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SaaS project costs in detail: The payoff isn't always in cash

The CIO of a credit union recouped his initial $64,000 investment in a Software as a Service (SaaS) project within six months. A financial services firm realized a more than tenfold ROI on his quarter-million-dollar investment in a SaaS project involving extensive back-end system integration within a year. Another CIO didn't need to add storage or other types of hardware to bring his call center in-house.

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But what about the ongoing costs of a SaaS installation? Does it save you money in the long run, and do the savings hold up against on-premise installations over time?

Three SaaS users have slightly different stories to tell regarding whether SaaS saves them cash or, while costing more, enables efficiencies and expansion that pay off elsewhere for the business.

SaaS savings bring big ROI for credit union

Brian Irvine is CIO of Unitus Community Credit Union in Portland, Ore., which has eight locations and an 18-person IT staff. He agrees that SaaS project costs such as monthly licensing fees are ongoing, and additional services and integrations with other systems can add up.

However, a SaaS ROI analysis that calculated the time the team would save resolving problems using its new SaaS service desk application (five hours per week, per IT employee) and what that meant in dollars using a blended salary rate for tier 1 and tier 2 employees showed that the company would break even within six months. Within year one it would realize an ROI of 110% and in years two through five an ROI of 170%.

He also justified the cost of a SaaS installation by factoring in these perpetual costs of on-premise software installations:

Hardware. Servers and other peripherals need to be replaced every three to five years, whereas using a SaaS model doesn't require any new server hardware.

Storage. Since Unitus' environment is partially virtualized, IT did not have to invest in additional storage to support its SaaS service desk application from Service-now.com.

Keeping the lights on. Estimates vary, but between 60% and 80% of total data center costs are in power (cooling and running the lights). SaaS allows Unitus to reduce the amount of hardware it has, which means less spent on heating and cooling.

Application, operating system and database licenses. Unitus pays a monthly fee for its SaaS service desk licenses, but if the application were on-premise, it would have perpetual costs for server OS licenses and database licenses if needed by the application. And most enterprise applications have some form of annual licensing/maintenance costs.

The direct and indirect costs of support. IT has less time to focus on other value-add services to the business if it's supporting an application in-house, fixing problems and managing releases and patches. The costs are hard to quantify, but they can have a significant impact. A SaaS provider handles maintenance for you.

Irvine did not calculate the total cost of these on-premise variables, but he said he thinks it would be more than the $40,000 he pays annually for his SaaS installation. That installation combined several projects such as replacing a service desk system and integrating the service desk with new change management and business improvement request processes.

SaaS not cheaper, but users win regarding upgrades

Adam Sokolic is vice president of product management at National Retirement Partners Inc. (NRP), whose agents manage individuals' retirement portfolios. He said he believes a SaaS application will cost more than an in-house installation over time because it's a continuous payment, but the trade-off is found in the release cycles.

"In most cases, SaaS providers continue to move the product forward with each release, and you don't have to pay for those additions," he said. "Compare that to buying Microsoft 2003. You get a limited number of updates for free, and then you have to start all over again when [Microsoft Office] 2007 comes out."

Efficiencies gained far outweigh the ongoing licensing costs, Sokolic added. He estimated that the integration of National Retirement Partners' SaaS customer relationship management application with nearly a dozen back-end systems saves his company's network of 400 financial advisors hours upon hours on a quarterly basis. NRP's advisors on average have to generate fund management reports for 100 to 150 clients who have between 15 and 36 funds and gather that information from four different websites and three or more systems. "Now it's in one central repository in the cloud," Sokolic said.

"The savings in the number of hours it saves the advisors on a quarterly basis is astronomical when you think about 400 advisors and close to 6,000 retirement plans under advisement," he said.

SaaS enables expansion despite recession

Bill Hoban, CIO at Salt Lake City-based Extra Space Storage Inc., a self-service storage company with 685 facilities, said SaaS made it possible for his company to invest, versus retrench, during this economic downturn.

The current SAN wouldn't have been able to handle everything we're doing with our Salesforce.com application.

Bill Hoban, CIO, Extra Space Storage Inc.

It costs Extra Space Storage about $425 a month, per facility to run its cloud-based customer service call center, which includes the salaries of 50 call center employees and the applications and network infrastructure costs. The SaaS portion of the call center -- the Salesforce.com Inc., inContact Inc. phone and Cast Iron Systems Inc. integration licenses -- cost each call center about $225 per month.

"If we hadn't gone the SaaS/cloud route, we wouldn't have been able to afford the telephony switch we needed [for the call center] and the current SAN wouldn't have been able to handle everything we're doing with our Salesforce.com application," Hoban said. The company also didn't have to add specialized hardware or software and was able to maintain and not add to its IT head count.

He disagreed with the idea that over time SaaS will cost more. "It's more of a gut feeling right now," he said. "We haven't done a TCO yet because we've been moving so fast with the projects, but I think all the integration work we've done and the fact that it's all in the cloud that the efficiencies we're gaining will save us money over time."

Since the call center in the cloud has been in place, self-storage reservation rates have increased, in turn boosting sales. "We don't have the figures yet, but that's just one example of the efficiencies we're gaining from the new system," he said.

Let us know what you think about the story; email Christina Torode, Senior News Writer.

This was first published in March 2009

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