Software-as-a-Service Can Save You Money -- Even in the Long Term

Challenging a commonly held belief that the real benefits of software-as-a-service (SaaS) are short-term -- mostly restricted to the first few years of a given deployment -- a recent report from Forrester Research suggests that SaaS pricing models may also offer the potential for better long-term return on investment (ROI) than their on-premises counterparts.

The Forrester report -- based on surveys with SaaS-solution vendors and users, past inquiries, and case studies with clients of Hewlett-Packard, Salesforce.com, and Workday (a provider of on-demand human resources software) -- identifies long-term benefit in three aspects of a SaaS initiative:

• rapid deployment of applications, releasing enterprises from the need to buy hardware;
• access to ready-to-go, preconfigured solutions that firms can turn on in days or weeks with minimal configuration; and
  
• better user-adoption rates thanks to familiarity with Web-like SaaS interfaces, which can allow businesses to forego expensive training.

Some of SaaS's other financial benefits, however, remain harder to quantify. "It doesn't affect only the existing members of an organization, who could lose anywhere from a couple of hours to a couple of days to formal training or having to call or look up when they can't do something," says Liz Herbert, a Forrester senior analyst and co-author of the report. "It has an effect every time you bring new hires on board."

Forrester also credits SaaS for reducing the need for information technology and administrative support -- responsibilities that might otherwise have meant hiring external service providers. Instead, SaaS providers often handle bug fixes and patches seamlessly. "That kind of a factor can make a significant impact in how much benefit is derived from SaaS," Herbert adds. "If you can eliminate your outsourcing relationship [with external support providers], it will likely have a significant impact."

To illustrate cost differentials, Forrester utilizes its "total economic impact" analysis framework to assess different SaaS solutions -- in CRM, information technology management, and human resources management. (Those three sectors roughly correspond to those served by Salesforce.com, HP, and Workday, respectively.)

For the CRM solution, Forrester's model initiative cost $923,701 and only produced benefits valued at $846,402 -- a negative cash flow of $77,299. By the second year, however, cash flow turned positive, to the tune of $147,548, and that figure only increased in each subsequent year of the model. By the fifth year, the company generated $344,632 in positive cash flow, bringing the cumulative five-year benefit to $916,780.

Still, Herbert cautions that not every company utilizing the SaaS model in place of an on-premises solution will save money over the long term. The outcome, she says, depends on the expenses and circumstances particular to the company in question -- and that requires some calculation.

Forrester declines to broadly estimate the percentage of companies that might expect to derive long-term benefits from SaaS, citing the need for statistical research aimed at determining the breadth of relevant users.

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