The Hidden Cost of SaaS

[NOTE: This article is the second of a two-part series. Part 1, which appeared in the February 2008 issue of CRM magazine, can be found here.]

Software-as-a-service (SaaS) has arrived; for CRM, even large enterprises are adopting it. The value proposition is well known by now: solid functionality that can be implemented quickly with low costs. But just how low are those costs? Do the economics withstand examination?

Implementation and Infrastructure
For implementation and infrastructure, SaaS does indeed fulfill its value proposition. Implementation costs can be 25 percent to 40 percent of those for an on-premise implementation, as measured in terms of the costs for internal staff and professional services. And the costs for infrastructure can be brought to zero with SaaS.

The degree of cost advantage depends on the degree to which data conversions and system interfaces are required. The requisite skills and effort do not vary greatly between implementations; indeed, the effort for data conversions in a SaaS implementation can actually be more complicated and time-consuming than in an on-premise implementation, due to differences between the current data-import tools available for SaaS solutions and the high-powered ones for on-premise solutions.

Software
SaaS does not necessarily offer software-cost advantages -- at least, not from a multiyear perspective for organizations where on-premise software is a viable option. Typical annual SaaS subscription fees are considerably higher than the annual maintenance fees for on-premise software. Thus, over the medium term, payments to a SaaS vendor will approach and exceed those to an on-premise vendor. The inflection point typically occurs after five to seven years.

Unrealized Value
For realizing CRM value and fulfilling an organization's CRM vision, the characteristic strengths of SaaS can present substantial shortcomings. The relatively limited scope for configuring or customizing a SaaS initiative makes for low-cost, fast-paced implementation. However, this limited scope and implementation may not support the requirements, may not include the automations, and may not generate the intelligence (i.e., reports and dashboards) that are critical to the business.

In other words, SaaS may actually impede the ability to realize full entitlement to CRM value. The cost is not a direct cost, but rather an opportunity cost in terms of lost CRM benefits, at least for enterprise-scale organizations that can afford on-premise solutions and might therefore be able to achieve greater CRM benefits from the greater functionality available from those solutions. For these organizations, the choice of SaaS may postpone or even prevent the realization of substantial benefits in terms of internal operations or customer experience.

Another concern: As with most every aspect of SaaS, the support model evolved in response to the needs and means of small and midsize businesses (SMBs). SaaS support is typically provided by a contact center that provides undifferentiated service to the entire customer base. For the enterprise that is pushing the boundaries of SaaS capabilities, that service model may prove unresponsive when "bugs" are encountered. In addition, for the organization with thousands of end-users, the undifferentiated support model may impede the ability to collect end-user feedback and may affect the ability to meet end-user expectations for support. This support model does not typically provide tools for monitoring or tuning performance. More important, it also presents risks in terms of system availability and data security.

SaaS costs are all relative. For SMBs, for whom on-premise software typically is not an option, SaaS offers affordable, enterprise-caliber functionality. For enterprises, SaaS can be valuable on either a permanent or an interim basis. The key to SaaS is to examine the not-so-well-known costs in addition to the well-known benefits. Basing adoption only on short-term considerations can be an expensive long-term mistake, even in the relatively inexpensive world of SaaS.

J. David Lashar (dlashar@us.ibm.com) is an associate partner in the CRM practice of IBM Global Business Services and the leader of the IBM SaaS Center of Excellence.

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