The Economics of SaaS

Software as a Service (SaaS), or on-demand software delivered to organizations via the web, offers as much confusion as opportunity these days for business owners and IT departments, particularly around cost in this economic environment.

Sixty percent of the Fortune 500 size organizations evaluating SaaS consider lower operational costs as a key advantage, while 38% are hoping for lower capital, or capex costs. But does SaaS offer these benefits?

To find out, the Corporate Executive Board modelled the costs and benefits that appear in real-world software projects. For instance, for a 500-user implementation with minimum customization or integration, SaaS costs can be 20% less over three years compared to an equivalent on-premise solution. The difference in capex costs was more modest, with SaaS coming in at only 10% less than on-premise solutions. The up-front savings from SaaS stem from lower infrastructure and deployment costs, but business change costs remain the same and integration costs to implement the software are slightly more. In addition, in the second and third year, the annual subscription costs for SaaS eat into much of the operational savings organizations receive.

When factoring in more customization and integration, the cost advantage of SaaS, over on-premise, falls to 11%. Similarly, when the project is scaled up from 500 users to 2,500 and 5,000 users, SaaS was only 3% to 6% cheaper than an on-premise alternative.

For organizations interested in fully outsourcing their capabilities however, how do SaaS costs compare to those needed to deploy Infrastructure as a Service (IaaS)? Looking again at the customized 500-user example over three years, SaaS was only 7% cheaper than a IaaS–based alternative.

SaaS and IaaS have their niche based on the scale, customization, and control required for the application. However, these findings suggest that as the offerings mature, organizations should view them as complements to traditional delivery models. As the Corporate Executive Board study found, there is little difference between SaaS and on-premise costs. Therefore, organizations evaluating whether or not to implement these offerings should focus on other factors outside of cost alone, such as functionality, deployment speed, and risk to choose the road that is right for them.

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