One of the biggest obstacles encountered as companies try and convince potential customers that software as a service (SaaS) is the way to go, is how to quantify return on investment (ROI). They are attracted to SaaS, but somehow can't cross the decision-making Rubicon until they can quantify ROI.
The calculations are relatively easy, and they are quite consistent, in my experience, so I thought I would share them.
Every rand has to be accounted for and capex is tighter than Julius Malema's bodyguards
Richard Firth is CEO and chairman, MIP Holdings.
But before I even get there, it's worth noting the roots of SaaS. This is not a new concept, and even in its full flower today it draws on a legacy more than four decades old.
Remember the time-sharing facilities and IT bureaus that were on offer in the 70s and 80s? Those massive, clunky data processing facilities that could do print runs, payroll, advertising brochures, for a designated cost?
That was the beginning of IT as a service.
Then came ASP, or application service provision, and before one could say Cleopatra, ASP was dead, a victim of the turn-of-the-century disillusionment with IT in general and dot-com computing in particular.
Gradually, companies returned to the model whereby IT was delivered and consumed as a service rather than being owned lock, stock and barrel by large organisations.
Today, and especially in SA, SaaS has taken root, and given the limitations of bandwidth on the ground, the local model is unique.
ROI model
Customers ask how to quantify the ROI, so here is a simple model, and it shows that SaaS is today the very best way for companies to do IT:
* Consider the acquisition cost of a business-critical software suite. Factor in the cost of the software licence itself, the database, the supporting hardware and the implementation costs. Companies must also factor in that in most cases, the implementation deadline will slip, often years beyond the initial deadline.
* The figures now break down like this: software, per se, R8 million.
* Hardware: R2.4 million.
* Consulting/implementation (if the company is lucky): R5 million.
* Ongoing annual operations and maintenance: R5 million.
* Most companies will factor their software capex over three years, so presuming the software suite has been implemented in 12 months (probability, low), the three-year cost looks like this:
* Year one: R17.4 million
* Year two: R5 million
* Year three: R5 million
Amortised over three years, this is equivalent to R9.1 million a year. Now, this has to come out of capex, which even in a good economy is hard to quantify. Never mind that no one ever got fired for buying (choose any three-letter acronym), it is hard to justify such an investment or quantify a return under such circumstances. Give or take a rand or two, I am talking a million a month.
Let's compare the South African SaaS approach:
* SaaS licensing: Around R80 000 a month (or less, and growing only as value is delivered).
* Hardware: R0.
* Ongoing annual operations and maintenance: R0.
* Support/customisation: R80 000 a year (amortised over three years).
Substantial savings
Over three years, I am talking about around R6 million over a three-year period, or R2 million a year, or under R200 000 a month. R2 million a year versus R9.1 million a year. R1 million versus R200 000 a month. Is there any argument?
Also, the SaaS model implies the cost of IT is taken off balance sheet, a crucial consideration in today's extremely tight economic environment, where every rand has to be accounted for and capex is tighter than Julius Malema's bodyguards.
Then there are the issues of business fit, meeting deadlines, the embarrassment of incorrect billing, non-billing, impact on cash flow, and guarantee of value delivery.
The South African model of SaaS says billing is incremental, and only increases as the customer obtains business value and growth. The traditional model says the customer assumes all the risk, with no guarantee of successful implementation or value delivery. The only guarantee is that costs will mount.
Is it any wonder, then, that SaaS is becoming the most popular method of software solutions delivery?
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