• Overview
• Cross Functional Team Formation
• Need Identification
• Potential Solution Identification
• Cost Model Definition
• Cost Model Calculations
• Negotiations
• Contract Definition Management

The Seven Shards of Software Acquisition

• Part I: IT and The Big Lie
• Part II: Checklists and References
• Part III: READ THE CONTRACT
• Part IV: Forego The Escrow
• Part V: Market Realities and Mind Games
• Part VI: Tips on Drafting a Truly Unbiased RFP
• Part VII: Fine Tune Your RFPs for Streamlined Performance

Jason Busch had a great post on Oracle’s new Sourcing on Demand offering on Spend Matters in “Going SaaS – Oracle Launches Sourcing On Demand Part 2” yesterday. Although it was a few paragraphs longer than his average post, and included a laundry list of features, it’s worth a read as it has some insightful information that is hard to come by. (Oracle, like a few other large players in this space, are very selective in who they talk to and, as such, solid information is hard to come by on the independent blogs.)

As I have not had the opportunity to demo the product, I’m not going to do a technical review but I am going to highlight two important take-aways from Jason’s post.

1. The original design of R12 (and MRD), which the new on-demand solution is based on, was written in 2004 and was 3 years in the making before its initial release in 2007.
   This says that while the solution may still be good, don’t expect the latest best-of-breed functionality. It’s not going to be there.
2. The list pricing is $850 per user per month with a minimum of 20 seats (and a set up fee of $5,000)
   Doing the math, that’s a minimum of 17,000 a month or 204,000 a year. That’s likely (at least) twice what you’ll pay for what I consider to be competitive on-demand best-of-breed sourcing solutions, especially in this market. I’m not saying it’s not worth it, but if it doesn’t “fit” snugly into your current platform, the ROI might not be there. Be sure to do a TCO/TVM assessment before making a decision (and consider bringing in an RFP Expert and Deal Architect to help you out).

Coupa recently released a good white-paper that did a great job exposing the true costs of On-Premise Software and why Software-as-a-Service, even with its annual license fee, can be much cheaper, especially when one does the long term calculation. Whereas SaaS generally has just two costs, the annual license fee and training costs, which are usually nominal as most of today’s SaaS technology is starting to utilize B2B 3.0 technology, which is more-or-less self-explanatory, on-Premise software has a host of up-front and hidden costs. In addition to the up-front perpetual license fee and installation costs, which can sometimes run into the seven (and even eight) figure range, you typically have additional up-front costs for required support software (such as databases and application servers) and hardware (as you need to buy production, backup, and QA servers and storage area networks). Then, you have annual maintenance fees, every few years you have to upgrade — or risk losing support for the version of the product you are on, and every few years you’ll have to upgrade your hardware as well. Finally, you have on-going training and re-training costs and, more importantly, on-going internal support costs that consists of the salaries of the system administrators and user support representatives that you need to maintain the system and support the users — and when you consider that you will need one support representative for every 25 to 35 users in a typical organization, these costs will quickly dwarf the acquisition costs.

Consider the following example for an average mid-size business over five-year and ten-year time horizons. Assuming that a perpetual license to an e-Procurement solution could be obtained for $150,000 and that maintenance could be negotiated at a mere 25%, by the time you factor in the need for six servers (for production, back-up, and QA before patches are applied in production) which need to be replaced roughly every three years, database software, application server software, upgrade costs at roughly $40,000 to $60,000 a pop every three years, initial implementation costs, training, and internal support costs which consist of a system administrator who likely makes at least $90,000 a year at 50% utilization and two support representatives who each make at least $60,000 a year, you end up with a fully burdened total cost of ownership that is anywhere between $150,000 and $240,000 a year! Compare this to a SaaS system, like Coupa, that can be obtained, depending on the size of your organization and e-Procurement needs, for somewhere between $25,000 and $50,000 a year. Now, it’s true that not all on-premise solutions will be this expensive and not all SaaS solutions will be this cost-effective, but it will usually be the case that the fully-burdened cost of traditional on-premise enterprise software will be significantly more expensive than SaaS.

What should you conclude from this? Simply that you should only choose an on-premise solution over a SaaS solution if:

• the SaaS solution is not evolved enough to meet your needs and
• the additional ROI you expect from the on-Premise solution is more than enough to cancel out the extra costs associated with an on-Premise solution for the next three to five years (as you’ll be stuck with the solution at least that long, whereas most SaaS providers allow you to go month to month after an initial six to twelve month contract).

For example, if you expect that the on-Premise solution will save you $400,000 a year in efficiency improvements and cost savings, but that the best SaaS solution, which is still evolving, would only save you $200,000 a year, and the on-Premise solution only cost $50,000 more per year than the SaaS solution in a fully-burdened calculation, then the on-Premise solution would likely be the way to go (since, over 5 years you could save as much as 750,000 over and above the expected returns from the SaaS solution). However, if the on-Premise solution cost $150,000 more per year than the SaaS solution, then the cost-savings are minimal, then SaaS would likely be the right solution, especially once you consider the other benefits and the fact that SaaS solutions mature rapidly and, within a year or two, could offer more savings potential then the on-Premise solution.

To run your own calculations, download the Excel Side-By-Side Costing Template that allows you to quickly and easily compute the expected 1-year, 3-year, 5-year, 7-year, and 10-year costs of on-premise vs. hosted ASP vs. SaaS, and the expected cumulative savings of going with a SaaS solution.