Most people quickly answer this question in the affirmative. I certainly do. However, there are people out there who aren't sure. They look at the monthly cost of a SaaS application and compare it to the equivalent licensed product over an extended period of time. Given enough time, you will eventually hit a point when the SaaS product appears to be more expensive. Let's look at it from the perspective of the total cost of ownership (TCO).

The true cost of a licensed product is much higher than just the software. Here are other things to factor in:

  • Hardware costs: You have to either buy machines or add your software to existing servers and manage them. If it is a mission-critical application, you will probably need dedicated machines and back-ups.
  • Additional software costs: You will most likely need an OS, application server software, a database, monitoring software, etc. Many of these products are open source now, but there are still associated costs.
  • Implementation costs: In my experience, the implementation costs associated with a behind-the-firewall solution are always higher than those of a SaaS application. There is simply more to do. You will either pay consultants or use your own valuable resources and time to worry about installing software, integrating it, building servers, configuration, etc.
  • Maintenance labor: If you have in-house software, there is going to be some level of effort required to keep it happy. Your IT people will need to take care of it, which will keep them from doing more value-added activities.

Another huge factor here is the ability to get the latest and greatest technology. Once you install software in a data center, it becomes more difficult to upgrade and maintain it (especially if you customize it). In such a case, you will be stuck with old software that you will have to replace in the same time frame described above. In other words, unless you are absolutely sure, beyond a shadow of a doubt, that your licensed software is going to meet your business needs for 5 years or more, then SaaS might make financial sense.

Let's look at a real-world example. A 100-person company has been sharing files via email and internal servers. The executives have finally concluded they need to join the 21st century and put a solution in place. One option is to implement SharePoint. Here is a rough estimate of what that might cost:

Year 1
MOSS server = $4,500
User client access license = $90
Hosting and maintenance = $5,000
Implementation and developer support = $20,000
Total = $29,590

Year 2 and on
Hosting and maintenance = $5,000
Developer support = $3,000
Total = $8,000

I know of a SaaS solution that has 80% of the file-collaboration functionality of SharePoint but charges $850 per month for 100 users.

Year 1
SaaS fees = $10,200
Implementation support = $10,000
Total = $20,200

Year 2 and on
SaaS fees = $10,200
Total = $10,200

It would take over 4 and a half years before the licensed software became cheaper. By that time, I'm quite sure there would be another solution that could replace SharePoint, and the cycle would start again. We can quibble about the numbers, but you get the point. Plus, the numbers don't reflect that the SaaS solution is likely to improve and innovate faster than the licensed software by a significant amount.

What do you think? Have you done this analysis, and what did you conclude?