Is SaaS Cheaper Than Licensed Software?
Most people quickly answer this question in the affirmative. I certainly do. However, there are people out there who aren't sure. They look at the monthly cost of a SaaS application and compare it to the equivalent licensed product over an extended period of time. Given enough time, you will eventually hit a point when the SaaS product appears to be more expensive. Let's look at it from the perspective of the total cost of ownership (TCO).
The true cost of a licensed product is much higher than just the software. Here are other things to factor in:
- Hardware costs: You have to either buy machines or add your software to existing servers and manage them. If it is a mission-critical application, you will probably need dedicated machines and back-ups.
- Additional software costs: You will most likely need an OS, application server software, a database, monitoring software, etc. Many of these products are open source now, but there are still associated costs.
- Implementation costs: In my experience, the implementation costs associated with a behind-the-firewall solution are always higher than those of a SaaS application. There is simply more to do. You will either pay consultants or use your own valuable resources and time to worry about installing software, integrating it, building servers, configuration, etc.
- Maintenance labor: If you have in-house software, there is going to be some level of effort required to keep it happy. Your IT people will need to take care of it, which will keep them from doing more value-added activities.
Another huge factor here is the ability to get the latest and greatest technology. Once you install software in a data center, it becomes more difficult to upgrade and maintain it (especially if you customize it). In such a case, you will be stuck with old software that you will have to replace in the same time frame described above. In other words, unless you are absolutely sure, beyond a shadow of a doubt, that your licensed software is going to meet your business needs for 5 years or more, then SaaS might make financial sense.
Let's look at a real-world example. A 100-person company has been sharing files via email and internal servers. The executives have finally concluded they need to join the 21st century and put a solution in place. One option is to implement SharePoint. Here is a rough estimate of what that might cost:
Year 1
MOSS server = $4,500
User client access license = $90
Hosting and maintenance = $5,000
Implementation and developer support = $20,000
Total = $29,590
Year 2 and on
Hosting and maintenance = $5,000
Developer support = $3,000
Total = $8,000
I know of a SaaS solution that has 80% of the file-collaboration functionality of SharePoint but charges $850 per month for 100 users.
Year 1
SaaS fees = $10,200
Implementation support = $10,000
Total = $20,200
Year 2 and on
SaaS fees = $10,200
Total = $10,200
It would take over 4 and a half years before the licensed software became cheaper. By that time, I'm quite sure there would be another solution that could replace SharePoint, and the cycle would start again. We can quibble about the numbers, but you get the point. Plus, the numbers don't reflect that the SaaS solution is likely to improve and innovate faster than the licensed software by a significant amount.
What do you think? Have you done this analysis, and what did you conclude?
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I completely agree. The numbers add up. One other factor that is of huge importance: With SaaS you're reducing your carbon footprint big time (minimum 50%). If you're using installed solutions and maintaining hardware, you're probably only using 20% of your server capacity and 35% of your storage capacity at any given time. That is a huge amount of kilowatt hour waste (plus you're probably using out-of-date equipment wasting even more kwh). Because of the high performance requirements of SaaS solutions, SaaS companies use the newest, most energy efficient machines on the market. And multiple-tenants on a single SaaS platform drive even more energy efficiency (sort of like carpooling).
One last point: If you're using an installed solution, about 70% of your IT team is focused on upkeep--not you're core business! This issue will become particularly acute with recessionary downsizing.
The fundamental question you have to ask yourself: What business am I in? Is it maintaining installed software and hardware that helps facilitate a business process? Or is it selling more of the product that truly differentiates your company?
I think all of your categories are accurate, and I'd just expand a bit on the last one, maintenance labor. Managing humans is a wildcard when it comes to expense and uptime, and is one category where the whole thing can go awry. Servers tend to crash at the worst times (nights, holidays) and you'd have to factor that in to the expense, or potential expense, in the licensed product scenario. If the crash happens to coincide with your sysadmin having the flu, it might just be a really bad time. And, what's the opportunity cost of not being able to get to your data? Not all SaaS companies have great uptime records either, of course. We're a SaaS company that's done the calculations ourselves, and we even decided to outsource our datacenter. You can read more about our philosophy about SaaS ROI at http://www.trackvia.com/blog/.
It is not just these costs but sometimes a revenue implication.
Our largest client moved their entire 500 person development team to our SaaS delivered system and even though we saved them a fortune against the traditional systems the real benefit the CEO outlined was the removal of the downtime they had each month due to virus attacks, server issues etc
This impacted their ability to finish projects and directly effected revenue. It translated to millions in financial benefits.
Don't forget the vast majority of purchased software is never fully utilized; a rarely discussed assumption that is chronic through-out the software industry. Customers always buy more than they actually use because they need to cover a wide-range of scenarios during the up-front planning & capital approval stages and follow the licensing schemes laid out by the vendors.
Most SaaS providers charge a monthly fee based on the actual number of active accounts, bums in seats, people using the software which always keep expenses inline with the minimum monthly business requirements. A significant consideration in these uncertain times.
What I think you've failed to consider is the potential cost of using inferior software. If the SaaS software has 80% of the functionality, does that mean that your 100 users are 80% as effective? What if the SaaS solution offers just 80% of the performance?
Not fair?
For argument's sake, let's assume that the SaaS solution offers 100% of the functionality at 95% of the performance. 100 employees @ $25 / hr + 20% overhead * 1 hr per day * 5% waiting around time = $39K / year. That's the entire cost of the traditional IT solution covered in just one year.
Of course if your SaaS solution turns out to be BETTER than the traditional in-house solution, that changes everything!
> I know of a SaaS solution that has 80% of the file-collaboration functionality of SharePoint
Sigh, like those 100 different web groupware solutions which have everything and more but lack a reasonable Outlook integration (20% ...).
Sure, 80% is often fine for a LOT of people. But in a 100 people company there will be 5 or 10 pals who _actually need_ (often 'are used to and are VIP') the remaining 20%. This quite often kills the whole project in the first run.
Thats not really the primary aspect of your article, but it might explain why the 80% SaaS solution _has to be_ cheaper in this specific case. (a more viable example would be comparing SharePoint with hosted SharePoint)
PS: of course the percentage is quite fuzzy, but I always listen up if a product claims 80% or even 90% of something. Usually sounds like they left out the hard parts ..., no offense ;-)
There are plenty of other reasons to choose SaaS besides just price. For example, many organizations value:
* Quick deployment times
* Automatic upgrades
* No need to purchase hardware that needs to be maintained and upgraded
* Pre-integration with other vendors in the application's ecosystem
* Being able to access the application from anywhere
The overall theme here is "Less Hassle". I have worked for several organizations that spent a ton of money on purchasing, configuring, maintaining and upgrading Exchange servers. At Zendesk, we just use Google Apps Mail, which is now SAS-70 Type II complaint and you Google guarantees 99.9% uptime. That's a lot better than I have experienced with any organization running Exchange in-house.
Zendesk's product is help desk-as-a-service. Besides our pricing, customer love us for our simplicity and straightforward approach. They can get up and running in minutes and can customize their business rules along the way as they get more sophisticated.
SaaS is often cheaper than buying a perpetual license for a package you install in-house, but it's not the real reason why SaaS is the future of software.
SAAS is great and here to stay for good. Salesforce just reported a great quarter but I really wish there were even more bigger players involved :)
Mike
http://www.wannadevelop.com/
Jason,
Agree with your overall approach.
Just to confirm your SaaS pricepoint. Microsoft Online Services offers SharePoint Online starting at $725/month for 100 users : http://www.microsoft.com/online/estimator/default.aspx
Elements that are also highlighted in earlier comments is that you can also factor in the benefits of the speed of implementation. For 100 users you can simply 'switch'on the environment for 100 users. Ofcourse your point on implementation still remains valid.
There are however also things to consider that can be seen as benefits for an on-premise environment :
- Richer functionality through the ability of customisation /add-on applications
- Integration of SharePoint with other backOffice Apps
All hypothetical, but just to illustrate that TCO is just one of the factors in your overall decision for on or off premise / SaaS ...
There is one major factor missing here. Microsoft has promised that every 2-3 years they will upgrade their software. Typical cost of a new version upgrade is 1/2 of retail price. This blows the cost equation out of the water. Microsoft has to find a way to make money after they sell the software, so major version upgrades are the way. So, Upgrade SharePoint, upgrade Office, upgrade OS, upgrade SQL Server, etc.. So on premises software is orders of magnitude more expensive. As for customization and integration, I would argue that there are many Niche SaaS Enterprise applications which need very little customization, unlike SharePoint which ALWAYS needs customization.
And don't forget the time value of money in the calculation either which further tips the calculation in favor of SaaS. Licensed software costs tend to be more front-loaded and a dollar spent today is worth more than a dollar spent in a year.
Great discussion everyone. Here are a couple of points that leap to mind.
#1 Good point. Thanks for throwing out the green benefit :)
#2 Absolutely. Tried to keep the model simple, but there are many factors to include to have a really accurate model.
#3 Agree
#4 See #5
#5 Nobody said the software was inferior. It is common knowledge that most software contains a varying degree of features that users never touch. The 80/20 rule is common knowledge and when a software package (like the one in my scenario) has the 80% that people use, it is actually better because it isn't cluttered with a bunch of stuff. Furthermore, easy-to-use, simple software helps with user adoption which I've discussed here on RWW as well.
#6 Would love to hear some examples of when the extra 10%, which usually accounts for significant software development time and cost, is really necessary for solving a business problem.
#7 Amen
#8 Trying really hard with our product :)
#9 Thanks for the clarification. I looked on the MSFT website and saw the Office Sharepoint Server 2007 for $4424. There are certainly benefits with using Sharepoint and my intent was not to pick on Sharepoint.
#10 True. This is part of the hidden costs of licensed software.
#11 Absolutely. See #2
Thanks everyone. Keep those comments coming.
Most of what has been said so far is pretty accurate, but not complete. A few weeks ago, I asked a similar question of two groups of IT professionals and received about 20 comments, some of them with additional follow-up comments. The question, and their replies can be read here: http://www.elegantsmbsolutions.com/smb-it-platform-costs/the-initial-linkedin-dialogue/.
Ultimately, each situation must stand on its own criteria. One important one that hasn't been mentioned so far is compliance to regulations, especially privacy and perhaps HIPPA and other industry-specific regulations. Another important one is: Who is on the hook if something goes wrong? Expanding that, if more than one vendor is providing the solution, each is likely to say the other is to blame.
Hope this helps. I expect I will comment again when I have more time. This topic is germaine to SMBs everywhere.
Boyd Carter
Not everyone wants the latest and the greatest. Ain't you wishing you could just go and buy XP and not Vista?
I have customers who ask for new features and changes and I have customers who ask to keep it as-is and don't change anything. Can't please everyone.
Strange that a lot of people can calculate how many miles to the gallon for many models at the same time, compare diesel Vs. Gas cars, and still not manage to calculate like you have for their company's benefit.
We have a home grown product called iMorfus which we upgrade for free whenever we create custom modules for other clients - as of now, it's installed on client servers (existing, nothing earth shaking besides IIS required), and we upgrade installations for free (besides customizing upgrades for clients). It's a hybrid SaaS model we provide it in.
Yet, people keep harping on about Sharepoint. Agreed, as it's an MS product, it integrates very well - but how much would you pay for Customization? Also, I honestly doubt if MS can help you iron out policies that may not be very feasible. As a company we also help clients to do that. Considering the facts above, and the calculations in this article, I would honestly say - Go with SaaS.
Maybe not us - but go with SaaS none the less. If you don't believe me, ask a friend from a large company what Legacy integration means.
In comment 13 above, I mentioned that the "real world" example was incomplete. The example described the additional cost of adding MOSS to the existing IT Infrastructure. To use MOSS and to provide a TCO, you must identify all costs that must be incurred in order to add MOSS to the solution stack and operate within that solution's boundary. In order to compare the Microsoft TCO for this solution to an Open Source TCO for the same solution, you must also identify all costs that must be incurred in order to HAVE an Open Source solution.
For example, start with the 100 Users. For a Microsoft solution, they must have a Windows PC with a recent version of Microsoft Office, Outlook and browser. What will that cost be compared to a Linux PC with a browser installed (assuming everything else exists "in the cloud").
Another example: What must be in the Microsoft solution stack in order for MOSS to perform as expected, compared to what must exist in the cloud for that solution to perform as expected.
We are using a Microsoft solution as a "licensed" solution. What about other licensed solutions. IBM's Lotus Foundations Start seems to be bridging the gap between Microsoft and Open Source. See this article at: http://www.microsoft-watch.com/content/server/ibm_to_microsoft_its_small_biz_server_war.html. I believe Lotus Foundations Start is providing a superior TCO for more solution-sets than either Microsoft or Open Source.
The problem with simple questions is that they require complex answers. This "simple" question is too imprecise for any answer to be "the right one".
Boyd Carter
Software-as-a-Service or “SaaS” provides many benefits to companies that prefer to subscribe to a service rather then purchase and maintain the systems
http://www.apps4rent.com/index.htm
SaaS (Software as a Service); Get Microsoft Exchange 2007 software as a service. $6.95/Box/Month - 1 GB, Hosted, Free Activesync, Free Outlook 2007, 24/7 Phone, Chat , and Migration help. Also look for Sharepoint 3.0 ($8.95/mo) at
http://www.apps4rent.com/software-as-a-service.html
have customers who ask for new features and changes and I have customers who ask to keep it as-is and don't change anything. Can't please everyone.
I see there's about a 20% different in annual price, there's also a 20% difference in functionality, depending on the company needs that 20% could tremendously outweigh the available 80%.
But even more important there is a security issue revolving around SaaS that is not apparent in this analysis. Hosted services often come at a much higher rick factor. Without use of a corporate VPN there are many ways important company data could be hijacked.
Although many SaaS may offer SSL it's still much more difficult to manage and monitor potential hackers and rogue employees.
Thanks for the excellent post- we have linked to you in a recent article describing the costs of managing source control in house vs. outsourcing to a SaaS solution.
We surveyed 241 technology companies (now SaaS customers), and found they spent on average 3,000 hours or $160,000 on maintaining in-house Software Change Management (SCM) systems each year. Enterprises easily spend five or ten times that (article breaks this down by activity). The survey data tells us that by using a hosted software version control provider, customers are able to reduce relevant costs by more than 90%.
The economies of scale afforded by multi-tenant hosting cuts costs for provider and customer alike. It's one of those rare win-win situations that a technological shift (SaaS) can offer to all.
At the risk of offending the author - who I've actually met (yes - in person even) and have a huge amount of time for, I've gotta say the argument has more holes than a vintage gouda.
Notwithstanding that I agree entirely and discuss the fact over here - http://www.cloudave.com/link/is-saas-cheaper-who-cares-its-better
Nice!
All,
Great commments. This is clearly a hot topic. I do suggest anyone looking to go deeper on SaaS should check out CloudAve, which is the blog Ben posted in comment 22. They focus on SaaS exclusively and talk about business and technical issues. My intent was not to go deep, and merely to contrast the license versus SaaS at a very high level.
If your company is in hosting software, then buy your own software.
All other companies are better off with a Saas solution as it is not their core business (operating, upgrading, hardware, ...).
It is obvious your company doesn't maintain the cars in use, thus the same should apply for managing software and hardware that are at least as complex.
The above pricing seems to be a bit high. There are a lot of sales analytics and sales metrics tools available, which is mainly centered on Saas Business intelligence. Anyways if we are getting by paying for these sotwares, it is fine.
I guess that host data center happened to be collocated or maybe rented data center floor space to the 100 person company. If not, then maybe the 100 person company is using a dial modem for email connectivity. Maybe they upgraded to one of those hot DSL or Cable modem business lines so all of their email can be easily posted on you tube and face book.
Maybe the bought one of those cheap old T1s to avoid the hole in the firewall that would expose its mission critical and trade secrets to you tube postings. Would you guess about a grand a month.
Maybe Saas in the ASP model is doomed to ASP results in the small business sector.
No one wants to pay a phone company $24,000