How should CFOs calculate the TCO of SaaS software?

Expert Hyoun Park explains why thinking of a SaaS software investment in terms of TCO isn't the most important consideration.

The best way to look at the total cost of ownership (TCO) of a Software as a Service application is to consider the costs of the software, hardware, labor, consulting and training associated with the existing process compared to the SaaS application. However, although SaaS applications typically have a lower TCO than on-premises applications due to the lack of hardware, maintenance and upgrade costs and to improved alignment between the application and the use case in question, chief financial officers (CFOs) should not use the TCO of a SaaS application as the key metric.

Hyoun ParkHyoun Park

Instead, CFOs should consider SaaS software, like any business purchase, in terms of return on investment (ROI) and payback period. ROI is useful in that it takes a value-based approach that includes the SaaS application's contribution to reducing operational costs, sunsetting obsolete equipment, reducing headcount, and supporting new and innovative business capabilities. However, because of the inherent risk in projecting ROI beyond a 12-month time frame, CFOs should really consider the payback period as a key metric for new technologies. If a technology can pay for itself within 12 months and continue to provide value above and beyond the cost of capital, it is a profitable technology.

About the author:
Hyoun Park is principal analyst at Nucleus Research, overseeing primary investigative research on analytics, big data, business analytics, social software and enterprise mobility. Follow him on Twitter @hyounpark and read his research at the Nucleus Research website.

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