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The Clear ROI of SaaS  [ Forbes ]
March 18, 2011 07:12 AM

Mar. 21 2011 - 6:30 pm

This article is commissioned by Microsoft Corp. The views expressed are the author's own.

In the last two posts I focused on the ROI of IaaS (Infrastructure as a Service) and the ROI of PaaS (Platform as a Service). Now it’s time to round out the series with a focus on the ROI of SaaS (Software as a Service).

To be honest, finding the ROI of SaaS is relatively easy, especially compared to ROI calculations for PaaS and IaaS. We’re simply delivering an application service over the Internet that typically resides within a single application domain, versus the more complex services of IaaS or PaaS that provide more systemic value.

The origins of SaaS go back further than many suspect. Time-sharing systems have been around for decades. By sharing applications between small businesses, these systems provided the ability to access computerized applications that were only available to larger companies. Then came the Internet and a few application service providers (ASPs), starting in the late 90s. These ASPs provided access to high-end applications as-a-service using a subscription model over the Internet. Many went out of business when the Internet bubble burst. 

These days, SaaS is the most descriptive term, and the poster child for a successful SaaS company is, which provides sales force automation and customer relationship management-related software as-a-service. More than 2,000 SaaS providers out there now offer everything from background checks as-a-service, to process modeling as-a-service. I consider the rise of SaaS as the start of the cloud computing movement that continues to accelerate today.

The ROI of SaaS is really around the ability to understand the differences between leveraging a single traditional in-the-datacenter application, versus leveraging a similar or same application on-demand. Thus the math consists of understanding the 3-year costs of hardware, software, and operations, versus the subscription-only cost of SaaS.

For example, let’s say you’re looking at a new ERP system and want to compare traditional enterprise software versus SaaS-based services. Considering a 3-year horizon the numbers look a bit like this (from my experience):

  • ERP Software: $1,000,000
  • Hardware: $300,000
  • Consulting/install: $500,000
  • Operations/yr: $600,000

Thus, the number over 3 years looks like this (leaving some of the small costs out for now):

  • Year 1: $2,400,000
  • Year 2: $600,000
  • Year 3: $600,000

Or, let’s say $3,600,000 or $1,200,000 per year. Although most ERP installs are famous for going over budget, let’s give this one the benefit of the doubt. Again, we’re assuming a new install for both SaaS and the traditional model.

Okay, now the same scenario using SaaS:

  • ERP SaaS Subscription: $10,000/mo
  • Hardware: $0
  • Support (Internal): $10,000/mo
  • Operations/yr: $0

Okay, the numbers over three years look like this, again in my experience. Subscription prices vary a lot, but in this model I’m not sure that matters much when considering the outcome.

  • Year 1: $240,000
  • Year 2: $240,000
  • Year 3: $300,000

I’m assuming the cost of the subscription goes up in year 3, which I suspect will be correct for most SaaS providers.

Thus, we’re at $780,000 or $260,000 per year. So, the ROI is really the monies saved by using SaaS over traditional software, which is significant given the case study I painted above.

However, there are many other considerations, such as the amount of customization required, security and compliance issues, performance, etc., and all need to be factored into the ROI. Thus, while SaaS can typically be the best financial bet, there could be reasons not to use it. ROI goes away quickly if you’re busted for some violation of the law by placing data someplace it should not be.

There are two significant things to think about here: 1) the amount of money saved in avoiding capital and operational costs; 2) the value of agility. While the first is easy to determine from the model presented above, the value of agility is something that’s a bit more complex. 

Agility means that I can alter things quickly, typically using a configuration and not a development approach, to change my IT infrastructure to accommodate my business. In the world of cloud computing, including SaaS, agility is typically a core advantage, since we can scale up and scale down as needed to support the business without requiring waves of hardware and software purchases. It’s just a matter of adding more accounts. Moreover, SaaS provides some easy-to-use configuration facilities, and thus alters the way in which we deal with a new market. For example, it is a bit easier to deal with a SaaS provider versus a traditional software player.

The ROI of SaaS is both easy to determine, as well as compelling. Consider the cost savings and the value of agility that most enterprises can benefit from. It’s also much easier to understand than IaaS and PaaS because we can compartmentalize the value into a single application domain. I don’t think all applications should be SaaS-based, but I’m finding that there are few reasons not to leverage SaaS if you can find the application functionality you need in the cloud.