SaaS is touted as a budget saver for SMBs, but a new report reveals that on-premise versus on-demand costs must be viewed from several angles.
Posted Oct 24, 2006
Over the past few years software-as-a-service has enjoyed an adoption explosion for one primary reason: It's cheap. However, a new report from Forrester Research, "The Financial Economic Impact of Software-As-A-Service," advises all companies to consider more than the price tag when making the decision to purchase an on-demand or on-premise solution. The report assesses the price of SaaS versus on-premise options from many angles using Forrester's Total Economic Impact model; in the end, with either on-premise or on-demand, a company at once creates and gets rid of different risks, benefits, and costs.
"I think a lot of people don't look at long term cost or don't take a long, deep look at cost when they're looking at software-as-a-service. Typically we don't see a big buying committee or the CFO signing off on it, or any of those other things that would lead a company to do a really detailed evaluation of what it is getting into," says Liz Herbert, senior analyst at Forrester and author of the study. This is a crucial step for all companies--SaaS is most often thought of as a better option for SMBs, but it is important for enterprise companies to weigh the on-demand option as well.
The study found that 26 percent of enterprises use SaaS and an additional 21 percent are interested in doing so. Some of the positives and negatives of SaaS versus on-premise, according to Forrester, are set up like so: SaaS is cheaper to implement initially, but depending on the length of use it can be more expensive over time as monthly subscription costs accrue. On-premise software can typically be customized in greater detail, however, this customization process is often more costly, difficult, and takes more time to complete. Control is also a factor. SaaS offers less control, but on-premise demands a company to put a great deal of IT's resources into maintaining control inside of the solution.
These and other trade-offs must be carefully weighed when making a buy/implementation decision. If a company is considering a solution for budget reasons, it should factor in the cost of training, integration, support, and customization. The report points out that cost "does not just include licenses." Additionally, if time to market is important to a company, SaaS provides a clear advantage due to its short implementation time. However, if vendor or business continuity risks pose a large threat to an organization, on-premise is a much safer bet.
Although the cost and benefits of hybrid (part SaaS/part on-premise) solutions are not formally evaluated in the report (there are a limited number of companies providing this option), Herbert believes that a hybrid might provide a good middle ground for companies wishing to get the best of both worlds. "I think it makes a lot of sense and long term, I think we'll see a lot of companies offering this as an option."
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