think Dan has missed from his list is the ability to modify functionality and processes in SaaS applications much more quickly and in a more iterative way than with conventional software, which means the business can operate more efficiently and seize more competitive advantage. These are huge knock-on effects of adopting SaaS, but they only become evident after a business has switched to SaaS so they're difficult to build into a return-on-investment projection.

One day all this will have been measured and quantified, but by then the only people still moving to SaaS will be doing it to catch up with everyone else. If you want to get ahead of the field, you'll have to adopt SaaS before all the benefits have become plain for all to see.

7 Comments

Very good points raised in this article. We have been promoting the wisdom of long-term cost comparisons of SaaS vs. on-premise for many years and always include at least one upgrade cycle in our cost modeling to allow a better comparison between the two approaches.

Thanks for the reference and good feedback Phil. I updated the original post to include your spot on thoughts on benefits from adaptability, and also included some additional thoughts on more of the less obvious but important sources of ROI / TCO benefits like faster time to value, reduced project failure risk, and superior operations.

Phil - it's interesting that I just blogged on SaaS as well, commenting on the recent Gartner survey.

Yeah, I saw the Gartner survey but I felt it was pandering to vendors who want to spread FUD about SaaS (who form a large part of Gartner's client base).

Your points are all correct, Phil.

What we see in our pricing consultancy is almost the mirror image to what you describe. Instead of neglecting to add back the incremental cost of the on-premise infrastructure, they neglect to back out the SaaS infrastructure.

Either approach is apples to apples and is therefore valid for TCO purposes.

The danger here is the SaaS-to-SW-only comparison is used to set prices. (And vendors do divide by 3-5 to get the annual fee.)

This causes two problems...

First, this causes vendors to underprice their offering because they haven't backed out their infrastructure costs. (This assumes the value delivered by the product and services are roughly the same.)

Second, the underpricing means capital needs are mis-estimated because the cashflow breakeven point occurs later than than expected.

If you put together this, what you describe in your post and the (apparently) suicidal price competition, the financial future is rosy only to those who have deep pockets.

The logic of the argument is undeniable, SaaS does indeed bring some very big benefits over on-premise. And when someone like Phil says it, people have to stand up and take notice :). I would add some more cost and financial benefits of SaaS:-

Support costs - You don't have to hire and train someone for an in house IT helpdesk.

Increased cash flow - Cash outlays are in small but recurring amounts, making for increased cash flow, which of much importance in these constrained times.

Reducing risk of investment - Although the cost of opting out of a SaaS solution is certainly not zero, it is a lot lesser than on premise software.

I agree 100%. The long term cost benefits of SaaS are usually ignored in these calculations.

Phil Wainewright blogs about how businesses are using the Web to get better plugged into today's fast-moving, digital economy.

Phil Wainewright

Phil Wainewright specializes in on-demand services View more

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