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Counting the cost of SaaS

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5th Jan 2007
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If the analysts are to be believed, then the Software as a Service (SaaS) bandwagon is now unstoppably underway. From its roots in the small and medium enterprise (SME) space, more and more enterprise level organisations are sitting up and taking note. With all of the leading CRM vendors finally making SaaS noises to a greater or lesser degree, it’s now a case that SaaS is an inevitable item on the corporate IT agenda – if Steve Ballmer and Bill Gates reckon it matters, then there’s a strong case to say that you better be looking into it as well!

From the point of view of customer management executives within organisations that means that if you haven’t already been asked about SaaS and its relevance to your company then the chances are you will as soon as the CEO or CFO reads that latest interview with Ellison, Benioff or one of the other SaaS advocates in the in-flight magazine on their next transatlantic crossing. So what are you going to tell them?

You can of course trot out the usual clichés about SaaS. You can talk about being able to reduce the emphasis on maintaining applications in-house and freeing up resources to focus on core business activities. You can talk about the ability to exploit the internet as a corporate business platform. You can even talk about being able to reduce your dependence on that perennial overhead, the IT department.

But in the end it’s going to come down to ROI. How much is it going to cost and how quickly are we going to see a return on that layout. This is where things are beginning to change and you’re going to need to adjust your thinking somewhat.

To date the popular viewpoint has been that SaaS short term costs are lower to begin with, but that over time the model may turn out to be less robust in terms of ROI than SaaS evangelists would have you believe. The analogy is with property. If you move to a new town for 6 months, you probably rent accommodation; if you’re planning to move there for 6 years, it’s probably more cost effective to buy.

Exactly where this tipping point comes with SaaS is a moot point. Various analyst firms have postulated a point anywhere between 3 and 5 years after roll out. As a CRM director, you will undoubtedly be asked by the board to quantify this. Where you choose to draw a line in the sand depends really on which analyst firm you choose to believe. So what’s the current thinking?

Gartner argues that through 2010, the SaaS model can lower the total cost of ownership for moderately complex CRM deployments by 10 percent to 13 percent over three years and by 4 percent to 6 percent over five years compared to on-premise systems. But the more complex the roll out, the more likely it is that the ROI will not be delivered as expected.

Larger companies have been impressed with the performance, price points and ease of implementation of SaaS applications, said Gartner Vice President Robert DeSisto. "What we are seeing now is that these larger companies are... trying to use SaaS to support more-complex CRM processes and, quite frankly, the providers are not there yet to meet those requirements."

But according to a study by analyst firm Aberdeen Group, SaaS implementation times and ROI cycles are growing shorter in such areas as sourcing and procurement, supply chain management, financial management and product lifecycle management. CRM application implementation takes less than two months and ROI is realized in less than six months, according to a study, which surveyed 631 companies from March to July 2006. "Although the value proposition of SaaS is seductive, companies considering SaaS need to educate themselves on a number of factors to make a solid buying decision," says Beth Enslow, senior vice president of enterprise research for Aberdeen.

At the end of the day, SaaS deployments need to be preceded by a rigorous set of ROI questions just as much as any traditional on premises alternative. And many of the questions you ask need to be the same as well – things haven’t changed that much! Forrester Research has come up with some key issues to consider on this front using its Total Economic Impact (TEI) methodology. The method includes factors beyond just costs, such as benefits, risks and flexibility of the deployment.

What business goals will the application address? Are you out to increase revenue, improve customer satisfaction levels or improve marketing and sales effectiveness? If you don’t know what you want to achieve, then how can you measure whether you’ve achieved it or not? Are you going to judge success based on increased revenue per sales representative or CRM solution costs per customer, for instance?

Don’t forget to think in terms of value-added. If you’re all about cost cutting and containment, then the chances are you will be disappointed – and all too many SaaS deployments to date have started from a cost-reduction premise. Have you considered the additional metrics, such as leading indicators and drill-down comparisons, that you can now use to identify and address the issues that will inevitably arise?

Remember to count everything in your analysis. Include the total internal and external costs of using the SaaS. One of the big selling points of SaaS is the ability to drop supplier and shift to another one. This is certainly easier than swapping on premises vendors, but it will still carry a cost. SaaS applications often include fees for extra features such as mobile and offline access, industry-specific functionality, extra storage and premium support.

“Enterprises with specific needs should place different weights on different categories," says Forrester Research Principal Analyst Ray Wang in the executive summary of a research paper. "For example, an increased cost in a packaged application may be offset by a decrease in risk. Likewise, the value of flexibility for an enterprise in a fast-changing and dynamic market may be worth more than [it would] for an enterprise in a more staid and predictable industry."

In other words, you can check out all the analyst comparisons and predictions that you like, but at the end of the day it’s you who is the person on the CRM frontline of your organisation and you who will have to answer questions from the board about how suitable SaaS is for your specific organisation. Take the analyst guidance as a jumping-off point by all means, but you need to apply the generic thinking to your particular needs in order to reach a satisfactory conclusion.

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