IT managers “underestimate” software-as-a-service costs

IT managers should not assume that software as a service (SaaS) is cheaper than on-premises software, according to Gartner Inc.

The analyst firm said that there has been a “great deal of hype” around SaaS and that businesses had misconceptions about its cost.

SaaS is cheaper during its first two years of use, Gartner said, but the total cost of ownership over five years would be lower for on-premises software. Part of this was from an accounting perspective, because the capital assets for the software would depreciate.

Calling for businesses to have a “reality check” on SaaS, Gartner analyst Robert DeSisto said, “The concern is that some companies are actually deploying SaaS solutions, based on these false assumptions.”

In its report “Fact-Checking: The Five Most-Common SaaS Assumptions,” Gartner also warned that SaaS was not necessarily faster to implement. While vendors quote 30 days as the normal implementation time, some software still takes up to seven months to set up, it said.

Businesses are equally wrong to assume that they’ll be billed according to usage, Gartner said. In “the vast majority of cases,” it explained, companies were pushed to sign predetermined contracts with fixed fees.

But companies also underestimated SaaS, the report stated. Many felt they could not integrate the software with on-premises applications or data sources. But data could be initially loaded to the SaaS application, then updated regularly or updated in real time using Web services. In addition, Gartner said, businesses need to remember that SaaS applications can be customized and are no longer only for basic functions.

SaaS spending on the rise

Meanwhile industry observers say spending on software-as-a-service applications is growing at double-digit rates, as users seek to benefit from what they believe will be the relatively low cost of implementing Saas technologies.

To be sure, SaaS is still very much a niche market from the standpoint of both revenue and user adoption levels. For instance, market research firm IDC expects $12.4 billion in SaaS spending worldwide this year – a drop in the bucket of the overall IT market.

But two weeks ago, IDC raised its projected SaaS growth rate for 2009 from 36 per cent to 40.5 per cent. The firm said recent surveys indicated that would prompt more users to choose subscription-based services over on-premises applications. IDC also forecast that nearly 45 per cent of U.S. companies will spend at least one-fourth of their IT budgets on SaaS by next year, up from 23 per cent in 2008.

“I think SaaS has an element of being recession-proof,” said Forrester Research Inc. analyst Ray Wang. Forrester last month released a report on the subscription revenue growth rates at Inc. and nine other SaaS vendors; most reported year-to-year gains of more than 40 per cent in the third quarter of 2008.

Wang did offer some caveats about the SaaS market, noting that many corporate users are proceeding cautiously, with small deployments and short contracts – even month-to-month agreements. “People are likely to be commitment-phobic,” Wang said.

More often than not, users aren’t certain whether it would actually cost less to use a SaaS application than run an in-house one because they don’t have a good breakdown of the IT costs associated with supporting individual apps. In addition, developing precise cost comparisons can be difficult.

For example, when companies move to SaaS, they often shift control of applications to the business units that use them. A business unit may claim that it will get a time savings if it can deal directly with a software vendor instead of having to go through the IT department. But it isn’t easy to quantify such savings.

In addition, there’s the question of whether SaaS users are trading off the short-term benefits of no longer having to run applications internally in return for some potential long-term financial pain, in the form of ongoing subscription fees.

Despite such issues, SaaS technologies are now being adopted by some very large organizations, including the U.S. Army and Sonoco Products Co., a $4 billion maker of packaging products in Hartsville, S.C.

Jennifer Roberts, Sonoco’s supply systems manager, said she was able to make an apples-to-apples cost comparison of SaaS vs. in-house software. And in Sonoco’s case, she thinks the SaaS approach will cost less.

Sonoco is a longtime user of the on-premises version of Ariba Inc.’s procurement applications. But the company wanted to expand its use of the software, and Roberts said that installing another module in-house would have required new hardware and the likely addition of an IT worker to manage and monitor the system.

That would have pushed Sonoco’s long-term costs above what it’s paying Ariba for the SaaS deployment, according to Roberts, who declined to disclose specific cost information.

Roberts also predicted that SaaS will increase her leverage with vendors such as Ariba by making it easier for Sonoco to switch to rival offerings if it decides that a change is needed. “When you’re dissatisfied with a tool when it’s in-house, the cost of switching is much higher than if it is software as a service,” she said.

The Army last fall began using’s hosted CRM software as part of a pilot program aimed at modernizing the military branch’s recruiting efforts.

The program is centered around a facility in Philadelphia, called the Army Experience Center, that lets potential volunteers learn about military technology, explore career options, run battle simulators, play computer games and even sample military cooking. The Army collects basic contact and demographic information from visitors who register at the center, and it then uses the data to customize its recruiting pitches.

The data goes into the SaaS application, which has been integrated with an in-house system for processing recruits. That work was done for the Army by systems integrator Acumen Solutions Inc. in Vienna, Va.

“This is a new model for the government to be using SaaS in this way,” said Maj. Larry Dillard, a marketing officer who is heading the Army Experience Center program. Dillard emphasized that it is still very much a pilot project, but he sees potential in SaaS.

“In about four months, we were able to take an off-the-shelf solution, configure it and deploy it,” Dillard said. That, he added, has given the Army “a very robust and very capable system for almost inconsequential cost and almost no [staff] time.”

The Army is sensitive to IT security issues, for obvious reasons, and SaaS forces organizations to consider whether they want to store data on third-party systems. Dillard said the Army addressed the security issues to its satisfaction by limiting the amount of data it stores about potential recruits. No Social Security numbers or other personally identifiable information is ever entered into the application, according to Dillard.

Mane USA Inc., a fragrance and flavorings maker in Wayne, N.J., adopted a SaaS version of Automatic Data Processing Inc.’s payroll and benefits software about a year ago. Employees now have self-service capabilities for making benefits changes, freeing up Mane’s human resources staff to do other work, said Deborah Knighton, the company’s vice president of HR.

The SaaS system has also reduced the amount of work HR needs to do to process year-end tax data, shortening the time required from several weeks to a day. “The benefits we got far exceeded the cost, if you look at it from a soft-dollar standpoint,” Knighton said.

Also last year, Springs Valley Bank & Trust Co. in Jasper, Ind., switched from an in-house payroll system to SaaS software offered jointly by application developer Unicorn HRO Inc. and development tools vendor Progress Software Corp.

Craig Buse, Springs Valley’s IT manager, said the in-house system was nearing the end of its life and wasn’t considered to be core to the bank’s business operations. With the SaaS system, Buse doesn’t have to worry about updating the software or dealing with hardware failures.

But he does think that SaaS may prove to be more costly than in-house applications over time. “In general,” Buse said, “you’re probably going to see a little bit of a cost increase because [SaaS vendors] are doing a little more for you.”


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Jim Love, Chief Content Officer, IT World Canada

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