Wednesday, May 31, 2006

SaaS Done The Wrong Way Equals More Cost For The End User

"Jim Nasmith, the CIO of a Fortune 500 company, called a meeting with his VP of Procurement, Steve Hightower, regarding purchasing a new software package. The software vendor had given them several purchasing options labeled "Software as a Service", and Jim wanted to analyze them to achieve the lowest cost of ownership.

One of the options was per-year subscription pricing rather than paying an up-front license. Jim and Steve added up the total costs for both possibilities over five years, and found that subscription pricing cost even more than paying for a perpetual license. The terms also allowed the software vendor to increase subscription prices after the third year, and Jim would have to continue paying each year for the software beyond five years. "This subscription pricing is just a way for the software vendor to charge us even more," Jim said. "We can finance the cost of the license and pay less than the vendor's subscription price."

The software vendor also had offered to host the software in its data center. Jim calculated his internal incremental costs to run the software internally in his shared data center, and again was surprised that the vendor's hosting charges were more than his alternative. "The vendor said they could operate their software more efficiently than we could, but where are the cost savings for us?" Jim asked.

"Plus, the implementation project will still take many months and cost almost a million dollars, and we will have to pay the vendor to perform an upgrade every few years. Maybe this 'Software-as-a-Service' trend isn't all it's cracked up to be," Jim concluded."

Read on to find out how to do SaaS the right way.

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