Category Archives: SaaS

Software Acquisition Insider Tips [2009] (Collected Links)

The Seven Shards of Software Acquisition

The New Delphi of Oracle Sourcing On Demand

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.

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.
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).

Uncovering the True Cost of On-Premise Sourcing & Procurement Software

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.

5-Year Amortized Solution Cost

Cost	On-Premise	SaaS
License	150,000	210,000
Maintenance	187,500	0
Upgrade	60,000	0
Hardware	60,000	0
Database	56,250	0
Application Server	56,250	0
Implementation	60,000	0
Internal Support	825,000	0
Training	50,000	25,000
Total	1,505,000	235,000
*SaaS Savings*		*1,270,000*

10-Year Amortized Solution Cost

Cost	On-Premise	SaaS
License	150,000	420,000
Maintenance	375,000	0
Upgrade	180,000	0
Hardware	90,000	0
Database	87,500	0
Application Server	87,500	0
Implementation	60,000	0
Internal Support	1,650,000	0
Training	50,000	25,000
Total	2,730,000	445,000
*SaaS Savings*		*2,285,000*

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.

SaaS Contractual Considerations: Part II

Despite the claims to the contrary from the monolithic on-premise players who are threatened by the new platform and all of the advantages it has to offer, SaaS is gaining momentum. The best evidence I have to offer is the rate at which analysts and bloggers, including yours truly, are getting inquiries into how to evaluate these offerings from a functional and TCO perspective and how to construct the contract. And it’s not just buyers who want to know what needs to be in the contract to protect their investment. Providers also want to know what clauses they should be including to protect themselves as well.

As I am not a lawyer, I cannot claim to be an expert on contract construction of any kind, but I can claim to be very familiar with IT contracts (as someone who has always handled his own and been involved in their construction and review at a number of companies) and to have considerable knowledge with regards to issues that need to be addressed on both sides of the table. Thus, I give you the doctor‘s top issues for consideration when negotiating your next SaaS contract in addition to the standard issues of term, fees, liability, representations, warranties, confidentiality, insurance, indemnity, rights, relationship, dispute resolution, publicity, and government law that your lawyers will remind you of in every contract drafting. Today, we’ll focus on the supplier:

For the Supplier:

We’re Not Responsible for Your Network
You are responsible for your software and network, and not your client’s software and network. If your client’s ISP goes dead, not your problem. If your client’s router starts acting flakey and randomly blocking required ports, not your problem. Your support requirements cease the minute you are able to demonstrate the problem is not on your network.
We’re Not Responsible for Your Systems
As a provider you are responsible for your software and your network, not your client’s software and network. As long as you provide the client with a complete list of compatible software products and supported versions, and the client agrees to it, you’re under no obligation to support the client should they choose to use other products or upgrade to non-supported versions before you have certified that such products are compatible with your system. I.E. if IT upgrades all the browsers before you certify them as compatible, and your system doesn’t work, not your problem if the client agrees in the contract to only use, and expect support on, pre-agreed browsers and supported versions thereof. Of course, in fairness, you should expect to have to support new versions within a certain time-window and agree to do so within a realistic time-window.
We’re Only Responsible for the Security of Data in our Systems
You’re required to follow industry standard best practices around data security and insure that all confidential and personal information on your systems is appropriately encrypted to the level of security agreed upon in the contract. However, you’re not responsible for what your client does with that data once they extract it from your systems. If they decide to cut and paste out of a secure browser session into an unsecure notepad file on a hacked PC, you cannot control that and have no responsibility for the consequences of such action.
We’re Not Responsible for Disasters Beyond our Control
You’re responsible for your software, systems, and data centers to the extent that you have control. Your Force Majeure clause says that you are not liable for damages if both of your power providers go black or if both of your internet connections get severed because of a natural disaster or other government or terrorist action beyond your control. That being said, if your providers stay dark for more than a short period of time, it’s your responsibility to transition to a backup facility or enable your client to set up a temporary instance of your application in their facility as per the terms that any reasonable buyer should be expected to insist on in the SLA.
Standard Rate for Services Above and Beyond our Standard Offering
You’re responsible for support, maintenance, upgrades and other services you agree to — and that’s it. Although you are happy to go above-and-beyond your service requirements, make it clear that you do not do custom work for free and that any custom tasks or services will be billed at a standard hourly or daily rate on the monthly invoice. Otherwise, the buyer might say “we thought that was free” and put you in a pickle if you hired additional resources to support the buyer above-and-beyond the agreed upon service levels.

Be sure to check out the Master “Software as a Service” Managed Services Agreement in the Procurement-Based Contract Templates, Version 2, that is made freely available to you by Stephen Guth of The Vendor Management Office blog.

SaaS Contractual Considerations: Part I

For the Buyer:

Data Export, Backup, & Security
It’s your data and you should have full access to it 100% of the time and the ability to extract some of it or all of it on a whim with little or no notice to a standard, open format such as CSV, EDI, or XML. Of course, if the provider is hosting your entire ERP system and you have Gigabytes of data, expect to pay a bandwidth usage fee if you plan to do this regularly, or a service fee if you require the provider to back it up to encrypted DVDs or Tape and courier the data to you. Similarly, it’s your data and you have every right to expect it to be secure and available no matter what. Insure that the provider is required to do complete backups at least daily, incremental backups at least hourly, and required to store a copy of the encrypted daily backups in an off-site location.
System Availability & Up-Time
One of the attractions of SaaS is the 24/7 uptime that your average company IT shop, that works 9 to 5 in one time zone, can’t deliver. Make sure the system has a guaranteed up-time of 99.999% when you need it (e.g. between 8 am PST and 8 pm GMT if your users are predominantly in North America or Europe) and that you have at least 99.5% uptime the rest of the time, with scheduled maintenance only occurring in agreed upon time windows with adequate notice.
Pay For Use
The beauty of SaaS is the scalability it offers you and the ability to add or subtract users as needed. Make sure you’re SaaS agreement only charges you for the number of users with active accounts (subject to any minimum number of seats you might have agreed to) on a monthly basis.
Guaranteed Response Time
There’s no perfect software system and something will inevitably go wrong with on-demand just like something inevitably went wrong with your current on-premise system. Make sure that the provider agrees to start investigating all outages immediately during agreed upon normal operating hours for your business and within 30 to 60 minutes otherwise. Make sure they are required to get back to you with progress within a maximum timeframe of 60 minutes and to report on progress on an agreed upon schedule.
Escrow & Guaranteed Availability
You generally select an enterprise system with the intent of using it for at least the mid-term, if not the long term, and if a system works well for you, the last thing you want to happen is for the provider to disappear (either due to financial failure or M&A) and take its system with it. Thus, it’s important to take precautions that will insure that, no matter what, you will have continue access to the system for as long as you so desire. The way to do this is to (1) insist on escrow and immediate access to the updated source code and related documentation which is to include required system architectural designs, complete installation instructions, and maintenance and support manuals that are kept up to date on every release and (2) forced support for a minimum period of time on material change of ownership, including the option to acquire the system from escrow at an agreed upon perpetual (annual) license cost at the end of the the minimum support period if the acquiring company no longer wishes to support the system.

Sourcing Innovation

Next Generation Supply Management Defined