Calculating the ROI of implementing SaaS

A Total Economic Impact model uncovers the long term value of SaaS

Firms almost always consider SaaS as a cost advantage over on-premise software in the short run due to its pay-as-you go rate and low cost of implementation, but many firms also question the long term value of SaaS and if there a cost crossover point between the “rent and own” version of software.

Forrester examined client decisions across a range of SaaS solution areas and found that firms do obtain long term value with SaaS solutions.

Firms use SaaS for more strategic, larger, and long term investments. SaaS has grown far beyond its early roots of popularity in a few select application areas such as HR and CRM technologies and is now gaining acceptance across a broad range of applications for business and IT user populations alike.

3 factors that determine the ROI of SaaS

Companies can use the simple version of Forrester’s Total Economic Impact(TEI) to consider:

• The benefits: how will your company benefit?
• The costs: how much does it cost on cash and resources for SaaS?
• The risks: how do uncertainties change the total impact of SaaS on your business?

Key benefits

How do companies benefit from using SaaS?

1. Rapid deployment

SaaS eliminates the need for firms to acquire their own set of hardware as well as associated testing, frequently offering a ready-to-go preconfigured solution that firms can turn on in days or weeks with minimal configuration.

SaaS also makes it easy for firms to deploy incrementally and offers short commitments of monthly or annual contracts — which means that purchasing cycles are often shortened as well.

Beyond initial deployment, SaaS also makes it easy for firms to roll out new users, new sites, and new functionality as it is often simply a matter of turning on the new logins or the new features.

For many firms that Forrester has interviewed, this time-to-value is a win for SaaS versus on-premise alternatives — in the short and long run.

2. Increased user adoption.

Firms complain to Forrester that on-premise applications suffer from low user adoption rates, despite significant investments in end user training and user interface design. However, SaaS applications frequently inherit their user interface from familiar Web programs.

This means that users feel that the user interface flow is natural and more intuitive.

Furthermore, SaaS applications are more likely to deliver proactive usage reports — which means that firms can more easily identify gaps in user adoption and either eliminate those subscriptions or address the problem.

3. Reduced support needs

Firms that we interviewed reported a significant reduction in support needs when moving from on-premise to SaaS.

One firm that previously paid a third-party IT services firm for support was able to eliminate those resources completely, while many others redeployed internal resources onto other projects.

Technical support staff (bug fix, patch) are usually eliminated completely as the SaaS vendor performs these tasks. Help desk staff is usually reduced because of SaaS’ enhanced usability and more useful training, built-in tutorials, and help files.

SaaS applications are more standardized and therefore the provided help materials remain more relevant.

The scale, timing, and duration of these benefits can be estimated by considering one or more key metrics and the value to the organization of improving those metrics over time.

Key costs

This TEI model considers scenarios of firms moving from existing on-premise deployments to SaaS solutions rather than net-new purchases of SaaS versus on-premise.

Therefore, organizations implementing SaaS will incur subscription costs for 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.

Implementation costs

SaaS implementation costs are typically lower than those for on-premise implementation. SaaS solutions often have reduced customization capabilities which keeps costs down. A disadvantage would be that SaaS has a smaller footprint than fuller on-premise software which means additional costs in areas like single sign-on and setting up integrations during implementations. Although these costs are relatively small compared to other costs saved during SaaS implementation. But SaaS still requires process consulting typically of all other software.

Recurring costs

The recurring costs in SaaS is the subscription costs. Firms may often have recurring costs for integration tools or other add-on technologies not included in the base subscription, from partners or from the SaaS vendor. People costs such as admin and support cost though greatly reduced dinner go away entirely.

Upgrade costs

SaaS solutions offer seamless, automatic, frequent upgrades as part of the ongoing subscription charge. Because the upgrade happens more frequently and therefore incrementally than on-premise solutions, they typically have significantly reduced testing and end user acceptance and training costs. Firms rarely have to re-engine third-party consultants they way they would with a major on-premise upgrade.

Key risks

Factoring these 2 risks into the analysis of SaaS implementation options converts an unachievable plan into one with high accuracy.

Moving to SaaS does not guarantee retirement of hardware or people resources. Firms often 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-effective in the long run. Some firms find that they end up spending too much money on change management, integration, or force-fitting a SaaS solution into their business process needs while others find the SaaS solution only covers a small footprint of functionality and that they do not entirely retire hardware and people resources.

Softer benefits around adoption, training, and scalability require planning and monitoring. Firms that are counting on increased adoption and reduced training as part of their benefits 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 suffer from serious usability flaws.

Calculating ROI for SaaS has specific considerations by application type

Beyond considerations common to most types of SaaS, firms must consider application-specific issues as well.

For example, some types of applications (e.g., employee-facing applications and CRM) have a high end user population, so usability is a big factor that can significantly affect training time and cost and user adoption of the solution — all of which heavily tie into ROI (see Figure 3 and see Figure 4). In contrast, IT applications — like IT management, security, and backup — are likely to have small end user populations and therefore are less likely to benefit from user adoption and training cost reduction in a significant way (see Figure 5). Many of the firms that Forrester interviewed talked about the significant effect that user adoption has on the usefulness of analytics and reporting on data contained in solutions and therefore the ability to drive useful business decisions from solution information.

Other key considerations include breadth of application footprint, which will determine hardware and IT staff 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 significant impact on costs incurred. In terms of upgrades, some categories of SaaS will benefit significantly from feature/ function enhancements that happen frequently (like GRC, where the actual risk profiles can be updated), whereas other types of applications are in areas where firms might be less inclined to care about new functionality (e.g., accounting packages).

SaaS can be a long term win as well — with benefits than costs savings.

Firms that Forrester interviewed have identified long-term benefits from SaaS using five-year cost/ benefit analyses. While almost all firms see a short-term win for SaaS in a net-new environment, many have also determined a longer-term value of SaaS, even in larger, established on-premise environments where firms achieve economies of scale in their own IT department.

Beyond simple factors such as subscription fees versus new license fees and associated maintenance, key factors that affect whether SaaS will be a long-term win include the ability to reduce or eliminate hardware costs, IT support/staffing, upgrades, software maintenance, and cost of capital. Firms also like the benefits associated with SaaS including the frequently higher adoption rates, reduced training costs and time, and ability to scale subscription up or down more easily to match needs.