Picked this nice piece from Christian Smaggs blog
Total economic impact of Software-as-a-Service: The foundation of a sound technology investment
by: Christian Smagg
As firms look to focus on core business processes, software-as-a-service (SaaS) provides an increasingly attractive alternative. Companies of all sizes are weighing advantages of SaaS which has emerged as an important deployment option in customer relationship management (CRM) but is also eliciting interest in other areas such as enterprise resource planning (ERP), security or backup just to name a few.
The key cost drivers for any software implementation are the cost of the software application, the hardware required to run the system and the people services required to design, deploy, manage, maintain and support the application. Nevertheless, in addition to typical cost drivers (such as capital expenses, design and deployment costs, ongoing infrastructure, operations, training and support costs), companies also need to look at intangible costs when completing a TCO analysis. Some of the intangible cost factors that affect TCO include reliability and availability, interoperability, extensibility, security, scalability, capacity and opportunity costs.
The difference in pricing and operating models between traditional software and SaaS application options can make an apples-to-apples total cost of ownership (TCO) comparison “tricky”. A white paper, produced by the SaaS Executive Council of the Software & Information Industry Association (SIIA), "Software-as-a-Service; A Comprehensive Look at the Total Cost of Ownership of Software Applications" helps in better understanding the different cost drivers and includes a simplified calculator that will help decision makers to better estimate the true TCO of a SaaS versus traditional software deployment.
But companies evaluating both SaaS and traditional on-premise options, must look beyond the pure cost trade-offs. Often, differences in business benefits, flexibility, and risk are as important, if not more important, when comparing options. Historically, choosing an enterprise application, or assessing the benefits of existing systems began and often ended with analyses of the costs to implement, deploy, and maintain them. However, a pure cost-oriented approach like total cost of ownership does not allow an organisation to measure the full economic impact of the investment. By measuring not just cost and financial benefits, but also risk or uncertainty as well as future flexibility, companies can establish a more inclusive and accurate picture of the return on investment (ROI).
By using Forrester’s Total Economic Impact™ (TEI) methodology, an organisation’s decision will be better aligned with business needs, project success rates will increase, risks will be better understood and mitigated, and business growth will be accelerated. A report entitled "Comparing The ROI Of SaaS Versus On-Premise Using Forrester’s TEI™ Approach" discusses SaaS-specific issues across the four dimensions included in Forrester’s Total Economic Impact™ model to provide a framework for the economic evaluation of a SaaS option. This document establishes criteria for a robust ROI analysis that is used to evaluate opportunities in vendor selection, consolidation, upgrade/migration, and software-as-a-service (SaaS) deployment scenarios.
In addition to the ROI analysis, every major technology initiative should be accompanied by a business case. The business case lays out the reasons for the investment, the expected benefits of the initiative, the costs to make it happen, an analysis of risks, and future options that are created. It documents the relevant facts and situational analysis, key metrics, financial analysis, project timelines, and demonstrates the business imperatives for initiating and funding the project.
Posted by Digvijay "VJ" Singh Rathore