This is a blog post from ReadWriteWeb, where I occasionally contribute.
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 an equivalent licensed product over an extended period of time. Given enough time, you will eventually hit a point where the SaaS product “appears” more expensive. Let’s look at it from total cost of ownership (TCO) perspective.
The true cost of a licensed product is MUCH higher than just the software. Here are other things to factor in:
- Hardware costs – You either have to 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, database, monitoring software, etc.. Many of these products are OpenSource 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 a SaaS application. There is simply more to do. You will either pay consultants or use your own valuable resource time to worry about installing software, integrating it, building servers, configuration, etc..
- Maintenance labor – If you have software in-house, there is going to be some level of effort required to keep it happy. Your IT resources 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 this case, you will be stuck with old software that you will have to replace in the same time horizon as we described above. In other words, unless you are absolutely sure beyond a shadow of the doubt that your licensed software is going to meet your business needs for 5 years or longer, it might make financial sense.
Let’s look at a real-world example. There is a 100 person company that has been sharing files via email and internal servers. The executives have finally concluded they need to join the 21st century and 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/Developer Support – $20,000
Total – $29,590
Year 2 – X
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 that charges $850 per month for 100 users.
Year 1
SaaS Fees – $10,200
Implementation Support – $10,000
Total – $20,200
Year 2 – X
SaaS Fees – $10,200
Total – $10,200
It will take over 4 and a half years before the license software is cheaper. By that time, I’m quite sure there will be another solution that replaces SharePoint and the cycle starts again. We can dither 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?
