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SaaS, TCO and you

Michael Pott (michael_pott) ‎04-02-2013 10:39 AM - edited ‎09-27-2015 08:05 PM

We as an industry have been having conversations surrounding Total Cost of Ownership (TCO) since the  beginning of SaaS. According to industry analysts, TCO is a primary factor for selecting a SaaS solution. On the other hand these analysts also found out that about a third of the companies using SaaS switch back to on-premise. Guess what these companies cite as a main reason for the switch?  A too high TCO. Wait a minute - how can that be? 

The economics of SaaS consists of a very wide field. Think of it like you would a car, there are many reasons for leasing a car, but it is not necessarily cost, is it? Let’s see. 

In this blog article I am going to discuss SaaS total cost of ownership (TCO). But before I get there, let me put this into perspective and touch on the other drivers that may be related to the cost discussion.


Key reasons for selecting a SaaS solution

There are many reasons to select a SaaS solution when compared to traditional on-premise solutions. I think they all can be put in a few categories though:

  • SaaS is a strategic decision
    Business and financial factors like a company’s sourcing strategy, shifting expenses from CAPEX to OPEX and total cost of ownership expectations for sure can be put here.
  • SaaS inherently comes with predictability and flexibility
    It enables better growth management by providing a pay-as-you-go (per user, monthly) model.
  • Simplicity, simplicity, simplicity
    Beside ease-of-use use of the software itself, SaaS also shines with simple price models
  • SaaS is your all-round careless package
    One can push the accountability for hardware, software deployment and maintenance, software upgrades, backup etc to the SaaS vendor based on service level agreements. This way you can focus on whatever you consider to be your core competencies and sleep well at night.

TCO - let’s take it one step further

Many of the drivers mentioned above are more or less inter-related and influence cost (TCO). Let’s go one step further and figure out what TCO really means.

A first very simple and very bold approach to the TCO question would be to look at the software alone. Ideally, the cost over time for the software in both models is a straight line:

  • On-premise solutions come with a relatively high upfront cost figure, plus ongoing cost for software upgrades and support like 5x8. The latter is typically a percentage of the license cost for standard support models. Then, from time to time, additional licenses may be purchased shifting the curve up.
  • SaaS solutions have no upfront cost for the software but instead have an ongoing subscription fee (per user, per month) bound to a contract (annual, bi-annual etc). Users can be added or removed from the contract.

In fact the conceptual graphs related to the solutions listed above are really step functions but this has no impact on the key point. Depending on the size of a company (driving the number of IT users for an ITSM solution) and concrete prices there can be a break-even point where the on-premise solution from a pure software cost perspective can be the better choice, especially for larger organizations. 

It would be nice if the math would be as simple as that – but there are more factors to consider, even if we stick to just looking at the software: 

  • On-premise software can be depreciated.
  • Companies renew their ITSM platform every four years on average. This may add a switching cost for the software to the equation when deciding on another vendor.
  • Customers who already have an on-premise ITSM solution have lower upfront cost because they already have purchased the licenses.
  • Other, more important cost factors than the software. Let’s look at these …

TCO – other cost factors are more important than the pure software price

Cost factors having and impact on TCO can be put into four big buckets:

  • Software costs according to the above; these are well understood.
  • Infrastructure costs; this includes all cost for any kind of required hardware, hardware upgrades, and required software like the OS, database and security.
  • People/service cost - Includes cost for design (e.g. processes), implementation and integration, deployment, maintenance including patches and software upgrades, training and internal support to name a few.
  • All intangible costs like time and effort in areas such as availability, continuity and capacity management

In IT Service Management (a SaaS-based email solution is much simpler to look at) people/service costs are in many cases the biggest cost factor for on-premise solutions,(now this depends on your goals). But …


What is the conclusion?

First and foremost, I think that looking at the TCO alone is not sufficient. The TCO tells you what you put in but it does not tell you anything about what you get out of your investment. 

In the above, if you take the SaaS part of the infrastructure and even part of the people/service cost (for deployment, maintenance, upgrades etc) out of the TCO equation, there is still a big portion of people/service cost left. And this can even be fairly high compared to all other cost. Is this a bad thing? I do not think so. It helps you get the most return from your ITSM solution investment and to realize a larger value, be it via SaaS or on-premise. Increasing the efficiency and maturity of your IT processes, as an example, can result in a high ROI. 

My conclusion from all this is that there are certainly situations where the TCO of a SaaS solution over a traditional on-premise solution is significantly lower at the end, and the other way round. Time will tell. I think it is more important to look at the entire picture – not just TCO - and understand the ROI.


Where to go next

HP can help customers with an ROI model that is structured to demonstrate the financial impact of productivity improvements based upon the industry standard Capability Maturity Model (CMM). 

This methodology incorporates actual human capital performance data along with formulations to determine future states based on rules. The rule-based model looks at cost of software, hardware and consulting over a three-year period. 

You can find more information on this ROI model in the business white paper Measure your ITSM investments, available on the HP IT Service Management portal under "White papers" on “Resources” tab.


What factors are important to you when it comes to choosing a delivery and deployment model (SaaS, on-premise, hybrid)? What is your view on total-cost-of-ownership (TCO) and ROI for ITSM software? I am interested to hear from you. Until then …


Have a nice day,

Michael Pott


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About the Author


Michael Pott is a Product Marketing Manager for HPE ITSM Solutions. Responsibilities include out-bound marketing and sales enablement. Michael joined HP in 1989 and has held various positions in HP Software since 1996. In product marketing and product management Michael worked on different areas of the IT management software market, such as market analysis, sales content development and business planning for a broad range of products such as HP Operations Manager and HP Universal CMDB.

on ‎04-02-2013 11:40 AM

This is a great question. It is my sense that the cost difference once you get beyond the hardware,  implementation, and maitenance cost is the cost of customizing. Software is meant to twist and turn. However, a service is not. This to me is where the cost difference will be really be found. What do you think?

on ‎04-02-2013 12:29 PM

Michael, My personal opinion is that the SaaS TCO equation has changed a bit over the past 3 years ago. 3-4 years ago, arguments would be made along the lines of "a SaaS implementation will cost less than your current (on premise) maintenance" or a variation would be "a new SaaS implementation will cost less than upgrading your current (on premise) service desk". There were valid points to both arguments, but there were also some/many liberties taken depending on who was telling the story.


SaaS TCO is much better understood these days. And the product/platform lease vs buy economics is not as important as it was ~3 years ago. I agree with your points about other factors now being as important. I also submit that customer expectations on usability - especially wrt configuration, administration, and maintenance has also positively impacted on-premise solutions (for example Process Designer being available on Service Manager and Service Anywhere).


And following on from this, the services/implementation considerations and associated costs are definitely part of the equation (as both you and Myles) note. Plug for my recent post on this topic.


Lastly as you also note, HP has ROI models based on the Alinean platform. For the service desk, these look across processes and other administrative dimensions for both on-premise and SaaS. HP and partners can help run these for interested customers.



on ‎04-03-2013 07:50 AM

SaaS or On-premise?  Seems to always be the big question these days when it comes to acquiring software.  Michael - I love your title “SaaS, TCO and you” because so often people forget about the “and you” component when first looking at the SaaS option. It would be a lot easier if we could just compute a TCO, and use it to make a decision, but the reality is that there are many other business factors as you mention in your article, and many are difficult to quantify. When asking “SaaS or on-premise?” the correct answer in my mind is almost always “it depends” and TCO is simply one facet in the decision process. 


Even TCO computations can be subjective.  For example when factoring the infrastructure cost as part of TCO, you need to consider if you are doing an “apples to apples” comparison of costs.  SaaS hosting facilities may have better security (both physical and electronic), full redundancy and a comprehensive disaster recovery capability. A SaaS provider may also pay for premium support contracts from 3rd party vendors that provide early issue notification, faster incident support and so on, as they need these to support their aggressive SLAs.  How does this compare to your in-house data center?  And do such differences even matter to your business model?  This is just one example of how the analysis is not always black and white.

on ‎04-05-2013 08:33 AM

I'm amused at your contention that "SaaS is your all-round careless package". I think its care-free, sure, to your likely intent -  as the decade-plus experience of (blatent plug alert HP SaaS, for example, certainly adds to the intangible benefit of trusting that these benefits are consistently delivered.  And this is a critical consideration. It's not just whether the TCO is positive, or the TCO-plus-intangibles is positive, but sleeping well at night with a SaaS model built into the IT infrastructure means trusting the SaaS vendor to deliver on the productivity improvements of the CMM you mention. 


Software as a Service is a proven delivery methodology - yet it is important to remember that not all SaaS providers are alike - and that is a variable that impacts the real-world TCO and warrants consideration in the final analysis. 

Michael Pott (michael_pott)
on ‎04-11-2013 02:00 AM

These are all great comments! Let me add my perspective ...


@Myles: Absolutely, the more you customize any software, the higher the maintenance cost for this software. This is definitely an important component. And there are some interesting new approaches to this like codeless configuration.


@Chuck: Agree - I find this interesting but not surprising: Usability and other factors are becoming more and more important factors over others like TCO. Although, in conversations, I still see the "TCO myth" coming up frequently. 

I would rather look at the ROI. and by the way, HP updated the ROI model based on the Alinean platform. The ROI tool now also allows to look at both HP Service Manager (on-premise) and HP Service Anywhere (SaaS) - and most of the other HP software solutions.


@Mary: No doubt ... there are so many reasons and drivers for answering the question "SaaS or On-premise" including all the intangible elements like security. Maybe that's worth another discussion (blog article). What do the other readers think here?


@Jim: At least someone who is amused ;-) But seriously, it's definitely care-free so that you need to care less about how to reach a high level of availability and security, for example. And not all vendors are alike. How could I forget about this!? Sleeping well at night also means that you know you can rely on a trusted business partner.

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