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Estimating cost of ERP as SaaS requires ditching old methods

Experts suggest the true value of ERP as SaaS derives not from the early savings but from being able to use a more modern, adaptive and secure platform in the long run.

Calculating and comparing the true full cost of business applications, especially ERP apps, have always been a tricky undertaking. With so many companies shifting from an on-premises system to the cloud -- often running their ERP as SaaS -- how they deduce costs has turned into an exercise in adaptation.

Whether they're trying to speed up their ROI or compute the ongoing total cost of ownership (TCO), companies are having to perceive the value of their software investments in a completely different way.

New ways to evaluate the value of ERP as SaaS

SaaS ERP vendor FinancialForce has embodied that evolution by dispensing with the traditional term ROI and instead focusing on a concept it calls "time to value." In other words, because potential customers want to see how fast software instances can be up and running and what kind of impact they'll have before committing to further use of the product, FinancialForce is enabling prospective buyers to evaluate live deployments of software before they pay for it, rather than spending six months testing them in a sandbox.

It's not just about changes in how you procure or pay for software. It's a different approach to how you evaluate software.
Kevin RobertsDirector of platform technology, FinancialForce

The company calls this approach "smart stops," combining preconfigured environments, known deliverables and achievable time frames into bite-size test runs. It's a strategy that reflects how widespread adoption of SaaS applications is changing the relationship between organizations and the software they use, said Kevin Roberts, director of platform technology at FinancialForce.

"It's changing the way people buy applications," Roberts said. "It's not just about changes in how you procure or pay for software. It's a different approach to how you evaluate software."

Steve Cox, group vice president of product marketing for Oracle ERP, agreed, that the ROI and TCO of a piece of software now take a back seat, to its ability to change a business.

With companies reorienting themselves around customer expectations and a fast-changing regulatory framework -- not to mention the constant need to contend with new and rebooted competitors -- they want software that adapts with them more than software that meets a budget or conforms to preconceived cost expectations.

"It's not the long-term costs of on-premises software we tend to discuss with customers," Cox said. "The discussion tends to be around the need to be on the most modern software, feel good about security and have a platform for innovation."

Bill McNee, a longtime analyst, who now blogs about business innovation as managing principal of McNee Associates, argued that a big reason companies have been changing the way they evaluate software is that trying to compare the TCO of traditional business apps to those residing in the public cloud simply doesn't make sense.

"I've not been a big fan of doing this sort of analysis," McNee said via email. "Comparing cloud apps, yes but not TCO of traditional apps versus cloud apps."

ERP as SaaS offers multiple benefits

Another problem is the whole nature of SaaS apps -- they're leased, not purchased -- and that has led Denis Pombriant, principal analyst at Beagle Research, to ditch the term TCO and instead rely on "total cost of use" (TCU).

That said, Pombriant doesn't think that calculating the true costs of ERP as SaaS and comparing them to the on-premises systems being replaced has to be so mysterious. In fact, he believes it all comes down to one word: accounting.

"This isn't that hard," Pombriant said. "It requires including TCU for the whole lifecycle and making some real-world assumptions about the cost of doing business with an old system."

Stephen Horrocks, CFO of British IT consultancy Methods, which has, in recent years, adopted SaaS offerings for a variety of business functions, including ERP, said that SaaS apps often bring value that on-premises software couldn't possibly match, masking costs that organizations didn't even realize could be tied to their software.

"What a lot of people don't think about is the hidden cost of not getting it right," Horrocks said. "Not being [able] to count on the fact that information is accurate and that you can quickly act on it; spreadsheet factories that exist beneath and beside the system; the time it takes to have people do non-added value work. No one assesses these things."

Along those lines, Roberts of FinancialForce brought up another unexpected cost that's being reduced by SaaS: audit fees.

"We see customers slashing this cost," Roberts said. "There's an extraordinary benefit to having access to everything without having to turn over every rock."

That, in turn, leads to other unforeseen benefits. Horrocks, for one, said Methods is starting to realize the value it's able to extract from the data in its FinancialForce system -- which runs in the Salesforce cloud -- and, as a result, is being asked to put more demands on that data. It also has had to add one more administrative person to manage its Salesforce environment, which introduces a cost, but also a benefit in the form of another mind that can identify potential uses of the new software.

"We're identifying new ways of automating things that we didn't know were possible at first," Horrocks said.

FinancialForce's Roberts insisted there's one other factor impacting the total cost of SaaS apps that companies should consider. Because SaaS vendors typically don't start making a profit until two to four years into a customer relationship, both parties have a vested interest in the customer's ongoing success. No one who oversaw a monolithic ERP deployment in the 1990s would say that was the case then.

"It creates more of a partnership between vendor and customer," Roberts said. "It's much closer than it was in the past."

This was last published in January 2018

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What, in your opinion, is the true cost of ERP as SaaS?
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Tony - of course the answer is it depends on factors like how much it has been modified, what the enterprise agreements look like, etc. Please see my comment on Workload TCO Analysis. - Bill Kirwin
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Just chiming in. As the "Father of TCO" I recognized several years ago that as the world migrated from assets to services, the idea of owning was dated. That is when I developed the idea and methodology to determine total cost of services (TCS). TCS looks at the aggregated cost of delivering a service, which includes assets, labor and other resources and aligns with  consumption-based approach. However, the TCO principles clearly align with making decisions about technology options - the proverbial shoot-out between competing scenarios. To more accurately assess those decisions, we have created the TCO Alliance and a service offering called Workload TCO Analysis. This compares a defined workload baseline and multiple scenarios for what it would cost on alternate platforms. As a comprehensive tool it includes the cost of governance, which includes audit and other management oversight and control.
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