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8/3/2019 17065 Saas Roi July09
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Making Leaders Successul Every Day
Jl 13, 2009
The ROI O Sotware-As-A-Servie Liz Herert ad Jo Eriksoor Sorig & Vedor Maagemet Proessioals
http://www.forrester.com/ -
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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. Topurchase reprints o this document, please [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 AalsisJaar 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]://www.forrester.com/http://www.forrester.com/go?docid=46302&src=53885pdfhttp://www.forrester.com/go?docid=46302&src=53885pdfhttp://www.forrester.com/go?docid=47534&src=53885pdfhttp://www.forrester.com/go?docid=47534&src=53885pdfhttp://www.forrester.com/go?docid=47630&src=53885pdfhttp://www.forrester.com/go?docid=47630&src=53885pdfhttp://www.forrester.com/go?docid=47630&src=53885pdfhttp://www.forrester.com/go?docid=47630&src=53885pdfhttp://www.forrester.com/go?docid=47534&src=53885pdfhttp://www.forrester.com/go?docid=47534&src=53885pdfhttp://www.forrester.com/go?docid=46302&src=53885pdfhttp://www.forrester.com/go?docid=46302&src=53885pdfhttp://www.forrester.com/http://www.forrester.com/mailto:[email protected] -
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2009, Forrester Researh, I. Reprodtio ProhiitedJl 13, 2009
The ROI O Sotware-As-A-Servie
For Sorig & Vedor Maagemet Proessioals
2
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 todays SaaS
deployments are in the thousands o users some even an order o magnitude higher i we
consider examples like Aravos 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 Forresters 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 ohardware 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.
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2009, Forrester Researh, I. Reprodtio Prohiited Jl 13, 2009
The ROI O Sotware-As-A-Servie
For Sorig & Vedor Maagemet Proessioals
3
Increased user adoption. Firms complain to Forrester that on-premise applications suer romlow 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 supportneeds 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 usuallyreduced 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 ofadoption
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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2009, Forrester Researh, I. Reprodtio ProhiitedJl 13, 2009
The ROI O Sotware-As-A-Servie
For Sorig & Vedor Maagemet Proessioals
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Implementation costs. SaaS implementation costs are typically signicantly lower than thoseor 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 oenhave 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 othe 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
Source: Forrester Research, Inc.53885
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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2009, Forrester Researh, I. Reprodtio Prohiited Jl 13, 2009
The ROI O Sotware-As-A-Servie
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Moving to SaaS does not guarantee retirement o hardware or people resources. Firms oenanticipate 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 dont 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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The ROI O Sotware-As-A-Servie
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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
Source: Forrester Research, Inc.53885
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
Source: Forrester Research, Inc.53885
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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2009, Forrester Researh, I. Reprodtio Prohiited Jl 13, 2009
The ROI O Sotware-As-A-Servie
For Sorig & Vedor Maagemet Proessioals
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Fiure 5 Model: Total Eoomi Impat Aalsis Smmar SaaS IT Maagemet
Source: Forrester Research, Inc.53885
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 aompas 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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The ROI O Sotware-As-A-Servie
For Sorig & Vedor Maagemet Proessioals
8
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 omortlevel 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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The ROI O Sotware-As-A-Servie
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9
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 companys 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 organizations 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 GEs 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.
http://www.forrester.com/go?docid=46747&src=53885pdfhttp://www.forrester.com/go?docid=46747&src=53885pdfhttp://www.forrester.com/go?docid=42924&src=53885pdfhttp://www.forrester.com/go?docid=42924&src=53885pdfhttp://www.forrester.com/go?docid=42030&src=53885pdfhttp://www.forrester.com/go?docid=42030&src=53885pdfhttp://www.forrester.com/go?docid=42030&src=53885pdfhttp://www.forrester.com/go?docid=42030&src=53885pdfhttp://www.forrester.com/go?docid=42924&src=53885pdfhttp://www.forrester.com/go?docid=42924&src=53885pdfhttp://www.forrester.com/go?docid=46747&src=53885pdfhttp://www.forrester.com/go?docid=46747&src=53885pdf -
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