The ROI of Software as a Service

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Making Leaders Successul Every Day

Jl 13, 2009

The ROI O Sotware-As-A-Servie Liz Herert ad Jo Erikso

or Sorig & Vedor Maagemet Proessioals

http://www.forrester.com/



© 2009, Forrester Research, Inc. All rights reserved. Unauthorized reproduction is strictly prohibited. Inormation is based on best availableresources. Opinions refect judgment at the time and are subject to change. Forrester®, Technographics®, Forrester Wave, RoleView, TechRadar,and Total Economic Impact are trademarks o Forrester Research, Inc. All other trademarks are the property o their respective companies. To purchase reprints o this document, please email [email protected]. For additional inormation, go to www.orrester.com.

For Sorig & Vedor Maagemet Proessioals

Includes a TEI™ model

ExEcuTIVE SuMMARy

Firms almost always consider soware-as-a-service (SaaS) as a cost-advantage over on-premise in the

short run due to its quick implementation times and pay-as-you-go pricing. But many rms question

the long-term value o SaaS, wondering i the rent-versus-own model necessarily has a cost crossover

point and i so, when? As SaaS continues to move into a broader range o applications and into larger,

more strategic deployments, Forrester examined client decisions across a range o SaaS solution areas

and ound that rms obtain long-term value with SaaS solutions.

TAbLE OF cOnT EnTSFirms Elore SaaS For More Strateic, Larer,

LoTerm Iestmets

Three Factors Determie The ROI O SaaS

Ke beets: SaaS Eales Fast Deplomet,better user Adoptio, Ad Reded Spportneeds

Ke costs: Ssriptios balae WithReded Implemetatio, upgrades, Ad

Traiig

Risk Aalsis: cost Savigs Ad AdoptioRates ca be uertai

Calculati ROI For SaaS Has Secic

Cosideratios B Alicatio Te

SaaS Ca Be A LoTerm Wi As Well With

Beets Beod Cost Sais

REcOMMEnDATIOnS

Sourci Eecs Should Weih The Coma

Secic Tradeofs O SaaS

Sulemetal Material

nOTES & RESOuRcESForrester iterviewed vedors ad sers o

SaaS soltios ad leveraged past researh

ad iqiries. We also odted i-depth ase

stdies with liets o HP, salesore.om, ad

Workda. We sed this iormatio to reate a

ROI model ased o or TEI aalsis ramework.

Related Research Documets

“Shold yor Email Live I The clod? A

comparative cost Aalsis”Jaar 5, 2009

“SaaS cotrat negotiatio Essetials: What

Sorig Eetives Shold Kow”

Deemer 22, 2008

“cost Estimator: SaaS Verss O-Premise

Sotware”

Deemer 3, 2008

Jl 13, 2009

The ROI O Sotware-As-A-ServieA Total Eoomi Impat™ Aalsis uovers Log-Term Vale I SaaS

b Liz Herbert ad Jo Ericksowith christie Ferrsi Ross, Adrew Parker, ad Philipp Karher

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mailto:[email protected]


http://www.forrester.com/go?docid=46302&src=53885pdf














mailto:[email protected]



© 2009, Forrester Researh, I. Reprodtio ProhiitedJl 13, 2009

The ROI O Sotware-As-A-Servie


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FIRMS ExpLORE SAAS FOR MORE STRATEgIC, LARgER, LOng-TERM InvESTMEnTS

Firms increasingly consider SaaS as a strategic alternative to on-premise applications, no longer

simply a divisional play or short-term ll-gap where they can aord to skimp on proper due

diligence such as a ormal total cost o ownership (CO) assessment. Many o today’s SaaS

deployments are in the thousands o users — some even an order o magnitude higher i we

consider examples like Aravo’s deployment o supplier relationship management technology at

GE.1 Additionally, SaaS has grown ar beyond its early roots o popularity in a ew select application

areas such as HR and CRM technologies and is now gaining acceptance across a broad range o

applications or business and I user populations alike.2

THREE FACTORS DETERMInE THE ROI OF SAAS

It is imperative to objectively evaluate the nancial impact on business when considering the

adoption or avoidance o SaaS. How? Companies can use a simplied version o Forrester’s otalEconomic Impact™ (EI) model to systematically consider:

1. Benets. How will your company benet rom SaaS?

2. Costs. How will your company pay, both in hard costs and resources, or SaaS?

3. Risks. How do uncertainties change the total impact o SaaS on your business?

Ke Beets: SaaS Eables Fast Delomet, Better User Adotio, Ad Reduced Suort

needs

Organizations that implement SaaS benet rom the ability to deploy applications rapidly — rom

initial deployment to adding new users and new modules. Firms also requently report better user

adoption and an elimination o the “shelware” that is common with on-premise deployments, as

well as a reduced burden on I and admin or user support. Te scale, timing, and duration o these

benets can be estimated by considering one or more key metrics and the value to the organization

o improving those metrics over time (see Figure 1). Benets include:

· Rapid deployment. SaaS eliminates the need or rms to acquire their own instance o

hardware as well as associated testing, requently oering a ready-to-go precongured solution

that rms can turn on in days or weeks with minimal conguration. SaaS also makes it easy or

rms to deploy incrementally and oers short commitments o monthly or annual contracts —which means that purchasing cycles are oen shortened as well. Beyond initial deployment,

SaaS also makes it easy or rms to roll out new users, new sites, and new unctionality as it is

oen simply a matter o turning on the new logins or the new eatures. For many rms that

Forrester has interviewed, this time-to-value is a win or SaaS versus on-premise alternatives —

in the short and long run.



© 2009, Forrester Researh, I. Reprodtio Prohiited Jl 13, 2009



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· Increased user adoption. Firms complain to Forrester that on-premise applications suer rom

low user adoption rates, despite signicant investments in end user training and user interace

design. However, SaaS applications requently inherit their user interace rom amiliar Web

programs — having an easy-to-learn Amazon.com or eBay-like look-and-eel. Tis means

that users eel that the user interace ow is natural and more intuitive. Furthermore, SaaS

applications are more likely to deliver proactive usage reports — which means that rms can

more easily identiy gaps in user adoption and either eliminate those subscriptions or address

the problem.

· Reduced support needs. Firms that we interviewed reported a signicant reduction in support

needs when moving rom on-premise to SaaS. One rm that previously paid a third-party I

services rm or support was able to eliminate those resources completely, while many others

redeployed internal resources onto other projects. echnical support sta (bug x, patch) are

usually eliminated completely as the SaaS vendor perorms these tasks. Help desk sta is usually reduced because o SaaS’ enhanced usability and more useul training, built-in tutorials, and

help les. SaaS applications are more standardized and thereore the provided help materials

remain more relevant.

Fiure 1 Ke beets O Sotware-As-A-Servie

Source: Forrester Research, Inc.53885

Dimension Software-as-a-service helps by . . .

Reduced cost of adoption

Quicker adoption

On-premise costavoidance

Reducing the licensing, training, and support costs of adding additional users.

Decreasing the time to ramp up new users, maximizing their productivity from

using the application.

Improved adoption Enabling more users to use the application.

• Eliminating maintenance costs.

• Reducing full-time help desk and server support, and transferring staff to higher

value, proactive roles.

Improved flexibility Reducing spend on excess capacity.

Ke Costs: Subscritios Balace With Reduced Imlemetatio, Urades, Ad Traii

Tis EI model considers scenarios o rms moving rom existing on-premise deployments to

SaaS solutions rather than net-new purchases o SaaS versus on-premise. Tereore, organizations

implementing SaaS will incur subscription costs or the SaaS solution but will eliminate many costs

elsewhere that are associated with running existing on-premise applications, such as resources,

hardware costs, and maintenance (see Figure 2). Firms that would like to analyze a net-new

purchase should actor in signicant additional upront time and expense or a new on-premise

deployment — in addition to the actors already in the EI models associated with this report.






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· Implementation costs. SaaS implementation costs are typically signicantly lower than those

or on-premise implementations. Many rms report typical implementation costs o .5x to 1x

the rst year subscription ee, compared with 1x to 5x the license cost o on-premise.3 SaaS

solutions oen have reduced customization capabilities, which keeps costs down. However, SaaS

typically still requires process consulting typical o any application implementation — which

is not necessarily dierent in the SaaS world versus on-premise. On the downside or SaaS

buyers, many SaaS solutions have a smaller unctional ootprint than uller on-premise suites.

Tis means that SaaS buyers may have more costs in areas like single sign-on and setting up

integrations during implementation. Although these costs must be taken into consideration,

they are oen quite small relative to other cost-savings that implementing SaaS achieves.

· Recurring costs. Te basic recurring cost is the SaaS subscription cost. However, rms oen

have additional recurring costs or integration tools or other add-on technologies not included

in the base subscription, rom partners or rom the SaaS vendor. Firms oen have some levelo people costs such as admin and support costs, which although greatly reduced do not go

away entirely. Some rms we have spoken with suggest that this number is reduced by a actor

o approximately one-h by comparison to on-premise deployment; however this can vary

greatly depending on characteristics such as type o application, size o deployment, and the

makeup o I organization skills.

· Upgrade costs. SaaS solutions typically oer seamless, automatic, requent upgrades as part o

the ongoing subscription charge. Because these upgrades happen more requently and thereore

incrementally than on-premise solutions, they typically have signicantly reduced testing and

end user acceptance and training costs. Firms rarely have to re-engage third-party consultants

the way they would with a major on-premise upgrade.

Fiure 2 Ke costs O Sotware-As-A-Servie


Upfront costs

Recurring/annualcosts

• Implementation

• Single sign-on configuration

• Third-party process consulting

• Third-party content development• Competency development

• External content (competencies)

• Change management

• Testing and certification

• End user support and administration

• Subscription

• Integration

• Training

Risk Aalsis: Cost Sais Ad Adotio Rates Ca Be Ucertai

No change — or avoidance o change — is without risk. Factoring this uncertainty into the analysis

o SaaS implementation options converts an optimistic and potentially unachievable plan into one

with higher accuracy. wo key risks, i actored in, allow the renement o the analysis:






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· Moving to SaaS does not guarantee retirement o hardware or people resources. Firms oen

anticipate lower implementation costs and eliminating hardware as well as people resources

when moving to SaaS. However, in some cases these anticipated savings do not materialize

or are too small to make SaaS cost-eective in the long run. Some rms nd that they end up

spending too much money on change management, integration, or orce-tting a SaaS solution

into their business process needs. Others nd the SaaS solution only covers a small ootprint o

unctionality and thereore they don’t end up retiring hardware or support sta resources rom

existing on-premise resources.

· Sofer benets around adoption, training, and scalability require planning and monitoring.

Firms that are counting on increased adoption and reduced training as part o their benets

assessment must realize this is not a guarantee across all SaaS solutions. While many are easier

to use and have shown higher adoption rates in studies, there are others that do not have such

strong track records and that suer rom serious usability aws. Similarly, rms oen toutthe ability o SaaS solutions to scale up or down with actual usage needs. However, ironclad

contracts or ailure to accurately track usage can prevent rms rom capitalizing on this

potential benet.

CALCULATIng ROI FOR SAAS HAS SpECIFIC COnSIDERATIOnS By AppLICATIOn TypE

o arrive at a quantitative assessment o the economic implications o SaaS applications, Forrester

evaluated the key drivers o benets, costs, and risks or an organization considering SaaS. Beyond

considerations common to most types o SaaS, rms must consider application-specic issues as well.

For example, some types o applications (e.g., employee-acing applications and CRM) have a highend user population, so usability is a big actor that can signicantly aect training time and cost

and user adoption o the solution — all o which heavily tie into ROI (see Figure 3 and see Figure 4).

In contrast, I applications — like I management, security, and backup — are likely to have small

end user populations and thereore are less likely to benet rom user adoption and training cost

reduction in a signicant way (see Figure 5). Many o the rms that Forrester interviewed talked

about the signicant eect that user adoption has on the useulness o analytics and reporting on

data contained in solutions and thereore the ability to drive useul business decisions rom solution

inormation.

Other key considerations include breadth o application ootprint, which will determine hardwareand I sta that can be retired or redeployed (costs saved); and some SaaS solutions will have

heavier requirements in areas like storage (e.g., content management solutions), integration (e.g.,

order management), or mobile (e.g., sales automation), which can have a signicant impact on

costs incurred. In terms o upgrades, some categories o SaaS will benet signicantly rom eature/

unction enhancements that happen requently (like GRC, where the actual risk proles can be

updated), whereas other types o applications are in areas where rms might be less inclined to care

about new unctionality (e.g., accounting packages).






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Te examples provided in the models are intended to prompt ideas around key actors to consider;

sourcing executives are encouraged to extend these ideas to the relevant areas o SaaS they are

considering.

Fiure 3 Model: Total Eoomi Impat Aalsis Smmar — SaaS cRM


Presentvalue (PV)Year 1 Year 2 TotalYear 3 Year 4 Year 5

Benefit

Cost

Net cashflow

NPV

ROI

Payback

Cumulativecash flow

$846,402 $925,104 $1,015,713 $1,087,261 $1,170,779 $5,045,258 $3,766,700

$923,701 $777,555 $793,106 $808,968 $825,148 $4,128,478 $3,143,096

-$77,299 $147,548 $222,606 $278,292 $345,632 $916,780 $623,604

-$77,299 $70,250 $292,856 $571,148 $916,780

$623,604

20%

12 to 24months

Fiure 4 Model: Total Eoomi Impat Aalsis Smmar — SaaS HR


Presentvalue (PV)Year 1 Year 2 TotalYear 3 Year 4 Year 5

26%

12 to 24months

Benefit

Cost

Net cashflow

NPV

ROI

Payback

Cumulativecash flow

$676,841 $735,869 $806,410 $857,489 $920,129 $3,996,737 $5,242,391

$721,942 $583,166 $594,830 $606,726 $618,861 $3,125,525 $4,148,115

-$45,101 $152,702 $211,580 $250,762 $301,268 $871,211 $1,094,276

-$45,101 $107,601 $319,181 $569,943 $871,211

$1,094,276






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Fiure 5 Model: Total Eoomi Impat Aalsis Smmar — SaaS IT Maagemet


Present

value (PV)Year 1 Year 2 TotalYear 3 Year 4 Year 5

Benefit

Cost

Net cashflow

NPV

ROI

Payback

Cumulativecash flow

2%

More than

2 years

$566,441 $623,261 $691,550 $740,331 $800,628 $3,422,211 $2,552,393

$721,942 $583,166 $594,830 $606,726 $618,861 $3,125,525 $2,383,837

-$155,501 $40,094 $96,720 $133,605 $181,768 $296,685 $168,555

-$155,501 -$115,407 -$18,687 $114,918 $296,685

$168,555

SAAS CAn BE A LOng-TERM WIn AS WELL — WITH BEnEFITS BEyOnD COST SAvIngS

Firms that Forrester interviewed have identied long-term benets rom SaaS using ve-year cost/

benet analyses. While almost all rms see a short-term win or SaaS in a net-new environment,

many have also determined a longer-term value o SaaS, even in larger, established on-premise

environments where rms achieve economies o scale in their own I department. Beyond simple

actors such as subscription ees versus new license ees and associated maintenance, key actors that

aect whether SaaS will be a long-term win include the ability to reduce or eliminate hardware costs,

I support/stafng, upgrades, soware maintenance, and cost o capital. Firms also like the benets

associated with SaaS including the requently higher adoption rates, reduced training costs and time,

and ability to scale subscription up or down more easily to match needs.

R E c O M M E n D A T I O n S

SOURCIng ExECS SHOULD WEIgH THE COMpAny-SpECIFIC TRADEOFFS OF SAAS

Despite ma geeralizatios arod the osts ad eets o SaaS verss o-premise, there

are ma ompa-spei ators that will aet the deisio, whih sorig ad vedormaagemet proessioals mst osider i their assessmet:

· vedor relatioshis ad discouts. Disot rates ad “vale” to a vedor will aet a

ompa’s iliatio to se SaaS i ma ases as it a sigiatl aet the ost o SaaS

verss o-premise eqatio. Frthermore, rms swithig o a major appliatio modle

shold osider the larger eet that old have o their relatioship with the appliatio






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provider. However, rms shold weigh this agaist the tradeo o potetiall large disots

that the a get sigig p as a ew liet or a SaaS vedor, partilarl i spaes where

SaaS is still ewer or where the SaaS vedor is trig to ild p presee i a geograph or

idstr.

· Aetite or risk ad loss o cotrol. While some orporate ltres have a high omort

level with o-premise sotware (ildig sig hostig or other o-premise models), some

rms d this model too risk or have reglatios idstr or otr that limit what a

go o-premise. Thereore, ltral or reglator isses a sigiatl aet the likelihood

o sess or i some ases the easiilit o SaaS or a orgaizatio. Alog these lies, some

orgaizatios might ol e ale to osider SaaS i SaaS-ealemet tehologies — sh

as paket aelerators, serit/moitorig, or additioal akp or esrow servies — are

prhased; sorig proessioals shold osider these isses i their ost/eet deisio.

Fiall, ma SaaS vedors are still smaller, reatig additioal risk arod vedor viailit or

likelihood o aqisitio.

· The multiedor “ta.” Most SaaS vedors still oer smaller slivers o tioalit ootprits,

meaig that rms that opt to adopt a heav SaaS strateg are likel to work with mltiple

SaaS vedors to over the same appliatio ootprit o a sigle o-premise ootprit. This

meas that eod the ROI/TEI aalsis or a sigle SaaS prhase, sorig strategies

arod adoptig a mlti-SaaS strateg mst osider osts sh as vedor maagemet,

idetit ad aess maagemet, ad itegratio — as well as additioal tioal

halleges sh as havig pgrades aross mltiple appliatios or hadlig workfow

aross mltiple SaaS appliatios, whih ma sers report to still e a isse.






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SUppLEMEnTAL MATERIAL

Olie Resource

Te underlying spreadsheets detailing the models in Figures 3, 4, and 5 are available online. Tespreadsheets are interactive tools to allow the user to customize the benet, cost, and risk data to t

your company’s situation.

Methodolo

Forrester Research uses a dened methodology or analyzing and evaluating the costs, benets, and

risks o a proposed solution. Tis methodology, termed otal Economic Impact (EI), provides

a holistic view o the decision by including an analysis o costs, benets, exibility, and risk. By

including an assessment o risk, EI provides a realistic view o expected outcomes, rather than one

shaded by early optimism and enthusiasm.4

Unlike a cost- or technology-based analysis, EI does not rely on industry averages or actors that

are applied to all organizations, but is a methodology or evaluating projects. Te EI methodology

orces the determination and quantication o relevant metrics in light o an organization’s current

state and uture goals. Firms can use the EI model as a proactive and predictive tool.

Comaies Iteriewed For This Documet

HP

Salesorce.com

Workday

EnDnOTES

1 GE’s partnership with Aravo is an example o how large companies are getting more comortable with

SaaS. Source: InormationWeek (http://www.inormationweek.com/news/services/saas/showArticle.

jhtml?articleID=211800221)

2 Forrester recently investigated the state o ollowing SaaS technologies: archiving/eDiscovery, business

intelligence, collaboration, digital asset management, enterprise content management, ERP, integration,

I management, and SCM. See the March 12, 2009, “echRadar™ For Sourcing & Vendor Management

Proessionals: Soware-As-A-Service” report.

3

Te revenues that system integrators (SIs) receive rom SaaS sales and implementation services are muchsmaller than those rom traditional on-premise solutions o a similar size. See the October 29, 2007, “SaaS

Economics Will Change ISVs’ SI And VAR Channels” report.

4 For an in-depth discussion o EI and the individual elements within the methodology, please see the

August, 4, 2008, “Te otal Economic Impact™ Methodology: A Foundation For Sound echnology

Investments” report.













The ROI of Software as a Service

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