Does SaaS Save Money?

April, 2013

According to a soon-to-be-published report by Computer Economics, IT decision-makers appreciate the benefits of software-as-a-service (SaaS) such as speed, agility, and scalability. But there is one benefit that they do not rate highly. They do not see that SaaS saves money.

Interviews with IT leaders who have implemented cloud-based business applications indicate that, while they are generally happy with their decision to go to the cloud, there can be significant costs associated with SaaS. Recurring costs often include per-user fees, platform costs, and partner per-user fees for complementary functionality. In addition, the up-front implementation consulting fees can be as costly as for on-premises systems. 

Cloud providers often argue that the real benefits of SaaS are not in direct cost savings but in the flexibility, agility, and scalability benefits that are derived from moving systems to the cloud. Nevertheless, for organizations to make intelligent decisions regarding cloud-based systems, it is important to understand the relative costs of SaaS vs. on-premises systems. In other words, does SaaS save money?

Four Theories

Why might adopters come to the opinion that SaaS does not save them money? There are at least four possibilities.

  • Theory 1: SaaS does save money, but customers do not realize it. In other words, perhaps customers do not fully appreciate the cost of staffing and supporting on-premises systems, such as the cost of implementing future upgrades. These are costs that are eliminated or greatly reduced with SaaS. But since customers do not fully recognize those costs, they do not count those savings. Or, because of the cost, they might be avoiding upgrades of on-premises systems and not recognizing the price their organization is paying by not staying current.
  • Theory 2: SaaS does save money, but you only realize those savings when you completely eliminate your on-premises systems. If you still have most of your systems on-premises, moving just one of them to the cloud does not eliminate your data center or data center staffing. So, you are not able to realize the cost savings from eliminating the data center.
  • Theory 3: SaaS does save money, but vendors do not pass along those savings to customers. In other words, SaaS applications are cheaper for vendors to develop, deploy, and maintain, but SaaS providers are just matching the prices of on-premises vendors and enjoy extra profits.
  • Theory 4: SaaS is more expensive than on-premises systems, but the cost is worth it. Perhaps SaaS does not save money, but the value of SaaS in terms of flexibility, agility, and scalability are so overwhelming that it is worth it to customers to pay extra.

These four theories are not mutually exclusive. For example, SaaS may save money (Theory 1) and also allow vendors to appropriate some of the cost savings as extra profit (Theory 3). Or, a mix of on-premises and cloud systems do not save money (Theory 2), but it is still worth it for customers in terms of agility (Theory 4). Furthermore, the answer may be different for different SaaS applications. For example, perhaps cloud CRM saves money, but cloud ERP does not.

More Data Needed

The question is still unanswered. Generally, from the customer’s perspective, does SaaS save money?

To answer this question, Computer Economics has launched a survey. As part of our annual IT spending and staffing survey, we are looking for organizations that have moved most or all of their applications portfolio to the cloud. In other words, we are looking for organizations that have no internally supported data center, or at least, a minimal set of on-premises systems. We are asking these customers to take part in our regular annual survey, and we will compare the IT spending ratios of these select customers against our standard industry ratios for IT spending and staffing. We will also interview these customers to learn more about their experience with SaaS and the perceived value as well as challenges.

Through this study, we hope to be able to answer three main questions. First, do companies that have gone largely to cloud computing spend less on IT than those that have not? Second, how does the mix of IT spending differ? Finally, where do customers see the business value of SaaS?

We already have a handful of respondents and the initial data is quite interesting. But we need more. If you are a company that has implemented all or most of your business applications in the cloud, please apply to take our survey. As an incentive, survey participants will receive $2,500 worth of research reports.

Apply for the Computer Economics Survey