|By Richard Minney||
|September 10, 2013 10:18 AM EDT||
To state the obvious, businesses of all sizes are moving their applications to the cloud or renting software as a service (SaaS) instead of licensing or buying the software outright.
The number one reason people cite is cost. Businesses large and small are under the impression they can save a bundle by moving their apps to the cloud. At the same time, companies who handle a move to the cloud badly can suffer a negative backlash from their user community.
When you consider all the cost factors, like your time, energy and risk to your business, will you save money in the long run by going with SaaS? The short answer is no.
One thing is clear: businesses will pay less up front for cloud vs. on-premise. Modern SaaS systems are rented on a pay-as-you-go basis, or might have short-term contracts. Average license fees for equivalent on-premise software range from two to three years' worth of SaaS subscriptions. Add in 20% annual maintenance when you buy and install your own software and you are in concept paying three years' worth of subscription revenues up front for the same tools.
Take into consideration the historically low cost of borrowing and the up-front license fee as the equivalent to three years or more of rentals. But three years isn't long for an established business. If you intend to own your software for more than three years, is it cheaper to buy vs. rent? Not quite.
Hidden Factors of SaaS
One of the first hidden factors you need to consider is flexibility. Most cloud software allows you to flex up and down your user base and pay more or less accordingly. Contrast this with paying cash up-front for installed software with no chance of getting that money back. If you grow and bring on more users, you must go back to the negotiating table, only this time the software vendor has the upper hand. So, if you plan on increasing or reducing your workforce over the next three years, you need to consider the greater flexibility that most SaaS products offer.
The second hidden factor is the hassle, time and resources required to manage everything. It isn't zero with a cloud product, but it is a lot less as compared to on-premise software. With cloud business software, you can wave goodbye to servers, back-ups, disaster recovery, upgrades, patches, performance monitoring, tuning and other server administration tasks. You still need to support your users and manage user access controls, system settings and perhaps a range of third-party plug-ins or interfaces, but much of the headache is gone (or at least outsourced as part of the rental fee).
One thing to remember though: you just put the security of your business data in the hands of someone else. Ask yourself who that someone is; do you know them? Who is their hosting partner? Is it one of the major players like Amazon, HP or Google with good procedures and back-up plans, or is it some three-man outfit in a far-off land with questionable credibility?
This hassle factor can be quite expensive. According to IT services firm HCL Technologies, the average cost to run on-premise systems is $1,518 per user per year, or just over $125 per user per month. But then, the cost of an enterprise user license for Salesforce.com is also $125 per user per month.
If you are a large firm, the fixed infrastructure and IT competency center cost looks small, but for a small business it really hurts.
You need at least two IT people to manage in-house systems so one is always there if the other is out. Two IT folks and a few servers in the US costs upwards of $10k per month. Spread that IT cost across 1,000 users, and $10/user/month is not bad. But at around 100 users, still quite a significant business, that's an extra $100/user/month just to manage everything in-house. Ouch!
As Apple has found out, making software easy and fun to use increases usage and adoption, which can only be good for your business. But more important than what the software looks like when you first install it is how it will look in three years' time. With cloud software, you are constantly getting software updates, wanted and unwanted. In other words, you are always using the latest version.
With on-premise installed software there is a huge financial disincentive to upgrade. Between the upgrade cost, business interruption risk, and the potential to pay more for license or maintenance as a result, most installed business software is five years out of date. Since you are buying 1990′s technology in the first place, in five years' time when you are still using the same version you will be some 20 years behind your peers running their business in the cloud.
You need to consider all these factors when comparing the true cost of cloud vs. on-premise. If you reach the conclusion that cloud software is considerably less costly, then you are in good company. Adoption rates for cloud software are many times higher than for new installed on-premise software.
However, when you take a long-term view, you might find that cloud software is actually more expensive than on-premise. This is when you must factor in the flexibility and reduced hassle of managing software in the cloud and note the fact that you will always be using the latest version. In many cases, the balance will tip back in favor of the cloud - even over a 3-5 year period - for all but the largest businesses.
Only you know your business' needs, and it is worth taking the time to find out if the cloud is right for you.