SaaS: Is it a wise business investment?

Companies typically use the ROI metric to measure the initial investment of IT software. This method isn't as useful when companies invest in recurring services and products, such as SaaS models. ROI expert Dan Merriman offers advice on how to make the business case for SaaS models and continually measure their value.

The increasing use of the Software as a Service (SaaS) model for acquiring IT applications is going to have a dramatic

and positive impact on the role of ROI analyses within technology initiatives. This will result from changes in the financial motivations of the buyers and sellers and the fact that companies in general are becoming much more disciplined in measuring and improving the actual business performance enabled by IT.

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When acquiring software using the traditional perpetual license model, the financial commitment is made up front and the many components purchased typically have little residual value if not fully used for that application. As a result, both the buyer and the seller focus their ROI efforts on justifying the investment. This focus will change when applications are purchased on a recurring basis as services because the interests of the vendor and the customer will be more compatible. Buyers will have much more flexibility in making changes, including the vendor used, and will therefore reassess the value being gained on an ongoing basis. Those selling SaaS services are highly motivated to actively help improve the actual business results gained after the sale in order to retain and grow their customers.

Evolving role of ROI 

For most companies today, ROI analyses are used to determine the expected quantifiable benefits and costs of IT investments as part of the purchasing process. Unfortunately, these analyses are typically shelved once the investment is approved, as the buyer and seller have little motivation to measure and improve actual business results.

When acquiring an SaaS service, companies should still assess whether it is a wise investment from the business perspective. However, the focus should be more on measuring and improving the actual value enabled. Determining the extent to which the service should be used in the future (i.e., maintained, expanded, terminated) is part of this ongoing process of continually improving value.

Questions to ask when assessing the value of SaaS

The following questions should be asked when considering an investment in SaaS:

  • What are the priority business goals that the application is going to help address (e.g., increasing revenue by improving the effectiveness of a business function, or reducing business costs by improving the efficiency of a process)?
  • How will the actual results be measured (e.g., business metrics such as revenue per sales rep, cost per order or cost per unit of IT service)?
  • What are the expected improvements in the values of these business metrics that will result from use of the application, and what does that mean for the bottom line? It is important to note that the focus should be on the increased business value that results from the SaaS application (the R of ROI), not merely the fact that the cost is reduced (the I of ROI) -- a serious shortcoming with many SaaS business justifications.
  • Does this expected quantifiable benefit justify the total internal and external costs of using the SaaS for at least one year, including costs to terminate usage or transition to another service provider?
  • Who in the organization is willing to be held accountable for each of the major expected improvements in business value?
  • What additional metric information, such as leading indicators, could the accountable people use to identify and address the issues that will inevitably arise, such as number of qualified opportunities per marketing campaign or time required to complete a key step in the process?

Working with service providers

SaaS providers should take a more active role in working with their customers to maximize the value gained from their services, as their success is now so closely tied to their customers' success. During the sales process, the following questions should be asked by buyers to assess the level of assistance that potential service providers could offer:

  • Besides the standard implementation and technical support, how will the provider help maximize the business results (e.g., business-oriented training and support, best practices, templates, active community of other users, etc.)?
  • What are examples of business metrics, reports and dashboards that would be useful based on your experience working with similar customers?
  • How does your application help track and improve business results (e.g., reports, dashboards, analysis capability)?

Preparing up front and asking the right questions can help determine whether the investment is justified and if you're selecting the best service provider for your needs.

Dan Merriman is president of Needham, Mass.-based Chapin Consulting Group Inc.. He helps companies maximize the business value gained from business and IT initiatives. He can be reached at dmerriman@chapinconsulting.com.
 

This was first published in July 2006

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