The Business Case for SaaS

I am often asked how to put together the business case for Software as a Service (SaaS) and if the traditional Return on Investment (ROI) metrics is the correct way to look at SaaS offerings. The question is very relevant as organizations affected by the economy now must leverage the reduced human and capital resources at their disposal.


30 June 2009

I am often asked how to put together the business case for Software as a Service (SaaS) and if the traditional Return on Investment (ROI) metrics is the correct way to look at SaaS offerings.

The question is very relevant as organizations affected by the economy now must leverage the reduced human and capital resources at their disposal.

Interestingly, to answer the question of a SaaS solution's ROI we must first calculate the value of enterprise software and hardware investments, which is called the Total Cost of Ownership (TCO).

Total Cost of Ownership (TCO) modeling is a tool that systematically accounts for all costs related to an information technology (IT) investment decision. TCO models were initially developed by Gartner Research in 1987 and have been widely adopted. Simply stated, TCO evaluates all direct and indirect costs incurred throughout the life-cycle of an IT asset, including acquisition and procurement, operations and maintenance, and end-of-life management.

TCO contemplates the total cost of: hardware acquisition cost and warranty expenses; software licensing and maintenance costs; people costs for development and maintenance; and resources required to support a platform over a certain operational time period. For example, if we looked at the first 72 months of a software system implementation, we typically would see significant capital costs for acquisition of hardware and software in the first 18 months and then maintenance and support costs over the remaining 54 months.

Surprisingly, the "maintenance" costs almost always overshadow the initial development estimates as the scope and functionality of the system continues to grow. It is not atypical to see a software project that started with a 25 person development and testing team to retain 20 people to "support" the platform and enhancements on an ongoing basis. There are also additional "hidden" costs of hardware upgrades and software platform add-ons, which can easily double the initial licensing estimates.

In my experience, the cost of recurring support of an in-production platform is about 60% of the first year's capital expense. So the TCO of that system over 6 years is easily 4X the initial investment and can be up to 8X the initial investment if significant upgrades and enhancements are a part of the execution strategy. I don't think any reasonable business person would want to say: "We agree to pay to develop and upgrade different versions of the same application over the total life at four to eight times the original cost to keep up with user requirements and technology."

Why not just pay for what you use, when you use it and get all the upgrades and updates as part of the use fee? You get to drive the latest model of the car-not even every year but every quarter as new features are deployed to all users. And all you pay is your annual or monthly fee for use!

This is the fundamental metric for making a decision to implement a SaaS solution. In other words, you must decide how much you will pay to develop and maintain a licensed software product versus what you will pay for a subscription to a SaaS platform.

Another important metric when considering SaaS solutions is Time to Value. This metric addresses how long it will realistically take to acquire, customize and deploy an application so that it generates value for the enterprise. Traditionally, a new application requires 9 to 18 months of time to acquire hardware and software. This is the time when the capital is sunk into the project with no return to the enterprise. With the SaaS model, a company not only avoids sunken capital costs but also saves time, since the typical deployment time is a matter of few weeks to few months. Thus, the enterprise starts to reap the benefits of this new innovation much more rapidly. When one adds in the opportunity cost and the accelerated business case, the SaaS model become convincing to all levels of the business - not just the technical executives.

To me, choosing a SaaS model means "I pay for it when I use it, I get to use it much sooner and I get to use the most up-to-date technology without worrying about outdated hardware, software and human resources."

To a company considering SaaS versus a traditional software model, the total cost of ownership is reduced more than 66% and there is an immediate time to value. Even more, capital dollars can be invested into the core areas of business to create more value for the enterprise. It's a wonder businesses still buy through the traditional model.



Fahim Siddiqui

Fahim Siddiqui

Fahim served as Chief Executive Officer at Sereniti, a privately held technology company. He was also the Managing Partner of K2 Software Group, a technology consulting partnership providing product solutions to companies in the high tech, energy and transportation industries with clients including Voyence, Inc., E-470 Public Highway Authority and Tellicent, Inc. Previously, Fahim held executive and senior management positions in engineering and information systems with ICG Telecom, Enron Energy Services, MCI, Time Warner Telecommunications and Sprint.