I recently met with an old friend, who we will call Bob, who owns his own successful services business. He engages with a high number of customers through a fairly low volume of transactions. Their contracts with customers are fulfilled exclusively using contractors. I had done some consulting work in the past to help the company reduce its IT costs while improving service levels using third parties exclusively - the company has no internal IT resources and wants to keep it that way. The company uses an IT solution which is similar to an ERP which is purpose built for their industry. This one was built in the early 1990's and is starting to show its age in many ways. It is difficult to use, expensive to change, and has none of the capabilities of a modern application.
Given Bob's desire to keep a lid on IT costs and address the shortcomings of his current application I decided to approach Bob with a cloud-based solution which would deploy salesforce.com and use the Force.com platform to develop the customized bits to make the final solution business user ready for Bob's company. Bob agreed to see a demo and go from there.
I prepared for the demo by prototyping a small component which was critical for their business using the Force.com platform.
The demo took about two hours and Bob was fully engaged, asking questions and clearly quite impressed. I navigated my way through an action-packed demo of salesforce.com, complete with customizations for Bob's industry, integration to a web page to collect leads, online case management from the web, mobile integration, and real-time synchronization of information in Outlook. Before I could even wipe the sweat from my brow, Bob asked the all important question, "How much?"
Well, those of you who make your living selling know this is one of those very important questions that demonstrates real interest on behalf of the buyer. All those expensive sales training courses I took over the years drilled it into my head this is a critical moment and the very last thing you do at this point is quote a price. All the training will tell you to begin the process of reeling in the fish very carefully to ensure the hook is set before scaring them away with price. So what did I do? I promptly forgot about all the sales training and blurted out the annual subscription fees for salesforce.com for the number of users Bob would need for his company.
Now Bob said, "Well that's more than I'm paying in maintenance for my current solution."
Having worked with Bob to reduce his IT costs I knew how much he was paying for maintenance on his current solution and replied, "That's true Bob, but software maintenance is just a part of your annul cost to support the application. What about the servers (3 that I knew of), database licenses, IT support (all of which Bob had outsourced at commercial rates for all IT services), virtualization, and backup services?"
And because it's always best to try for the knock out blow before the buyer can catch their breath, I added, "And remember last fall when you lost your application for three days because the disk mirroring wasn't working and you had to go to a backup to recover? Well, that kind of thing isn't going to happen anymore."
Bob now looked at me like he either had a very bad case of stomach cramps or was thinking about committing violence, "But Kalvin (and he might have felt like adding - 'you moron'), I've already bought all of that stuff. And my current application works just fine for my business needs. And the backup recovery process worked just like its supposed to..."
I had now turned the conversation into a debate, or perhaps even worse, an argument. It dawned on me at that point I would not recover from my enthusiastic rant and it would be best if I backed off for the time being. We both agreed to talk at some point in the future when I had something compelling to share with him (and he was likely hoping whatever happened next didn't involve me continuing to tell him he wasn't 'getting it').
I have a background in cost benefit analysis and before starting a process of cranking the numbers myself I decided to see what was available online. In earnest I started my online research and found various cost calculators. The free ones are mostly provided by vendors of products and to me demonstrate a bias towards the vendor's products. There are also a number of companies offering value calculators or TCO calculators as their central offering and they, of course, require compensation for efforts. I didn't want to go down this path for an opportunity which was still speculative.
I decided to build my own simple model in an Excel spreadsheet. You may download a copy if you wish. I discovered very quickly is there is no such thing as a simple TCO model. In the case of Bob's company, to obtain enough value to justify the implementation of a new solution would also dictate integration from the cloud-based solutions to both in-house applications and the company's online presence. The online presence is hosted with a third party hosting company. It would also mean a redistribution of IT services from their conventional supplier of in-house services to a cloud services provider. It is also has a profound effect on current development costs and time to implement changes.
The important point here is for many companies with a base of legacy applications, the introduction of SaaS applications will require integration and sustainment activities with in-house or other outsourced applications.
I therefore organized the model recognizing an investment in SaaS may also involve an investment in in-house applications and a change to the shared services model for the entire IT environment:
SaaS costs
- subscription fees based on multiple billing models per solution
- premium support fees (for 7x24, for example)
- incremental device costs required to support the solution (does everybody get a PDA to run the app?)
- complementary services - startup, development, testing, documentation, ongoing configuration, etc.
- expenses - T&L, etc.
- license costs
- maintenance and premium support
- incremental devices
- servers
- network
- environmental - facilities, power, recycling
- hosting
- complementary services - startup, development, testing, documentation, ongoing configuration, etc.
- other expenses
Shared Costs
- business continuity
- business practices
- interfaces
- desktop support
- server support
- database management
- storage management
- security management
- network management
Working through the TCO model for Bob's solution, it is very clear the TCO will be lower for the SaaS or cloud-based solution. The principal reason is the core application we are replacing is the mission critical application for the business. We will be reducing the shared costs by 70% and in-house costs by an equivalent percentage. The new SaaS costs are very manageable as the number of users required in the business is not significant and number of users is the primary pricing mechanism for salesforce.com.
The interesting learning for me, however, is in future I will not likely be so quick to assume TCO will always be lower for a cloud-based solution, especially in a legacy environment with many established systems where the introduction of the proposed SaaS application does not significantly displace some existing costs, or where the foot print of the SaaS application is not significant enough to drive the value of its incremental cost.
TCO only the starting point. It comes down to value.
So while I believe it is meaningful for us all to crank the TCO model using something like the model provided here (we don't ask for your email id or other info), we also need to assess the value of the respective solutions being evaluated, whether they are SaaS or on-premise applications to ensure we get the best possible return on our investment.
The bottom line - TCO is only the first step in comparing solution alternatives, whether they are cloud-based or on-premise. While important, it is only a determining factor in influencing solution alternatives where the cost of on-premise or shared services can be significantly reduced. In most cases we need to evaluate the business impact of the various alternatives in the form of a cost benefit analysis, where TCO is one component of the business case.
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