Money Matters

Cost savings delivered by SaaS

lady engineer in engineering garb

This is the 2nd in a 5-part series on the benefits of software delivered as a service, commonly referred to as “SaaS.” In part 1 we acknowledged that all SaaS is delivered via the cloud, but also concluded that not all cloud was SaaS.  Indeed, while there are benefits of web enablement and access to software via the cloud when it comes to cost savings, we see far greater potential from SaaS.

These cost savings might come from a variety of sources, the most obvious of which is lower start-up costs, including licenses and implementation costs. There is no up-front license fee and Mint Jutras research finds SaaS implementations typically shave a full month off the time to reach a first “go live” milestone. In addition, there is the elimination of hardware and infrastructure purchase costs, along with the associated cost of maintenance and the cost of obsolescence. And then there’s the reduced cost and effort of upgrades, also contributing to an overall lower total cost of ownership (TCO). And throughout, you also have the option of treating your investment as an operating expense, rather than a capital expense.

In spite of these factors, some industry influencers (consultants, analysts and industry observers) argue that SaaS is no less expensive. This sentiment is reflective of an obvious “rent versus buy” mentality. But licensing software is very different from purchasing a house. You are not building equity in your software purchase – quite the contrary.

The naysayers will generally point to break-even points in the five to seven-year range. In other words, after five (or seven) years, you will have paid just as much as if you had licensed the software and run it on-premise. We might argue that these naysayers aren’t looking at the complete picture and taking into consideration all the direct and indirect costs. But even if this is accurate, it still implies you have paid less during that initial period, which only strengthens the argument for lower start-up costs.

And once you reach that break-even point, the costs associated with a traditional license don’t stop. You still have the ongoing cost of maintenance, and the cost of the IT staff (or a qualified third party) needed to support and maintain it. You also face the cost of obsolescence in having to replace or significantly upgrade not only your hardware but most likely your software as well (more on the topic of innovation in our next blog post).

Let’s take a little deeper dive into each of these different opportunities for cost savings.

Lower Start-up Costs

If you understand how business software is “bought and sold,” the concept of lower startup costs with SaaS should be quite intuitive. But we put that phrase in quotation marks because even today many business leaders don’t quite understand that enterprise applications are neither bought nor sold.

In the past, the software used to run your business was always licensed for use and that practice continues today for on-premise deployments and many hosted ones. It may be licensed for use by a company, on a particular computer or by other criteria such as the number of users. This license fee is a one-time, up-front cost that is typically large enough to be viewed as a capital expense. After the initial payment, there are ongoing recurring costs for maintenance. A maintenance agreement typically provides both technical support and certain innovations. Some of those innovations will be included in your maintenance fee and others (new modules or extensions) might require additional purchase. Maintenance is typically priced as a percentage of the software license and can be accounted for as an operating expense.

In contrast, when software is delivered as a service, there is no initial lump sum payment upfront. Instead of licensing the software you subscribe to it. Maintenance is included in your subscription. And you have the option of treating your software purchase as an operating expense immediately. This breaks down the barriers of entry, along with the fact that you don’t need to invest in a server to run it on.

Elimination of Hardware and Related Costs

Not having to purchase hardware impacts your costs both directly and indirectly. The direct impact is obvious. There is no need to invest in new servers. Of course, hardware costs don’t completely disappear until you successfully replace every application running on-premise with a SaaS solution. With the rapid evolution of technology today, the risk of obsolescence is real. But by reducing the burden on any existing hardware (think computing power and storage), you either defer or ultimately eliminate the need to upgrade.

But there are indirect cost savings as well in eliminating hardware. You also don’t need IT staff to maintain the hardware, except for desktops, laptops and mobile devices. Of course, your IT staff is likely doing more than just maintaining hardware, but the more time it spends on just keeping the lights on, the less time it has for strategically adding value.

A recent Mint Jutras Enterprise Solution Study found 31% of companies that had moved to SaaS had reduced the size of their IT staffs. The remainder and the majority (69%) had redeployed members more strategically, providing more opportunities for these employees to add more value. We also suspect that those who did reduce staff may have used the transition to SaaS as an opportunity to “clean house” so to speak, eliminating staff with outdated technology skills (a reminder to all to keep those skills current!)

Faster Time to Value

Mint Jutras measures time to value in two ways. First of all, we measure the expected and actual time to achieve the first “go live” milestones. We choose this metric for two reasons. First, it is less variable than a full implementation. But bear this in mind: What you accomplish, and how much you achieve in arriving at this first milestone can vary.

Some implementations go “big bang” with all functions going live at once. For example, Avenu Insights & Analytics had just six months to implement new business applications to run the company, which supplies revenue enhancement and administration software and services to more than 3,000 state and local governments. Leveraging Sage Intacct’s cloud financial management platform, Avenu cut its aged receivables accounts in half, trimmed the monthly close by 20%, and accelerated $2 million in cash flow thanks to reducing days sales outstanding.

Others may approach it more incrementally. For smaller companies or those being divested from a larger corporation (on a tight timeline), it might represent their complete implementation. For large multinationals with many different legal entities and/or operating locations, it might represent a single division.

With a traditional on-premise solution, this initial phase might include site preparation, lead time to deliver hardware and the physical loading of software. None of this is necessary for a SaaS implementation, which leads to faster initial implementations, as well as a faster ramp-up for adding new divisions or expansion into new territories.

The second reason we choose this metric is that this is when you are most likely to see specific, quantifiable results.

This leads us to the second way in which we measure time to value: Return on Investment (ROI). In our survey, we defined the timeline for ROI as the time it took to recoup 100% of the initial cost of ERP through cost savings or added revenue.  A full 85% of companies surveyed projected a timeline for ROI and 82% of those who had projected it achieved it. While the average was 2.52 years, those with SaaS implementations shaved about a quarter (3 months) off this and averaged recouping their costs in 2.29 years.

Reducing the Cost and Effort of Upgrades

Cost savings can also be derived from reducing the cost and effort of upgrades. The top challenge our study participants faced in deriving the maximum value from their solutions was the cost and effort of upgrades, which prevented them from innovating. With SaaS, the solution provider does the heavy lifting.

It is one thing to deliver innovation more frequently, but quite another to consume it. If we average the frequency of delivery across all our respondents, we find upgrades being delivered just about every 6 months. We also asked our participants how often they upgraded and found they consumed those upgrades about once every 13 months. But if we contrast SaaS deployments to those licensed, we found upgrades consumed far more frequently (Figure 1) when delivered through SaaS.

This Chart Shows Reducing the Cost and Effort of Upgrades

Figure 1: How frequently are these upgrades “consumed?” Source: Mint Jutras Enterprise Solution Studies

In our next installment, we will explore how SaaS solution providers can potentially deliver more innovation through more frequent and robust upgrades. But from a cost perspective, not only are you relieved of an immense burden, but also think of not consuming innovation as a lost opportunity cost to your business.