SaaS, TCO and buying a TV for my parents

By Kyriba May 1, 2014

The other day, my brother Bill called me and said that our parents would like us to buy them a new TV.  “Sure, but why would they want us to buy it instead of buying it themselves?” I asked. He went on to explain, that every time they go into buy one of these “new fangled” electronic thingamajigs, they get nothing but acronyms and techno mumbo-jumbo thrown at them, and they end up walking away making no decision or afraid of making a bad decision.

Unfortunately a similar situation happens to us in our professional lives.  Have you ever been in a meeting with a technology vendor when they started throwing out countless, often obscure, acronyms?  I’ve been around software either as a developer, product manager, or product marketing for over 25 years and it seems like the use of alphabet-acronym-bingo is a pattern that won’t stop soon.  

The point is that the technical aspects of any solution are a way to deliver business value and the focus should be on just that, the business value delivered. Probably the one topic that rises to the level of supreme-on-high technical mumbo-jumbo is the cloud. I will develop a few posts to try to de-mystify the cloud, not from a technical perspective but from a business perspective directed at the non-technical person. So here’s the first installment, and I’ll focus on an acronym which is commonly associated with the term cloud: TCO.

You could ask 100 people to define cloud and you’ll get about 135 answers (some people can’t make up their mind and offer multiple opinions).  For the purpose of our discussion, I’m going to define cloud as “accessing and using computing resources (hardware and/or software) that is not physically on your premise.” As opposed to on-premise (on-prem) which is “accessing and using computing resources (hardware and/or software) that are physically located on your premise.”

Taking it one more step, you’ll hear the term SaaS (Software-as-a-Service) used alongside cloud, sometimes interchangeably, which is a mistake but would take another blog to address that situation.  To stay at a fundamental level, I suggest that the last S – service – is the just as important as the other S (software) of the SaaS acronym. It indicates that the solution includes services as part of the overall solution. I know it’s simple, but that’s my goal and it’s my blog. And I’m sure I’ll receive 135 reasons or definitions that are different.

One of the key discussions around cloud technology is TCO – total cost of ownership. Essentially what this means is to take the totality of all of the costs associated with the computing asset to arrive at a total cost of ownership. It’s a mathematical formula. I previously managed software that helps organizations calculate and manage computer assets and their total costs of ownership, and I can tell you that individual companies’ TCO formulas all differ, even if slightly. Here’s a generic formula.  

     Number of years  x  (software license fees +  maintenance fees +  ancillary software +  computer hardware to operate: e.g. backup servers, sandbox, etc.) 

+  One-time service fees: i.e. implementation 

+  On-going services: e.g. help desk calls, software upgrades, administration, operations.

=  Total Cost of Ownership

A key factor to consider is number of years. I’ve seen a common practice of using three or five years. The others parts of the equation are pretty much straight-forward.  Software license fees are those charged by your software vendor, and if it’s a perpetual license then they have maintenance fees as well.  Ancillary software is the software costs for other software required to support. Some examples might be operating systems, database management systems, business intelligence, security, etc.

Computer hardware usually doesn’t count personal computers because employees have them anyways, but the servers to support the software certainly do and where some companies usually miss, are the backup servers, sandbox (where development plays and it’s not production yet) and other hardware to support the entire system, but usually not network related hardware. One-time services is professional services and the cost to implement.

Ongoing services are the services your IT department performs that business units are not usually aware of. This is usually a big enough cost item that you should forget.  It’s one area that is commonly overlooked from the business people within an organization, but certainly not from IT.  The services here are usually help desk support, the cost to change versions, which could be professional services again as well, hardware upgrades and ancillary software upgrades, administration and operations. No matter where your computing resources are, in the cloud or on-prem, there is a cost, a total cost. And you could use this simple formula to get an idea of total cost of ownership and actually compare vendors this way, as two solutions are not created equally.  

The difference between SaaS solutions and on-prem solutions is that SaaS includes software license fees, on-going services, a lot of the ancillary software, if not all of it, computer hardware and maintenance fees (five of the six major components of the TCO formula) into a single subscription price.  If you created a formula comparing a SaaS solution against an on-prem solution from a pure TCO perspective, much of the formula for the SaaS solution would have zeroes.  

Again, that’s from a TCO perspective only and should not be the entirety of a basis to make a decision, although it’s certainly a major consideration, and I’ll provide some other critical points about SaaS solutions in future posts. Part of the simplicity offered by SaaS solutions is usually a simple pricing model that includes the use of their software and the services and hardware that otherwise would be the responsibility of your organization’s IT department.  Usually, when you run the formulas for SaaS versus an on-prem solution, you’ll usually see that SaaS provides a lower TCO.  That’s the business value – lower total cost of ownership.

I find it funny when a SaaS software vendor sales rep says “TCO is a benefit.” If they don’t bring it up, ask them about TCO. The right answer should be “our solution lowers your total costs of ownership,” and they should provide some detail about what that means.  If they’re an on-prem solution provider, I’ll bet they never mention the term. If they can’t answer the question correctly, are an on-prem solution provider, or don’t know what TCO stands for and how to simply break TCO down, don’t ask them about HD television sets, I’m not sure my parents can take it. 

img
Activate Liquidity.

Transform how you use liquidity as a dynamic vehicle for growth and value creation

Find out how