Total economic impact of Software-as-a-Service: The foundation of a sound technology investment

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by: Christian Smagg

As firms look to focus on core business processes,
software-as-a-service (SaaS) provides an increasingly attractive
alternative. Companies of all sizes are weighing advantages of SaaS
which has emerged as an important deployment option in customer
relationship management (CRM) but is also eliciting interest in other
areas such as enterprise resource planning (ERP), security or backup
just to name a few.

The key cost drivers for any software implementation
are the cost of the software application, the hardware required to run
the system and the people services required to design, deploy, manage,
maintain and support the application. Nevertheless, in addition to
typical cost drivers (such as capital expenses, design and deployment
costs, ongoing infrastructure, operations, training and support costs),
companies also need to look at intangible costs when completing a TCO
analysis. Some of the intangible cost factors that affect TCO include
reliability and availability, interoperability, extensibility,
security, scalability, capacity and opportunity costs.   

The difference in pricing and operating models
between traditional software and SaaS application options can make an
apples-to-apples total cost of ownership (TCO) comparison “tricky”. A
white paper, produced by the SaaS Executive Council of the Software
& Information Industry Association (SIIA), “Software-as-a-Service; A Comprehensive Look at the Total Cost of Ownership of Software Applications
helps in better understanding the different cost drivers and includes a
simplified calculator that will help decision makers to better estimate
the true TCO of a SaaS versus traditional software deployment. 

But companies evaluating both SaaS and traditional
on-premise options, must look beyond the pure cost trade-offs. Often,
differences in business benefits, flexibility, and risk are as
important, if not more important, when comparing options. Historically,
choosing an enterprise application, or assessing the benefits of
existing systems began and often ended with analyses of the costs to
implement, deploy, and maintain them. However, a pure cost-oriented
approach like total cost of ownership does not allow an organisation to
measure the full economic impact of the investment. By measuring not
just cost and financial benefits, but also risk or uncertainty as well
as future flexibility, companies can establish a more inclusive and
accurate picture of the return on investment (ROI). 

By using Forrester’s Total Economic Impact™ (TEI)
methodology, an organisation’s decision will be better aligned with
business needs, project success rates will increase, risks will be
better understood and mitigated, and business growth will be
accelerated. A report entitled “Comparing The ROI Of SaaS Versus On-Premise Using Forrester’s TEI™ Approach
discusses SaaS-specific issues across the four dimensions included in
Forrester’s Total Economic Impact™ model to provide a framework for the
economic evaluation of a SaaS option. This document establishes
criteria for a robust ROI analysis that is used to evaluate
opportunities in vendor selection, consolidation, upgrade/migration,
and software-as-a-service (SaaS) deployment scenarios.

addition to the ROI analysis, every major technology initiative should
be accompanied by a business case. The business case lays out the
reasons for the investment, the expected benefits of the initiative,
the costs to make it happen, an analysis of risks, and future options
that are created. It documents the relevant facts and situational
analysis, key metrics, financial analysis, project timelines, and
demonstrates the business imperatives for initiating and funding the

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