What You Don't Know About SaaS

Hunting for Bargains

SaaS vendors position themselves strongly as a cheaper alternative to traditionally licensed, on-premise software. But is this portrayal really accurate?

Experienced CIOs warn against focusing too keenly on the low basic per-user fees that a SaaS provider throws out. That's just the starting point, says Peter Ross, CIO at Vedior North America, a $1-billion staffing and recruiting company based in Wakefield, Mass. He notes that extra services such as a dedicated support team, speedy problem resolution or local copies of the software all send the basic fees climbing upward.

"For me, the big selling point is not worrying about our applications," he explains. Vedior uses on-demand staffing and recruiting software from Bullhorn Inc. "We could have gotten Bullhorn in a box, but then I'd be spending my time making sure the technology is up and running and not focusing on revenue-generating activities."

Even SaaS that's loaded with several add-ons may end up being cheaper than premise-based software. Ross says that initially he may have been able to build a workable system internally for less money because he currently uses only a percentage of the Bullhorn application. But in the long run, if Ross opts to add more functionality, the overall cost of doing it in-house would be more expensive.

With SaaS, Ross says, Vedior's 40 U.S. offices share the same data through centralized databases hosted by their SaaS vendor, allowing the company to go after new, low-margin business. Recently, one of Vedior's customers had a staffing request spanning 13 states. Vedior customized the orders for each office, matching candidates to requirements and passing on the information quickly to recruiters who then jumped in to make "money calls" rather than wasting time hunting for information. Before moving to Bullhorn, Vedior had maintained several databases on separate servers around the country, each running a different software application.

At Bandwidth.com, CTO Scott Barstow has been using Salesforce.com for three years. The telecommunications company is now a believer in the cost-saving aspects of SaaS. Even though Barstow characterized Salesforce.com's outages last year as "high impact," he plans to continue his subscription, and he isn't soured on the concept of Software as a Service. When all is said and done, Barstow says, "getting CRM as a service is the most cost-effective way for us to get that application." Building a CRM application with comparable capabilities "would take a team of developers full time" and "be a waste of valuable resources," he adds.

Comparing the cost of SaaS options with premise-based software is a tricky proposition. No two businesses have the same needs, so there's no universal formula for comparing costs across the board. Rob Bois, research director of AMR Research in Boston, says CIOs should be skeptical of blanket cost-savings estimates. "Much of the cost savings in the SaaS model may not be realized for organizations that already have investments in database licenses, middleware, hardware and personnel," he notes. In such cases, premise-based software can be more cost-effective.

If additional equipment and staffing are required, analysts say that SaaS is almost always less expensive in the long term. Yet AMI's McCabe cautions that the prevailing criterion should be whether the application meets the critical needs of the business. CIOs must look at what's rolled into the subscription price of a SaaS application and compare that with the layered costs of premise-based software. "When people think of total cost of ownership, they may not think of everything," she says. "There's the cost of the software, the middleware, the hardware, the dedicated IT personnel, or the need to recruit and hire new IT personnel."

This was first published in October 2006

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