Beyond Simple Total Cost of Ownership

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1 WHITEPAPER Beyond Simple Total Cost of Ownership Messick SuccessFactors Erik Berggren Vice President of Customer Results & Global Research SuccessFactors

2 Strategic Workforce Planning For a Changing Business Environment Subscribe to our Blog Unless you ve been hiding under a rock or in the witness protection program, then you probably understand the basic differences between traditional on-premise software applications and software delivered as a service or SaaS. If not, then here s a quick primer: Traditional Software Applications require installing software on each individual machine, whereas SaaS applications are hosted and managed by a third party, and can be accessed from anywhere through your typical web browser. Simple enough? Well, that s just the beginning... Buy vs. Rent Line Managers In the IT space, the traditional question has always been Build vs. Buy. This question, and searching for the answer, has kept many Analysts, Consultants, and IT developers employed for the better part of the past decade. The new question facing companies of all sizes is now Buy vs. Rent. If you re reading this, then your company has probably bought software in the past so the process is pretty familiar. Your CIO decides to purchase an application. Next thing you know an onslaught of consultants and internal IT staff starts to occupy the cubicles near your office. If you re lucky (or unlucky) then maybe you were one of the chosen ones needed to test (and re-test over and over again) the application across the course of the implementation. Many months (or even years) later the application is live and regardless of whether or not the application actually solves your problem, you breathe a sigh of relief. Your relief lasts only as long as the time between upgrades at which point you have to rinse and repeat the process all over again. Don t worry. You are not alone. The McKinsey Quarterly writes that customers are eager for the shift, as they re frustrated by the traditional cycle of buying a software license, paying for a maintenance contract, and then having to go through time consuming and expensive upgrades. Software-as-a-Service (SaaS) or renting the application is very different. Your CIO decides to purchase a SaaS application, or rent it for the purpose of this conversation. You may not even know that the decision has been made right away because you re unlikely to see to consultants and IT staff congregating near you. Instead you may work with a smaller implementation team as a Subject Matter Expert, but you ll likely see a finished product in a much shorter period of time (less than 30 days in some instances). Is SaaS the answer to all of your software problems? Could be, but one thing is for sure: With SaaS you have the flexibility to move on if need be without having made a monstrous investment to get started. 2

3 Buy vs. Rent Executive Standpoint From an executive standpoint, the Buy vs. Rent argument is largely a discussion of the Total Cost of Ownership (TCO) of the competing solutions. The general consensus is that SaaS is less expensive. McKinsey estimates that a 200-seat SaaS CRM implementation costs 30% less than a traditional 200-seat software purchase and implementation. If you re buying software, then you can probably take a pencil and a napkin and start to divide your costs into the following categories: Alignment & Collaboration Total Cost of Ownership Differences Sample implementation of Performance Management Software (5000 seats) Put simply, one side of your napkin (Traditional Software) likely has a larger total than the other side (SaaS). Beyond the simple total cost, your organization is able to spread out the payment across the term of your contract as opposed to the typical large upfront license and implementation costs associated with traditional software implementations. That s certainly a good thing in a economic climate that will likely dictate lower IT budgets and possible headcount reductions. From an accounting standpoint, your company s Capital Expenditures will be significantly lower with a SaaS implementation since hardware and infrastructure costs have been incurred by your service provider resulting in minimal impact to your cash flow statement. 3

4 Strategic Workforce Planning For a Changing Business Environment Subscribe to our Blog Service vs. Maintenance As discussed earlier, on-premise software typically requires a maintenance contract of approximately 20% (annually) of your license cost. These contracts have always been considered a cost of doing business regardless of whether or not the customer deemed them valuable. In fact, in a recent CIO magazine article, a survey of 200 SAP customers found that 85% saw little or no value. That s not exactly a ringing endorsement. The problem is simply that implementations are often so convoluted, so expensive, and so unique that un-installing the software is almost as much trouble as installing it. Because of this, companies continue to pay their 20% year in and year out. Would you put your mechanic on retainer and pay whether or not your car actually needs service? No? Well, that s the same logic that inflates traditional software company s margins. By comparison, SaaS companies operate more like a magazine subscription. You sign up for a period of time, receive value over that period (weekly, monthly, etc ) and then at the end of your subscription determine whether or not you want to renew. The publisher has incentive to provide high-quality content or else you will just cancel. Likewise, in a SaaS environment you pay only for the service you need, and given that your switching costs are low, the SaaS provider has great incentive to actually serve you. Configuring vs. Customizing TCO starts at the ground floor TCO is determined by a number of factors, but it starts with how an application is built in the first place. Do you choose to build a house out of brick, straw or concrete? That initial decision has a lot to do with how long your house will last, how much work it will take to maintain and so on. In the world of software - there has traditionally been only one choice: On-premise. In an on-premise software environment packaged software becomes custom software. It s a trap that many companies fall into and it s the reason why so many implementations have cost and calendar overruns. The main problem with this is that it essentially creates a unique base code. When programmers have to get involved to make the software do what you want it to do you re customizing your software. Unique is nice when it comes to personalities and snowflakes, but when we re talking about an enterprise software application, unique isn t a good thing. Unique is expensive and difficult to implement, maintain, and upgrade. With SaaS implementations, customers configure the application to meet their needs by flipping switches instead of customizing it by altering the code base. Because of this, the code (housed centrally per the definition of SaaS) can easily be updated by your provider for the benefit of all its customers simlultaneously. This means that upgrades and patches can be applied much more frequently and without the typical hassle associated with on-premise implementations. More strategically, it creates a scenario where your SaaS provider and all of its customers are constantly improving the application for the benefit of the entire customer base. 4

5 Beyond Simple Total Cost of Ownership Total Cost of Ownership, while important, does not tell the complete story as it relates to the Traditional vs. SaaS software debate. From a common sense standpoint, TCO only really matters if the solution meets your needs. That s why TCO, absent of any confidence in your Return on Investment (ROI), is nonsense. Let s face it, if the Lines of Business and C-Level aren t convinced that there is significant return, arguing that one worthless solution costs less than another is likely to garner some strange looks. At SuccessFactors, we have a number of ways we work closely with customers to improve the application all enabled by our on-demand model and the flexibility it provides. First, our idea Factory. The IdeaFactory is a place where customers submit their product ideas and requests. All the submissions are available for all other customers to see, comment and vote on. This way, as customers of all sizes from all around the world weigh in, SuccessFactors has the ability to understand the needs and desires of its customer group as a whole. Because each customer s implementation is configured and not customized, each and every update we make as a result is instantly available to all customers who choose to enable it. Another initiative is our OneVoice program. OneVoice is an ongoing conversation between product managers and customers. Each month, the product manager hosts a conference call where he or she presents all the information about new and upcoming updates to the system and leads a discussion around where the product should go in the future. These calls give customers an opportunity to stay on top of the frequent updates made to the application and to make their voice heard in setting its future course. The conference calls are complemented by an online discussion forum, open 24x7, in which customers can share their thoughts, questions and ideas with each other and with SuccessFactors. The point is that buying SuccessFactors is buying much more than a Performance and Talent Management application. Becoming a member of the SuccessFactors world means joining a community of people dedicated to the future of talent management. Working together we are generating the best new ideas and discovering the most potent strategies to generate business impact based on smart human capital investments. The question here is simple can you afford to continue paying for highly customized, one-off solutions, when there is another alternative? An alternative that is constantly improving, fixed in cost, and provides a structure that allows you opt-in or out based on the actual value received. 5

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