• September 21, 2006
  • By Marshall Lager, founder and managing principal, Third Idea Consulting; contributor, CRM magazine

The Last Word on SaaS TCO?

Many arguments about the relative business value of hosted and installed applications come down to the question of which costs more in the long run. Forrester Research's latest report provides hard data for medium and enterprise businesses, based on its Total Economic Impact (TEI) model. The findings, presented for businesses with 50, 100, 250, and 500 users, indicate compelling benefits over time for smaller businesses using SaaS, but larger enterprises are likely to do better with installed code. It's still a split decision, according to "Comparing The ROI Of SaaS Versus On-Premise Using Forrester's TEI Approach." A company of 100 to 249 employees, including 50 users, will provide better TEI over a 10-year period while incurring lower absolute costs: a typical SaaS deployment would cost $1,680,000 and have a value of $882,500, as compared to installed software's $2,008,000 and $429,500, respectively. Meanwhile, a company of 2,500, including 500 users, is still going to do better with on-premise apps. With SaaS, such an enterprise would spend $13,700,000 for a TEI of $15,831,250, but with installed software the TCO and TEI would be $13,732,500 and $17,673,750. The most notable differences come at either end of the spectrum. "Forrester's analysis shows significant TEI for SaaS deployments in enterprises with 50 and 100 users and for on-premise deployments in enterprises with 250 and 500 users," says Ray Wang, principal analyst for Forrester Research and report author. But there is still wiggle room, depending on varying factors like cost, benefits, flexibility, and risk. "In addition, a more accurate depiction requires enterprises to consider the number of users per site and not the total number of users. This case applies specifically to enterprises in which SaaS is deployed at smaller subsidiaries or emerging markets while on-premise is deployed at the headquarters or parent entity." The numbers show that the inflection point, where one deployment mode becomes more costly to the company after a period time, only appears in larger implementations. In the case of 250 users and 500 users, representing a company of 1,000 and 2,500 employees respectively, on-premise apps have a better TEI after year six and a cumulative cost advantage after year 7. "This has really changed my thinking on the topic," Wang says. "For a long time I've been a proponent of on-premise over SaaS. While each individual customer has to do their own math, it's clear that SaaS has an advantage for smaller organizations." There should no longer be a question whether SaaS is a valid delivery model for business applications, but individual businesses must still perform due diligence to be sure it's the best choice for them. "While adoption of software-as-a-service has become widely accepted in CRM, usage in ERP continues to play catch up. Consequently, firms evaluating various deployment options should consider evaluating both SaaS as well as traditional on-premise options beyond the pure cost tradeoffs," Wang says. "Depending on the business models and economic drivers, differences in business benefits, flexibility, and risk are important when comparing these deployment options." Related articles: Evaluate On Demand
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