In our last post on the buying of enterprise software, we discussed the process by which you could identify potential solutions capable of meeting your needs. In today’s post, we talk about how you identify the components required in your cost models, define the appropriate lifetime calculations, and why these cost models are critical to good solution identification.
4. Build Your Cost Models
Those of you who know software know that there’s the up-front price and then the true back-end cost that materializes after you sign on the dotted line, and that the back-end costs can often outweigh the up-front pricing by an order of magnitude, especially if you are going to be tied to the system for a number of years. Thus, before you enter into negotiations for any piece of software, it’s important to understand the range that your total lifetime ownership costs are likely to fall in, how this range compares to other solutions, and whether the ROI is likely to be there. If the annualized total cost of ownership is in the millions and you only have a quarter million per year in the budget, if the median cost is three times as much as the median cost of other solutions being considered, or if the ROI is negative, then you immediately know that a solution isn’t appropriate and can narrow your search, evaluation, and negotiations to other potential solutions.
While the total cost of lifetime ownership will depend on the delivery model of the software being delivered, the pricing structure used by the vendor, the skills of your internal IT support department, the price concessions you get in negotiations, and a host of other factors, it is possible to build a reasonably accurate model based on the delivery model of the software, the supporting platform requirements, and benchmark costs (which can then be refined during negotiations with the shortlisted vendors).
Furthermore, there’s no fast and simple rule as to when a certain type of application will be cheaper. Some people will argue that SaaS is always more expensive in the long run, on the faulty premise that rental models are always more expensive than up-front buys, and some will argue that SaaS is always cheaper on the faulty premise that SaaS does not require back-end hardware costs or internal support personnel, which can cost hundreds of thousands of dollars a year. The fact of the matter is that each buying scenario is different. It strongly depends on the solutions being considered, current market pricing, whether or not the space has recently seen any disruptive entrants, and how long you are likely to keep the application. If the trend is to replace the application you are buying every 5 years, and the rental model only becomes more expensive in year 15, the on-premise advocates don’t have a leg to stand on. If the solution you are buying does not require much in the way of compute power (as all it does is suck data in, aggregate it, and spit out some basic reports), your racks are only running at 50% capacity, and it’s a product your new network admins are already familiar with, it might not require that much in the way of support, knocking the legs out from under the SaaS evangelists. You’ll never know which solution is truly cheaper until you build the model, get the facts, do the math, and then negotiate for the best deal you can get.
On-Premise applications will generally entail at least the following costs:
- License Cost (Up Front)
- Maintenance & Support (Annual)
- Dedicated Server Costs
- Supporting Software Costs, usually Database and Application Server at a minimum
- Implementation & Customization Costs
- Integration Costs
- Training Costs (Up-Front)
- Internal Support Costs
- Major Software Upgrade Costs, usually every 2-3 years
- Hardware Upgrade Costs, approximately every 3 years
- (Re)Training Costs (on Upgrade)
Hosted ASP applications will generally entail at least the following costs:
- Annualized License and Maintenance Cost
- Annualize Hosting Cost that consolidates hardware, bandwidth, and support costs
- Major Software Upgrade Costs, usually every 2-3 years
- Implementation & Customization Costs
- Integration Costs
- Training Costs (Up-Front)
- (Re)Training Costs (on Upgrade)
True multi-tenant SaaS Applications, that don’t require a dedicated instance and the costs that go along with the classic ASP model, will generally entail at least the following costs:
- Annualized License, Hosting, and Maintenance Cost
- Implementation & Customization Costs
- Integration Costs
- Training Costs (Up-Front)
In our next post, we will discuss the calculation of each of these primary cost elements.