Analysis of SaaS and On Premise ICT solutions for SMEs in Turkey

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1 Graduate School of Social Sciences Department of Business Administration Analysis of SaaS and On Premise ICT solutions for SMEs in Turkey e-mba Graduation Project Salih Bülent Özkır Project Advisor: Yrd.Doç.Dr. Levent Aksoy İstanbul, Ocak 2012

2 T.C. MALTEPE ÜNİVERSİTESİ e-mba BİTİRME PROJESİ ONAY FORMU Proje Konusu : Analysis of SaaS and On Premise ICT solutions for SMEs in Turkey Projeyi Yapan Öğrencinin; Adı Soyadı : SALİH BÜLENT ÖZKIR Öğrenci Numarası : Maltepe Üniversitesi e-mba yüksek lisans programının Proje dersini Başarılı olarak tamamlamıştır. Bu form ile birlikte 2 suret ciltli bitirme projesi ve Bitirme Projesi dosyasını içeren CD ile Sosyal Bilimler Enstitüsüne teslim edilecektir. 20 / 01 / 2012 Yrd.Doç.Dr.Levent Aksoy Proje Danışmanı

3 TABLE OF CONTENTS PREFACE... i ABSTRACT... ii LIST OF ABBREVIATIONS... iii LIST OF TABLES... iv LIST OF FIGURES... v 1 INTRODUCTION DEFINITION AND TAXONOMY Overview of Cloud Computing Definition of Cloud Computing Deployment Models Service Models Essential Characteristics Illustration of NIST Cloud Definition Differences in Scope and Control among Cloud Service Models Conceptual Cloud Reference Architecture Possible Services Available to Cloud Consumers PROBLEM DEFINITION METHODS SaaS MARKET AND VENDOR ANALYSIS Changing Sources of Firm Software Evolution of SaaS - Yesterday, Today, and Tomorrow Forrester Research SaaS Maturity Model Key Technology Considerations for SaaS Providers In House or SaaS Advantages of SaaS Service Model for Turkish SMEs Hardware, Software, and IT Staff Cost Savings... 38

4 5.6.2 Easy To Adopt Less Problematic Software Updates and Patches Scalability on Peak Times Pay per Use Financial Model Improved Release Management and Testing of New Releases Rapid Resource Provisioning SLAs Security Few Technical Skills Required for New Technology Disadvantages of SaaS Service Model for Turkish SMEs Cloud Computing Knowledge and Understanding Security System Integration Capability Ability to Move Among SaaS Providers and Ability to Change Deployment Models When Necessary Availability and Reliability Adaptability and Task Productivity Regulatory and Compliance Issues Impact on IT Roles and Responsibilities IT Governance Issues Different Cloud Computing Standards among Cloud Providers TURKISH ICT MARKET ANALYSIS Analysis of Current IT Usage, Risks, and Issues in Turkish ICT Market ICT in Turkey and SWOT Analysis of the ICT Market Internet and FaceBook Usage in Turkey and Europe OECD Outlook for SMEs in Turkey Report Stating Turkey's SMEs Lag in IT Turkey Cloud Computing Survey Results SWOT Analysis of Using SaaS for Turkish SMEs Strengths of SaaS... 71

5 6.3.2 Weaknesses of SaaS Opportunities of SaaS Threats of SaaS DECISION MODEL FOR SELECTING SaaS PROVIDER SaaS Provider Qualification Checklist Multi Criteria Based Cloud Service Provider Selection Scoring Model Total Cost Of Ownership (TCO) IT Service Costing Model for On Premise TCO Calculation Examples TCO of SaaS vs. On Premise Using Simple Approach TCO Of SaaS vs. On Premise Using another Simple Approach The SaaS vs. On Premise TCO Calculator TCO Calculation Comparing SaaS With On Premise Solution TCO for Office 365 vs. On Premise TCO for CRM On Demand vs. CRM On Premise TCO for On Premise and Office 365 online using Microsoft s tool Return On Investment (ROI) ROI Comparisons for Different SaaS Applications Using Complex Approaches Forrester Research s Total Economic Impact Model Analysis for Office DISCUSSIONS CONCLUSION REFERENCES CURRICULUM VITAE

6 PREFACE This study is written as the final graduation work of the Maltepe EMBA English program. First of all, I would like to thank my study supervisor, Yrd.Doç.Dr. Levent Aksoy, for lots of great inspiration, ideas, comments, and feedbacks. I would like to sincerely thank Serdar Angün, Distance Education Coordinator at Maltepe University, for his coordination, kindness, guidance, and professionalism during my EMBA program. I also want to express my utmost gratitude to my instructors at the program who helped me to develop and improve my business acumen and skills. Finally, lots of thanks are due to my wife, Yrd.Doç.Dr. Vildan Çetinsaya Özkır, for expertly proof reading this study. Hopefully she has tried to remove all the serious errors, but any that might be left are wholly my responsibility. i

7 ABSTRACT This study is written to provide guidance for evaluation SaaS solutions and comparing it with on premise solutions by developing an integrated framework which includes qualitative and quantitative aspects. The cloud computing is a fairly new technology that has many facets that remain mysterious to the average person. This study will seek to help familiarize SMEs and analysts with the SaaS concept and why it makes sense to subscribe IT applications online instead of owning them on premise. The variety of options and potential benefits of SaaS make it a consideration worth making. This study is written for SMEs particularly who want to use their IT budget and resources better than their competitors in the future. Although written with SMEs in mind, large organizations may also benefit from it due to hybrid deployment models. There are a several options when it comes to SaaS. SMEs must understand the nuances inherent in the different models they evaluate, along with understanding the difference between SaaS, hybrid, hosted, and in-house. If we make analogy such as most companies do not build their own electrical generating plants or their own water treatment facilities. They purchase only the utilities they really need without wasting any resources deliberately. Why not do that with computing in terms of fitness for purpose and fitness for use. This study covers the in depth analysis of SaaS service model and public deployment model of cloud computing. SaaS is never one-size-fits-all, however. IT departments should have a clear framework for evaluating and operating any new model, and a detailed supply chain IT impact assessment should be performed to determine if the SaaS model is a good match for the operation. Benefits such as rapid deployment, lower cost, and scalability must be balanced by other key decision criteria particular to an organization such as fit for use, fit for purpose, total cost of ownership (TCO), return on investment (ROI) and risk. Evaluations should consider both long-term ROI and short-term total cost of ownership. ii

8 LIST OF ABBREVIATIONS CAL : Client Access License COBIT : Control Objectives for Information and related Technology CRM : Customer Relationship Management ESB : Enterprise Service Bus HIPAA : Health Insurance Portability and Accountability Act HR : Human Resources ICT : Information and Communication Technologies IaaS : Infrastructure as a Service ISO : International Organization for Standardization IT : Information Technology NIST : National Institute of Standards and Technology NPV : Net Present Value PaaS : Platform as a Service PV : Present Value ROI : Return on Investment SaaS : Software as a Service SLA : Service Level Agreement SME : Small Medium Enterprise SWOT : Strengths Weaknesses Opportunities Threats TCO : Total Cost of Ownership TUBISAD : Türkiye Bilişim Sanayicileri Derneği iii

9 LIST OF TABLES Table 2.1 Actors in Cloud Computing Table 5.1 Comparison Between In-House And SaaS Solutions Table 6.1 SWOT Analysis of Turkish ICT Market Table 6.2 Internet Penetration in Turkey Table 6.3 Internet and Facebook Usage in Europe, June Table 6.4 Internet Usage and Population Statistics in Turkey Table 7.1 A Scoring Model for SaaS Vendor Service Selection Table 7.2 TCO Cost Components iv

10 LIST OF FIGURES Figure 2.1 NIST Cloud Definition Figure 2.2 Differences in Scope and Control among Cloud Service Models Figure 2.3 Seperation of Responsibilities Figure 2.4 Conceptual Reference Model of Cloud Computing Figure 2.5 Possible Services Available to Cloud Consumers Figure 4.1 Integrated Framework for Filtering and Selecting SaaS Providers Figure 5.1 Sources of Software Expenditures Figure 5.2 Possible Evolution Of SaaS from past to future Figure 5.3 SaaS Maturity Model according to Forrester Figure 5.4 Technology Considerations Regarding SaaS Provider Selection Figure 5.5 Primary Drivers for Considering Cloud Computing Figure 5.6 Cloud Related Investments Can To Help Reduce ICT Spending Figure 5.7 Provisioning For Peak Load Figure 5.8 Underprovisioning Figure 5.9 Underprovisioning Figure 5.10 Malicious and Potentially Unwanted Software Figure 5.11 The Major Concerns And Barriers To Cloud Adoption Figure 5.12 Key Concerns in Deploying Cloud based Business Solutions Figure 6.1 Breakdown of ICT Spending in Turkey Figure 6.2 Hardware Expenditure in Turkey Figure 6.3 ICT Canada Projected Spending on Hardware, Software, Services and Communications 2010 to 2013 (WITSA) Digital Plant, 2010, (Forecast in US$) Figure 6.4 Top 10 Internet Countries in Europe, March 31, Figure 6.5 Currently Leveraging Cloud Computing Figure 6.6 Leveraging Cloud Computing In These Areas Currently Figure 6.7 Cloud Computing Initiative In Place Within The Organization Figure 7.1 A model for Calculating the cost of IT Services Figure 7.2 IT Service Based Costing Figure 7.3 The SaaS vs. On Premise TCO Calculator Comparison Data Figure 7.4 The SaaS vs. On Premise TCO Calculator Results Figure 7.5 TCO For 100 Users SME, Office 365 vs. On Premise Figure 7.6 TCO For 100 Users SME, CRM On Demand vs. CRM On Premise Figure 7.7 Microsoft Office 365 TCO Tool, Initial Page Figure 7.8 Microsoft Office 365 TCO Tool, Inputs Page Figure 7.9 Microsoft Office 365 Tool, Results Page v

11 Figure 7.10 Microsoft Office 365 Tool, Cost Comparison Page For Office 365 vs. On Premise Software Figure 7.11 Model: Total Economic Impact Analysis Summary - SaaS CRM Figure 7.12 Model: Total Economic Impact Analysis Summary - SaaS HR Figure 7.13 Model: Total Economic Impact Analysis Summary - Saas IT Management Figure 7.14 Composite Organization Three-Year Risk-Adjusted Roi Figure 7.15 Composite Organization Three-Year Risk-Adjusted Cumulative Cash Flow vi

12 1 INTRODUCTION Cloud computing is simply the ability to access files and applications online through multiple devices, such as computer, browser, or phone. The analogy that derives cloud computing concept is if somebody needs milk, that person should not buy a cow. Forrester Research defines cloud computing as a standardized IT capability (software, infrastructure, or services) delivered in a pay-per-use self-service way (Staten, 2009). Cloud computing is a technology that uses the internet and central remote servers to maintain data and applications. Cloud computing allows consumers and businesses to use applications without installation and access their personal files at any computer with internet access. This technology allows for much more inefficient computing by centralizing storage, memory, processing and bandwidth. Businesses around the world are already beginning to make the transition to this new model of computing. Basically, there are three reasons why this trend is so overwhelming: agility, focus and economics. Agility, focus, and economics are the key factors that motivating companies to make the move to cloud computing. The first is agility, which has several facets. Cloud computing speeds up the ability to capitalize on new opportunities, and respond to changes in business demand. Business can deploy applications much faster and more efficiently, and business can deliver solutions to its end users so they can work from nearly anywhere, at any time, across devices in ways that are both secure and manageable. Also, with cloud computing, the entire IT infrastructure business need to operate quickly and 1

13 efficiently is available at the flip of a switch. So, the next time the marketing department launches a campaign and doesn't tell anybody, its Website is much less likely to go down. The environment can quickly scale up and down to meet spikes in demand. The second factor driving adoption of cloud computing is "focus. By this we mean the ability to focus on improving the success of the business through better IT. Put another way, business can focus more on innovation and less on infrastructure. Today, the typical IT department spends most of its time and money on maintenance and operations. Cloud computing cuts those costs down dramatically. ICT infrastructure is abstracted and its resources are pooled, so IT runs more like a utility than a collection of complicated (and often fragile) software and hardware systems. When business can pay more attention to ideas than IT complexity, business adds a new kind of value to the business. The third factor driving adoption of cloud computing is economics. This means lowering the cost of delivering IT and increasing the utilization and efficiency of the datacenter and IT spending. The delivery costs go down because now business can offer self-service of applications and resources, and business can meter the usage of those resources in new and very precise ways. Utilization goes up because the infrastructure resources (storage, compute, and network) are now pooled and abstracted. So, for example, when a self-service application is finished, the server and storage resources it used will go right back into the pool. The environment is highly automated so the ICT systems are not just sitting around idle, they are always at work as much as needed, not much, not less. 2

14 This study explores and analyzes the benefits and risks of cloud computing for Small and Medium sized Enterprises (10 < full time employees < 251) in Turkey using global and local information available. The study will inspects the ROI of public Cloud Services offerings provided by some SaaS vendors. This study also performs SWOT analysis of cloud computing for the SaaS market. The study will also exhibit cost comparison of public cloud services vs. on premise IT including all direct and indirect costs and benefits over 5 years. However, the keep the scope more understandable and concise, the study will only focus on public deployment model and SaaS service model, thus, private and hybrid deployment models as well as PaaS and IaaS service models are excluded. 3

15 2 DEFINITION AND TAXONOMY Consumer and business products, services and solutions delivered and consumed in real-time over the Internet. Cloud services are shared, standard services, built for a market, not for any specific customer. Cloud computing is a general term for anything that involves delivering hosted services over the Internet. These services are broadly divided into three categories: Infrastructure-as-a-Service (IaaS), Platform-asa-Service (PaaS) and Software-as-a-Service (SaaS). A cloud service has several distinct characteristics that differentiate it from traditional hosting which is onpremise. A cloud can be deployed as private, public, hybrid, or community. 2.1 Overview of Cloud Computing Cloud computing, or simply cloud, is changing how IT delivers services and how a user can access computing resources at work, from home, and on the go. Cloud enables IT to respond to business opportunities with on-demand deliveries that are cost-effective and agile in the long run. Much happening in enterprise IT now is a journey to transform existing IT establishment into a cloud-friendly, cloud-ready, cloud-enabled environment. The evolution of cloud computing can be split into 3 phases (Banerjee, 2011). The Idea Phase: This started in the 1960s and stretched to the pre internet bubble era. The core idea of computing as a utility computing and grid computing developed. The Pre Cloud Phase: This started around 1999 and lasted till In this phase internet as the mechanism to provide Application as Service got developed. 4

16 The Cloud Phase: this phase started in 2007 when the term cloud computing term became popular and the sub classification of IaaS, PaaS & SaaS got formalized. Client computing is one of the most optimum ways of providing computing resources and software. The concept typically runs on the established convention of the internet where clients and servers communicate remotely and on demand via subscription model. The concept can sometimes be referred to as Internet as a Product since all products provided via Internet infrastructure by commercial companies can be rent as a kind of cloud computing service. Cloud computing is a technology that uses the internet and central remote servers to maintain data and applications. Cloud computing allows consumers and businesses to use applications without installation and access their personal files at any computer with internet access. This technology allows for much more inefficient computing by centralizing storage, memory, processing and bandwidth. Cloud computing provides new services ranging from data storage to end-to-end computing. Cloud computing takes away the task of infrastructural deployment and makes technology, platform or just software readily available commodities just like electricity or water or gas or TV. One pays as per the usage besides other set up costs, which when combined, are far less than the conventional ways of acquiring technology. Cloud computing is broken down into three segments: "application" "storage" and "connectivity." Each segment serves a different purpose and offers different products for businesses and individuals around the world. 5

17 Community cloud shares infrastructure between several organizations from a specific community with common concerns (security, compliance, jurisdiction, etc.), whether managed internally or by a third-party and hosted internally or externally. The costs are spread over fewer users than a public cloud (but more than a private cloud), so only some of the benefits of cloud computing are realized. 2.2 Definition of Cloud Computing For Information Technology (IT) technical professionals, Cloud Computing may mean utility computing, high speed grids, virtualization, automatic configuration and deployment, on-demand and remote processing, and combinations of them. For business users, Cloud Computing is simply the Internet, a cable form a service provider or just something out there networked with my computer. Either public, private, or in between, the conventional wisdom, as published in The NIST Definition of Cloud Computing, assumes noticeable characteristic regarding how computing resources are made available in Cloud. Cloud computing is a model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction. This cloud model is composed of five essential characteristics, three service models, and four deployment models (Mell & Grance, 2011). The National Institute of Standards and Technology (NIST) explain these essential characteristics, service models and deployment models as in the following subsections. 6

18 2.2.1 Deployment Models A cloud deployment model represents a specific type of cloud environment, primarily distinguished by ownership and size. These can be summarized as private cloud, community cloud, public cloud, and hybrid cloud (Mell & Grance, 2011). Private cloud: The cloud infrastructure is provisioned for exclusive use by a single organization comprising multiple consumers (e.g., business units). It may be owned, managed, and operated by the organization, a third party, or some combination of them, and it may exist on or off premises. Community cloud: The cloud infrastructure is provisioned for exclusive use by a specific community of consumers from organizations that have shared concerns (e.g., mission, security requirements, policy, and compliance considerations). It may be owned, managed, and operated by one or more of the organizations in the community, a third party, or some combination of them, and it may exist on or off premises. Public cloud: The cloud infrastructure is provisioned for open use by the general public. It may be owned, managed, and operated by a business, academic, or government organization, or some combination of them. It exists on the premises of the cloud provider. Hybrid cloud: The cloud infrastructure is a composition of two or more distinct cloud infrastructures (private, community, or public) that remain unique entities, but are bound together by standardized or proprietary technology that enables data and application portability (e.g., cloud bursting for load balancing between clouds). 7

19 2.2.2 Service Models A cloud delivery model represents a specific combination of IT resources offered by a cloud provider. These can be summarized as Software as a Service, Platform as a Service, and Infrastructure as a Service (Mell & Grance, 2011). Software as a Service (SaaS): The capability provided to the consumer is to use the provider s applications running on a cloud infrastructure. The applications are accessible from various client devices through either a thin client interface, such as a web browser (e.g., web-based ), or a program interface. The consumer does not manage or control the underlying cloud infrastructure including network, servers, operating systems, storage, or even individual application capabilities, with the possible exception of limited user-specific application configuration settings. Platform as a Service (PaaS): The capability provided to the consumer is to deploy onto the cloud infrastructure consumer-created or acquired applications created using programming languages, libraries, services, and tools supported by the provider. The consumer does not manage or control the underlying cloud infrastructure including network, servers, operating systems, or storage, but has control over the deployed applications and possibly configuration settings for the application-hosting environment. Infrastructure as a Service (IaaS): The capability provided to the consumer is to provision processing, storage, networks, and other fundamental computing resources where the consumer is able to deploy and run arbitrary software, which can include operating systems and applications. The consumer does not manage or control the underlying cloud infrastructure but has control over 8

20 operating systems, storage, and deployed applications; and possibly limited control of select networking components (e.g., host firewalls) Essential Characteristics A cloud is a distinct and remote IT environment designed for the purpose of remotely provisioning scalable and measured IT resources. In order to remotely provision scalable and measured IT resources in an effective manner, an IT environment requires a specific set of characteristics. These characteristics need to exist to a meaningful extent for the IT environment to be considered an effective cloud. These can be summarized as on-demand self-service, broad network access, resource pooling, rapid elasticity, and measured service (Mell & Grance, 2011). On-demand self-service: A consumer can unilaterally provision computing capabilities, such as server time and network storage, as needed automatically without requiring human interaction with each service provider. Broad network access: Capabilities are available over the network and accessed through standard mechanisms that promote use by heterogeneous thin or thick client platforms e.g., mobile phones, tablets, laptops, and workstations. Resource pooling: The provider s computing resources are pooled to serve multiple consumers using a multi-tenant model, with different physical and virtual resources dynamically assigned and reassigned according to consumer demand. There is a sense of location independence in that the customer generally has no control or knowledge over the exact location of the provided resources but may be able to specify location at a higher level of abstraction e.g., country, state, or datacenter. Examples of resources include storage, processing, memory, and network bandwidth. 9

21 Rapid elasticity: Capabilities can be elastically provisioned and released, in some cases automatically, to scale rapidly outward and inward commensurate with demand. To the consumer, the capabilities available for provisioning often appear to be unlimited and can be appropriated in any quantity at any time. Measured service: Cloud systems automatically control and optimize resource use by leveraging a metering capability at some level of abstraction appropriate to the type of service e.g., storage, processing, bandwidth, and active user accounts. Resource usage can be monitored, controlled, and reported, providing transparency for both the provider and consumer of the utilized service Illustration of NIST Cloud Definition The NIST cloud definition shown in the Figure 2.1 below recognizes several types of cloud deployment models, service models, essential and common characteristics. This figure lists Common Characteristics which is not part of the NIST essential definition additional quality attributes in the lower section that can help to prioritize what cloud features are important to organizations. 10

22 Figure 2.1 NIST Cloud Definition Source: Joyner., J. (2011). How cloudy is your cloud - The NIST offers a cloud standard, Differences in Scope and Control among Cloud Service Models The following Figure 2.2 illustrates the differences in scope and control between the cloud subscriber and cloud provider, for each of the service models discussed above. Five conceptual layers of a generalized cloud environment are identified in the center diagram and apply to public clouds, as well as each of the other deployment models. The arrows at the left and right of the diagram denote the approximate range of the cloud provider s and user s scope and control over the cloud environment for each service model. In general, the higher the level of support available from a cloud provider, the more narrow the scope and control the cloud subscriber has over the system (Jansen & Grance, 2011). The two lowest layers shown denote the physical elements of a cloud environment, which are under the full control of the cloud provider, regardless of the service model. 11

23 Heating, ventilation, air conditioning (HVAC), power, communications, and other aspects of the physical plant comprise the lowest layer, the facility layer, while computers, network and storage components, and other physical computing infrastructure elements comprise the hardware layer. The remaining layers denote the logical elements of a cloud environment. The virtualized infrastructure layer entails software elements, such as hypervisors, virtual machines, virtual data storage, and supporting middleware components used to realize the infrastructure upon which a computing platform can be established. While virtual machine technology is commonly used at this layer, other means of providing the necessary software abstractions are not precluded. Similarly, the platform architecture layer entails compilers, libraries, utilities, and other software tools and development environments needed to implement applications. The application layer represents deployed software applications targeted towards enduser software clients or other programs, and made available via the cloud. Figure 2.2 Differences in Scope and Control among Cloud Service Models Source: Jansen, W. Grance, T. (2011). Guidelines on Security and Privacy in Public Cloud Computing, 12

24 2.3 Conceptual Cloud Reference Architecture One way to describe cloud computing is to base on the service delivery models. There are three, namely SaaS, PaaS and IaaS and depending on which model, a subscriber and a service provider hold various roles and responsibilities in completing a service delivery. A schematic is shown below in Figure 2.3 highlighting the various functional components exposed in the three service delivery models in cloud computing compared with those managed in an on-premises deployment. Essentially, cloud computing presents separation of subscriber s roles and responsibilities from those of a service provider s. And by subscribing a particular service delivery model, a subscriber implicitly agrees to relinquish certain level of access to and control over resources. Figure 2.3 Seperation of Responsibilities Source: Chou, Y. (2010). Cloud Computing Primer for IT Pros, 13

25 In SaaS, the entire deliveries are provided by a service provider through cloud. The benefit to a subscriber is there is ultimately no maintenance needed, other than the credentials to access the application, i.e. the software. At the same time, SaaS also means there is little control a subscriber has on how the computing environment is configured and administered outside of a subscribed application. This is the user experience of, for example, some offering or weather reports in Internet. In PaaS, the offering is basically the middleware where the APIs exposed, the service logic derived, the data manipulated, and the transactions formed. It is where most of the magic happens. A subscriber in this model can develop and deploy applications with much control over the applied intellectual properties. Out of the three models, IaaS provides most manageability to a subscriber. Form OS, runtime environment, to data and applications all are managed and configurable. This model presents opportunities for customizing operating procedures with the ability to on-demand provision IT infrastructure delivered by virtual machines in cloud. As shown in the Figure 2.4, the NIST cloud computing reference architecture defines five major actors: cloud consumer, cloud provider, cloud carrier, cloud auditor and cloud broker. Each actor is an entity (a person or an organization) that participates in a transaction or process and/or performs tasks in cloud computing. 14

26 Figure 2.4 Conceptual Reference Model of Cloud Computing Source: Liu, F., Tong, J., Mao, J., Bohn, R., Messina, J., Badger, L. & Leaf, D. (2011). NIST Cloud Computing Reference Architecture, The following Table 2.1 briefly lists the actors as defined in the NIST cloud computing reference architecture. Actor Cloud Consumer Cloud Provider Cloud Auditor Cloud Broker Cloud Carrier Table 2.1 Actors in Cloud Computing Definition A person or organization that maintains a business relationship with, and uses service from, Cloud Providers. A person, organization, or entity responsible for making a service available to interested parties. A party that can conduct independent assessment of cloud services, information system operations, performance and security of the cloud implementation. An entity that manages the use, performance and delivery of cloud services, and negotiates relationships between Cloud Providers and Cloud Consumers. An intermediary that provides connectivity and transport of cloud services from Cloud Providers to Cloud Consumers. Source: Liu, F., Tong, J., Mao, J., Bohn, R., Messina, J., Badger, L. & Leaf, D. (2011). NIST Cloud Computing Reference Architecture, 15

27 2.4 Possible Services Available to Cloud Consumers The documentation inside Cloud Reference Architecture outlines several cloud computing examples depending on the service models (Liu et al., 2011). Depending on the services requested, the activities and usage scenarios can be different among cloud consumers. The Figure 2.5 below presents some possible cloud services that can be provided to cloud consumers by cloud providers. Figure 2.5 Possible Services Available to Cloud Consumers Source: Liu, F., Tong, J., Mao, J., Bohn, R., Messina, J., Badger, L. & Leaf, D. (2011). NIST Cloud Computing Reference Architecture, List of possible services that can be consumed by a typical cloud consumer are documented in the NIST Cloud Computing Reference Architecture as below. SaaS services: SaaS is a model where an application is available on demand. It is the most common form of cloud computing delivered today. 16

28 o and Office Productivity: Applications for , word processing, spreadsheets, presentations, etc. o Billing: Application services to manage customer billing based on usage and subscriptions to products and services. o Customer Relationship Management (CRM): CRM applications that range from call center applications to sales force automation. o Collaboration: Tools that allow users to collaborate in workgroups, within enterprises, and across enterprises. o Content Management: Services for managing the production of and access to content for web-based applications. o Document Management: Applications for managing documents, enforcing document production workflows, and providing workspaces for groups or enterprises to find and access documents. o Financials: Applications for managing financial processes ranging from expense processing and invoicing to tax management. o Human Resources: Software for managing human resources functions within companies. o Sales: Applications that are specifically designed for sales functions such as pricing, commission tracking, etc. o Social Networks: Social software that establishes and maintains a connection among users that are tied in one or more specific types of interdependency. o Enterprise Resource Planning (ERP): Integrated computer-based system used to manage internal and external resources, including tangible assets, financial resources, materials, and human resources. 17

29 PaaS Services: PaaS is a platform available on demand for development, testing, deployment and on-going maintenance of applications without the cost of buying the underlying infrastructure and software environments. o Business Intelligence: Platforms for the creation of applications such as dashboards, reporting systems, and data analysis. o Database: Services offering scalable relational database solutions or scalable non-sql data stores. o Development and Testing: Platforms for the development and testing cycles of application development, which expand and contract as needed. o Integration: Development platforms for building integration applications in the cloud and within the enterprise. o Application Deployment: Platforms suited for general purpose application development. These services provide databases, web application runtime environments, etc. IaaS Services: IaaS is an IT environment with ability for a subscriber to on demand provision infrastructure. This infrastructure is, for example, delivered with virtual machines in which a subscriber maintains the OS and installed applications, while the underlying fabric is managed by a service provider. o Backup and Recovery: Services for backup and recovery of file systems and raw data stores on servers and desktop systems. o Compute: Server resources for running cloud-based systems that can be dynamically provisioned and configured as needed. 18

30 o Content Delivery Networks (CDNs): CDNs store content and files to improve the performance and cost of delivering content for web-based systems. o Services Management: Services that manage cloud infrastructure platforms. These tools often provide features that cloud providers do not provide or specialize in managing certain application technologies. o Storage: Massively scalable storage capacity that can be used for applications, backups, archival, and file storage. 19

31 3 PROBLEM DEFINITION IT investment is still very risky for SMEs. The results of this research revealed that SME owners or managers are quite dissatisfied with their existing IT investment and IT infrastructure (Turan & Ürkmez, 2011). Many issues related to IT usage and adoption in worldwide SMEs is also valid for Turkey. Findings of the study are as follows (Kutlu & Ozturan, 2008): Increased use of IT in SMEs is mainly for operational and administrative tasks. Proof of this is the dominant use of accounting and office software. Development of internal IT skills produce high levels of success with IT adoption. Evidence for this is the increase in usage of production applications indicating a higher level of adoption in parallel with an increase in number of program developers. Business owners and managers with positive attitude are inclined to be more successful in adopting and implementing new technology. Verification of this is the positioning of SMEs in a higher level of adoption among the ones that encouraged their employees for IT usage. One of the factors affecting the usage and adoption of IT in SMEs is the expected benefits of IT. The findings of this study, which is an indication of this item, point out that, expected increase in the accuracy of information, comfort level with technology and expected increase in the processing speed are the major factors affecting IT implementation decisions. 20

32 We have analyzed the Comscore metrics reports and Tracker 2010 usage data reports. We have identified the following problems for SMEs worldwide. We believe the same issues apply to the Turkish SMEs as well. Most of the SMEs are still running old servers in terms of hardware and software. One or two employees oversee whole IT operations for growing company, so they don t have the luxury to apply proven best practices timely. The SMEs don t have strong backup, restore, and disaster recovery capability. SMEs cannot provide high availability or reliability targets. Performance issues such as delays in mail delivery and not downloading properly on smartphones. Calendars not synchronizing correctly. SMEs have distributed remote workforce to compete with other SMEs and large companies. SMEs can go global if they have new opportunities abroad. SMEs can merge with other SMEs or can be acquired by large organizations. SMEs don t have enough IT resources to take on new projects. If employees change their cell phones, then their directory of contacts do not work properly sometimes. SMEs need to share and collaborate with peers and partners over the internet with fewer clicks in a secure way. For example, they need to share large files with advertising agencies. Companies spend a lot of time in custom reporting using old technology and disintegrated enterprise applications. 21

33 Employees cannot collaborate over internet. For example, they need to edit same documents simultaneously. Most of the SMEs have not obtained ISO and ISO certifications which are related to ICT. Therefore they lack security standards. Internet facing servers are not patched timely which poses security risks. As a consequence of these research studies, we can deduce that today most of SMEs have some pains related to their ICT including Software Adequacy, Timeliness, Software Maintenance, Security and Integrity, Information Content, Productivity, Information Accuracy, Documentation, Information Format, Vendor Support, Ease of Use, and Training and Education, which are related to new technology adoptions and operational costs. SMEs need to focus on higher priority projects related to core business instead of supporting IT capital investments. SMEs also need to pay only for services used as they have limited ICT budget. The SMEs have limited operational ICT employees so they need to reduce IT complexity. Most of the startup companies and SMEs often try different business opportunities but very few of them become successful, most of these initiatives fade away. Some of these new products require extensive ICT spending due to the nature of technology. For SMEs it should be possible to add computing resources without building new infrastructure for these new initiatives and research efforts. SMEs mostly don t have enough ICT budget to apply or upgrade to the latest ICT technology so they lack competitiveness and have relative poor productivity gains compared to large organizations. Access to leadingedge technology for a decent cost and effort will allow SMEs to use the latest and brightest ICT technology similar to large organizations without making huge capital and operational expenses. 22

34 To alleviate these problems for SMEs, cloud computing is becoming very popular every day because customers only pay for the computing infrastructure that they actually use. In many cases users experience lower IT costs than if they had to buy all the equipment, hire the technical staff to run it and maintain it, and purchase software applications. This type of on-demand computing is beneficial to small and medium-size companies since they can easily scale up and down their IT requirements as the pace of their business demands it. Larger organizations however, may not want their most sensitive data stored on servers which they don t control. System reliability is also a special concern to all businesses. The unavailability of business data and applications for even a few hours may be unacceptable. The SaaS model means that SMEs can get the latest software and required infrastructure at a low, monthly cost, rather than having to go through the headaches of upfront investments, installation and upgrades themselves. 23

35 4 METHODS In this study, I propose an integrated framework with qualitative and quantitative aspects. The elements of this methodology can be summarized as follows: SaaS Evolution of Technology: SaaS technology has been around for a while. We will investigate where it came from in the last decade and how it will be evolving in the future. SaaS Market Analysis and SWOT Analysis: SWOT analysis of SaaS solutions are documented to give the knowledge about Strengths, Weaknesses, Opportunities, Threats of SaaS vendors and solutions for evaluators about the situation of the technology. Evaluators should check this guidance to see different angles and perspectives. Checklist for qualifying SaaS provider: There are several checklists when checking the solution is adequate or not. There are several components to a successful SaaS purchase, including Functionality, Implementation Process, and Cost. There are multiple factors to consider when making the deal. Scoring table for evaluation SaaS provider: The organization which selects the SaaS solution from different vendors can score each SaaS vendor s rating for 1-9 for several characteristics to quantify criterion. The higher the score the better for that SaaS vendor. On Premise ICT costing model: In this section, all the direct and hidden costs of having ICT on premise are revealed. TCO Total Cost of Ownership: Total Cost of Ownership calculation examples help us to compare total cost of on premise ICT vs. SaaS solution. ROI Return on Investment: In this section, we focus on the net present value of current SaaS investment s return. 24

36 Based on these methods, I have developed a simple SaaS Evaluation Framework for SMEs as listed below: Is SaaS the right technology for my company? o SaaS Evolution today and future o SaaS Market Analysis o SaaS Maturity Model o Advantages and Disadavantages of SaaS model o SWOT Analysis of SaaS How should I filter the SaaS providers? o SaaS Provider Qualification checklist How should I select the right SaaS providers? o Multi Critearia Based SaaS Provider Scoring tool How much do I spend for On Premise ICT Services? How much will I pay for online SaaS solutions? How much will I save if go for SaaS over On Premise? o Direct and Indirect Costs per ICT Service calculation model o Simple TCO calculation models o Complex TCO calculation models Will my costs outweigh my benefits if I invest in SaaS solutions? o Complex ROI calculation models If we illustrate the workflow of this model using a flowchart, it can be designed as in the following Figure 4.1: 25

37 START Is SaaS the right technology for my company? Qualitative Methods: SaaS Evolution today and future SaaS Market Analysis SaaS Maturity Model Advantages and Disadavantages of SaaS model SWOT Analysis of SaaS How should I filter the SaaS providers? Qualitative Methods: SaaS Provider Qualification checklist How should I select the right SaaS providers? Quantitative Methods: Multi Critearia Based SaaS Provider Scoring tool How much do I spend for On Premise ICT Services? How much will I pay for online SaaS solutions? How much will I save if go for SaaS over On Premise? Quantitative Methods: Direct and Indirect Costs per ICT Service calculation model Simple TCO calculation models Complex TCO calculation models Will my costs outweigh my benefits if I invest in SaaS solutions? Quantitative Methods: Complex ROI calculation models END Figure 4.1 Integrated Framework for Filtering and Selecting SaaS Providers 26

38 5 SaaS MARKET AND VENDOR ANALYSIS The rapid adoption of all forms of Cloud IT, from IaaS to PaaS to SaaS, is changing the way that organizations evaluate and manage the concerns related to the selection of SaaS solutions for business operations and management. But most of all, it is changing how firms of all sizes, and in all markets, see and manage IT. Software-asa-Service (sometimes referred to as Cloud-based business solutions ) is a means of acquiring and using software via the Internet. With SaaS, users do not need to buy, install, and maintain applications. All maintenance and upgrades are performed by the SaaS provider. As a result, the key benefits of SaaS center on reduced upfront cost and simplified software management. These benefits are helping to drive very rapid and widespread SaaS adoption in all aspects of business, from desktop applications to departmental solutions (such as sales force automation) to core business systems such as finance and human resources. SaaS may be acquired, used, and paid for in a variety of ways. The provider may charge per-use or through a periodic subscription fee. Most providers offer volume license discounts that reduce the cost per-user significantly. As a result, the software cost is typically an operating expense rather than a capital expense (this is of particular interest to firms who need to conserve their capital) (Saugatuck Technology Inc Report, 2010). 5.1 Changing Sources of Firm Software Today many business firms continue to operate legacy systems that continue to meet a business need and that would be extremely costly to replace. But they will purchase or rent most of their new software applications from external sources. The following Figure 5.1 illustrates the rapid growth in external sources of software for U.S. firms. There are three external sources for software: software packages from a commercial software vendor, outsourcing custom application development to an external vendor, 27

39 and cloud-based software services and tools. In 2010, U.S. firms will spend over $291 billion on software. About 40 percent of that ($116 billion) will originate outside the firm, either from enterprise software vendors selling firm wide applications or individual application service providers leasing or selling software modules. Another 10 percent ($29 billion) will be provided by SaaS vendors as an online cloud-based service (Laudon & Laudon, 2011). Figure 5.1 Sources of Software Expenditures Source: Laudon, K.,& Laudon, J. (2011). MIS Managing the Digital Firm 12th Edition, New Jersey: Prentice Hall, p Evolution of SaaS - Yesterday, Today, and Tomorrow There is a dispute among analysts whether SaaS would displace standard on premise software and hardware in the future or not. The classical software license model has still a lot of strengths and will still find enough people that prefer this solution. But the market share of SaaS applications will grow so that these two software 28

40 distribution models will complement each other. SaaS offer so many fundamental advantages to the customer that it will not just become another IT hype that will not last for a longer time. The strength of the one model is the weakness of the other model and the other way round. But SaaS is still just in the beginning of its evolution. The following Figure 5.2 whos how SaasS evolved since 2003, and how it is expected to evolve by The huge disadvantage of the SaaS model is the limited customizing. If the SaaS providers make the provided software solutions more customizable to fit it to the special needs of the customers -which will be quite possible - it will be much more interesting to many companies. Many companies still do not see the potential of SaaS, especially SMEs, or they just do not know what SaaS is at all. They often do not see that SaaS has limited customizability. But every company that deals with the idea of using SaaS must make itself clear what kind of restrictions - besides all advantages - SaaS has got. So if the costs do not matter every company would get just the best individual software solution. But in real the cost do matter so this is why standard software is primary there and the logical continuation for the future would be SaaS. But already today SaaS is at least an option that has to be checked before achieving new software for a company. All in all it will be a question of time when SaaS offers so many different add-ons and customizing possibilities that it converges to the old application service provider model without repeating the mistakes so that it could be called as real software through the line. If this is done SaaS will be a very profitable business part and a huge part of the current revenues for software implementation and integration will go to the SaaS providers. Prospectively the customer will get the best software solution for his company and can although source out operative IT services. That minimizes 29

41 the companies risk. But the future will not be completely without individual or customized standard software. There is still a need for these specialized software applications for the companies to achieve competitive business process advantages. And finally, for the customer it does not matter if the IT services were handled inside the company or external, important is that the business processes will run perfectly. So this is the huge goal that both standard software producer as well as SaaS provider should have. The one who makes it the best will finally rule the market. Figure 5.2 Possible Evolution Of SaaS from past to future Source: Saugatuck Technology Report. (2010). Software-as-a-Service Managing Key Concerns and Considerations, Services/~/media/Category/CRM/SalesLogix/Assets/Collateral/SaaS_Concerns_and_Consid erations_072610_sage.pdf 5.3 Forrester Research SaaS Maturity Model SaaS is the hottest trend in both CRM and SME market in general. While SaaS appears to be a threat to software vendors with traditional perpetual-license models, 30

42 it is also an opportunity for competitive advantage. The question is how independent software vendors and service providers can capitalize on this opportunity. Forrester's SaaS maturity model provides an assessment of the solutions and underpins our guidance on realistic strategy transformation for those software vendors and services providers considering a SaaS business model. Targeting the highest maturity level is not necessarily the best fit for every vendor. Forrester classifies the maturity of SaaS solutions on six levels. We define each level according to its answer to the question of who provides what to whom (see the following Figure 5.3). Figure 5.3 SaaS Maturity Model according to Forrester Source: Ried, S. (2008). Forrester Research SaaS Maturity Model, The explanations of these 0-to-5 SaaS Maturity Levels are listed below: 31

43 Level 0: Outsourcing is not SaaS. In outsourcing, a service provider operates a major application or a unique application landscape for a large enterprise customer. As the outsourcing company can't leverage this application for a second customer, outsourcing does not qualify as SaaS. Level 1: Manual application service provider business models target midsize companies. At level 1, a hosting provider runs packaged applications like SAP's ERP 6.0, which require significant IT skills, for multiple midsize enterprises. Usually, each client has a dedicated server running its instance of the application and is able to customize the installation in the same way as self-hosted applications. Level 2: Industrial ASPs cut the operating costs of packaged applications to a minimum. At level 2, an application service provider uses sophisticated IT management software to provide identical software packages with customerspecific configurations to many SME customers. However, the software package is still the same software that was originally created for self-hosted deployment. Level 3: Single-app SaaS is an alternative to traditional packaged applications. At level 3, software vendors create new generations of business applications that have SaaS capabilities built in. Web-based user interface (UI) concepts and the ability to serve a huge number of tenants with one, scalable infrastructure are typical characteristics. Customization is restricted to configuration. Single-app SaaS adoption thus focuses on SMEs. Salesforce.com's CRM application initially entered the market at this level. Level 4: Business-domain SaaS provides all the applications for an entire business domain. At level 4, an advanced SaaS vendor provides not only a 32

44 well-defined business application but also a platform for additional business logic. This complements the original single application of the previous level with third-party packaged SaaS solutions and even custom extensions. The model even satisfies the requirements of large enterprises, which can migrate a complete business domain like "customer care" toward SaaS. Level 5: Dynamic Business Apps-as-a-service is the visionary target. Forrester's Dynamic Business Application imperative embraces a new paradigm of application development: "design for people, build for change." At level 5, advanced SaaS vendors coming from level 4 will provide a comprehensive application and integration platform on demand, which they will prepopulate with business applications or business services. They can compose tenant-specific and even user-specific business applications on various levels. The resulting process agility will attract everyone, including large enterprise customers. 5.4 Key Technology Considerations for SaaS Providers The following figure shows Global SMEs Executive SaaS Survey results from Saugatuck Technology Inc. This survey results in Figure 5.4 illustrates top technology considerations when selecting SaaS providers. 33

45 Figure 5.4 Technology Considerations Regarding SaaS Provider Selection Source: Saugatuck Technology Report. (2010). Software-as-a-Service Managing Key Concerns and Considerations, Services/~/media/Category/CRM/SalesLogix/Assets/Collateral/SaaS_Concerns_and_Consid erations_072610_sage.pdf 5.5 In House or SaaS The following Table 5.1 compares criterion based advantages of in house solutions and SaaS. Since these qualitative comparisons can be different for each organization, therefore every SME should create a similar chart for its IT expectations and outlook for the technology. 34

46 Table 5.1 Comparison Between In-House And SaaS Solutions Source: Orminski, F. (2008). Does Software as a Service (SaaS) displace standard software?, Advantages of SaaS Service Model for Turkish SMEs SaaS is an on-demand solution that provides businesses an affordable way to use a software application without having to purchase it. This is done by leasing the program from a provider and either accessing or subscribing to it through the internet. As an IT business solution, SaaS has become an increasingly popular choice since companies only rent the software, rather than committing to the purchase price of the application and user licensing. Regardless of the type of business, it will realize several benefits if it chooses any SaaS solution. Advantages include the following: 35

47 Affordable: With SaaS, business won't have a large up-front capital expense as it would if it chooses to purchase the software. A reasonable monthly fee is all business will pay to have the latest version of the favorite software. Business won't need to spend money purchasing and installing software. Business won't have to worry about the cost of upgrading it, either. The SaaS provider will take care of it so business doesn t have to. Flexible: Because SaaS is offered as an on-demand service, business can adjust its contract to fit its staffing needs. Stable: The SaaS applications are installed on more powerful, secure, and redundant hardware infrastructure than business could afford to own. Quick deployment: Because most SaaS solutions are web-based, deployment is instantaneous, giving business immediate access to the business solutions it needs. Accessible: Regardless of where it does business, it will always have access to its SaaS applications as long as it has access to the internet. Compatible: Most SaaS applications are compatible with most systems and smart phones. Vendor s Responsibility: SaaS providers are responsible for managing and maintaining both the software and hardware components of the application. The network issues such as data redundancy, data backup and recovery are also planned and managed by the vendors. They upgrade the software on regular intervals. Ownership: Since SaaS vendors charge a set price per user per month, the firms don t have to pay extra money for modules they don t even use. It literally removes the maintenance, end user support, and administration costs of the 36

48 software. The implementation and customization costs of SaaS are also lower than the traditional software. All this results in a very low TCO. Scalability: Hosted software, another term for SaaS offers business more scalability in using the software. By utilizing SaaS business is free to use as much or as little part of any software as it needs. This gives business easy and economical access to many programs. Regular Upgrading: SaaS Vendors regularly upgrade their software, so that the users don t have to put any effort into installing and upgrading the applications. Easy Access: A major advantage of SaaS is it can easily and quickly be accessed from anywhere with a web browser. This gives users a great facility even when they are at home or in another country. They can access real time synchronized applications from Laptops and Smart Phones. SLA adherence: reported bugs can be fixed minus any rollout overhead. Sure the provider actually has to fix the issue, but assuming they ve deployed a moderately efficient SaaS application the rollout of a patch or fix should happen in the blink of an eye. Ease Internal IT Pains: SaaS offloads a great deal of IT pains incurred by software consumers in the traditional client and server model. This leaves IT personnel to focus on improving the day-to-day technical operations of the company instead of being called upon to troubleshoot 3rd party software or maintain aging infrastructure. Redistribute IT Budget: by outsourcing software functionality to a provider, the enterprise realizes a cost savings in infrastructure requirements and IT personnel knowledge requirements. This allows the enterprise to focus on core 37

49 competencies. It also means that the cost savings from using SaaS applications can be flat out saved, or reallocated to boost productivity through other services. According to Forrester Research s survey conducted in Middle East Africa (MEA) region including Turkey, the top 3 important motivations for moving to cloud computing in Turkey are Reduce Hardware Infrastructure Costs, Scalability on Demand to Meet Business Needs, and Simplified Server/Resource Provisioning, respectively (Hamad and Erickson, 2011). The following Figure 5.5 lists all the drivers with their overall percentage. Figure 5.5 Primary Drivers for Considering Cloud Computing Source: Forrester Research MEA and Turkey Cloud Computing Survey. (2011) Hardware, Software, and IT Staff Cost Savings Traditionally, deploying large-scale business-critical software systems, such as ERP and CRM application suites, has been a major undertaking. Deploying these systems across a large enterprise can cost hundreds of thousands of dollars in upfront licensing cost, and usually requires an army of IT personnel and consultants to customize and integrate it with the organization's other systems and data. The time, staff, and budget requirements of a deployment of this magnitude represent a 38

50 significant risk for an organization of any size, and often puts such software out of the reach of smaller organizations that would otherwise be able to derive from it a great deal of utility. The on-demand delivery model changes some of this. SaaS applications don't require the deployment of a large infrastructure at the client's location, which eliminates or drastically reduces the upfront commitment of resources. With no significant initial investment to amortize, an enterprise that deploys a SaaS application that turns out to produce disappointing results can walk away and pursue a different direction, without having to abandon an expensive onpremise infrastructure. Additionally, if custom integration is not required, SaaS applications can be planned and executed with minimal effort and roll-out activities, creating one of the shortest time-to-value intervals possible for a major IT investment. This has also made it possible for a number of SaaS vendors to offer risk-free "test drives" of their software for a limited period, such as 30 days. Giving prospective customers a chance to try the software before they buy it helps eliminate much of the risk surrounding software purchase. The following survey results in Figure 5.6 clearly illustrate these savings. Figure 5.6 Cloud Related Investments Can To Help Reduce ICT Spending Source: Forrester Research MEA and Turkey Cloud Computing Survey. (2011). 39

51 5.6.2 Easy To Adopt SaaS applications are available from any computer or any device, anytime, and anywhere. Because most people are familiar with using the Internet to find what they need using MSN, Hotmail, or use FaceBook applications, SaaS apps tend to have high adoption rates, with a lower learning curve Less Problematic Software Updates and Patches Because the SaaS provider manages all updates and upgrades, there are no patches for customers to download or install Scalability on Peak Times The management burden of anticipating and building out excess capacity IT infrastructure decreases. The result is less management, maintenance, and deployment time, with the additional benefit of greater scalability to more easily handle peaks in demand. The key observation is that Cloud Computing s ability to add or remove resources at a fine grain and with a lead time of minutes rather than weeks allows matching resources to workload much more closely. Real world estimates of server utilization in datacenters range from 5% to 20%. This may sound shockingly low, but it is consistent with the observation that for many services the peak workload exceeds the average by factors of 2 to 10. Few users deliberately provision for less than the expected peak, and therefore they must provision for the peak and allow the resources to remain idle at nonpeak times. The more pronounced the variation, the more the waste (Armbrust et al., 2009). Assume our service has a predictable daily demand where the peak requires 500 servers at noon but the trough requires only 100 servers at midnight, as shown in Figure 5.7. As long as the average utilization over a whole day is 300 servers, the 40

52 actual utilization over the whole day (shaded area under the curve) is 300 x 24 = 7200 server-hours; but since we must provision to the peak of 500 servers, we pay for 500 x 24 = server-hours, a factor of 1.7 more than what is needed. Therefore, as long as the pay-as-you-go cost per server-hour over 3 years4 is less than 1.7 times the cost of buying the server, we can save money using utility computing (Armbrust et al., 2009). Figure 5.7 Provisioning For Peak Load Source: Armbrust, M., Fox, A., Griffith, R., Joseph, A.D., Katz, R.H., Konwinski, A., Lee, G., Patterson, D.A., Rabkin, A., Stoica, I. & Zaharia, M. (2009). Above the Clouds: A Berkeley View of Cloud Computing, p.13 In addition to simple diurnal patterns, most nontrivial services also experience seasonal or other periodic demand variation (e.g., e-commerce peaks in December and photo sharing sites peak after holidays) as well as some unexpected demand bursts due to external events (e.g., news events). Since it can take weeks to acquire and rack new equipment, the only way to handle such spikes is to provision for them in advance. Even if service operators predict the spike sizes correctly, capacity is wasted, and if they overestimate the spike they provision for, it s even worse. They may also underestimate the spike as shown in the Figure 5.8, however, accidentally turning away excess users (Armbrust et al., 2009). 41

53 Figure 5.8 Underprovisioning 1 Source: Armbrust, M., Fox, A., Griffith, R., Joseph, A.D., Katz, R.H., Konwinski, A., Lee, G., Patterson, D.A., Rabkin, A., Stoica, I. & Zaharia, M. (2009). Above the Clouds: A Berkeley View of Cloud Computing, p.13 While the monetary effects of overprovisioning are easily measured, those of under provisioning are harder to measure yet potentially equally serious: not only do rejected users generate zero revenue; they may never come back due to poor service. The following Figure 5.9 aims to capture this behavior: users will desert an under provisioned service until the peak user load equals the datacenter s usable capacity, at which point users again receive acceptable service, but with fewer potential users (Armbrust et al., 2009). Figure 5.9 Underprovisioning 2 Source: Armbrust, M., Fox, A., Griffith, R., Joseph, A.D., Katz, R.H., Konwinski, A., Lee, G., Patterson, D.A., Rabkin, A., Stoica, I. & Zaharia, M. (2009). Above the Clouds: A Berkeley View of Cloud Computing, p.13 42

54 5.6.5 Pay per Use Financial Model SaaS vendors are compensated by users for the use of the hosted software. Payments can be either on a pay-per-use basis or as a monthly payment. Some SaaS applications are available completely free of charge while others are open source (the customer decided where to host the application). But the one thing all SaaS applications have in common is that they are all delivered as web applications to the browser Improved Release Management and Testing of New Releases In the earliest stages of assessing the feasibility of a Cloud Computing solution it is key for the business and Cloud delivery provider to understand the requirement for a Cloud solution within that business context. The business must carefully document what they require from such a solution clearly and unambiguously. As with the development of any solution, business requirements are the key driver to the success of the solution. As business look more and more often to third parties to deliver these solutions, the foundations for the delivery must be solid. Business requirements are these foundations. Static Testing on business requirements will ensure that these are concise and complete. Undergoing the process of reviews and workshops to understand what is being asked for in business requirements will save time and money later in the development lifecycle by removing potential software defects before they are built. Cloud Computing solutions claim to be scalable on demand. How does the business verify that the solution delivered is capable of coping with the workload which it is required to undertake? Load or Stress testing can be used to prove that the developed solution can scale as required. By using test techniques and tools which are capable of applying huge amounts of load on the solution the Cloud can be accurately 43

55 measured and its capacity verified. Using a distributed Cloud Computing solution should mean that the delivery will perform to a high standard. Performance testing techniques allow the systems performance to be measured and verified accurately. Using performance testing and load testing techniques in tandem allows an accurate image of the solutions ability over the cloud to be created. This in turn provides the comfort that the system is constructed so as to be capable of acting as delivery mechanism for the business requirement. Security testing can provide assurance that business critical data is stored and transported safely. Techniques such as Penetration Testing can prove that the mechanisms, which have been developed to maintain security, will remain intact during potential attempts to compromise the Cloud solution (AppLabs Report, 2009) Rapid Resource Provisioning A cloud model gives business the ability to respond to business demands more effectively and helps ensure employees have on-demand access to critical business information, customers, partners, and each other, using nearly any device, from virtually anywhere. The result is they can give priority to the most critical business tasks first SLAs Businesses must exercise caution when using software outsourcing or SaaS providers. If things can go wrong, they likely will. Service level agreements (SLA) help protect both customers and the service providers. Here are the main points of SLAs (Laudon & Laudon, 2011). Defines responsibilities of the service provider and level of service expected by the customer 44

56 Specifies the nature and level of services provided Criteria for performance measurement Support options Provisions for security and disaster recovery Hardware and software ownership and upgrades Customer support, billing and conditions for termination SME executives are attracted to all types of Cloud Computing solutions primarily for strategic reasons such as flexibility and speed to market, in addition to potential cost savings. To achieve these strategic and operational goals, SMEs need to change the way they manage IT, including the organizational structure and skills of the IT support staff. There is a need to manage SLAs, data access, subscriptions, and license management through a robust vendor management process. Additionally, whether business is going to replace one, some, or all of its business applications with a SaaS solution, it will need a realistic plan and timeframe to securely implement, migrate, and then turn off legacy applications. Further, a well-defined process may be required to optimize key consulting resources to work with the business in prototyping workflows and building requested customizations (Saugatuck Technology Inc Report, 2010) Security The following Figure 5.10 shows that Turkey SMEs are way above the world average in terms of Malicious and Potentially Unwanted Software according to Microsoft Security Intelligence Report in The higher the security risk exposed the more motivation for moving to SaaS service model. This is due to reason that 45

57 high security risk is an indicator for SMEs not managing their ICT well in terms of Security. Figure 5.10 Malicious and Potentially Unwanted Software Source: Microsoft Security Intelligence Report. (2010) Few Technical Skills Required for New Technology With SaaS, the job of deploying an application and keeping it running from day to day such as testing and installing patches, managing upgrades, monitoring performance, ensuring high availability, and so forth, is handled by the SaaS provider. By transferring the responsibility for these "overhead" activities to a third party, the IT department can focus more on high-value activities that align with and support the business goals of the enterprise. Instead of being primarily reactive and operations-focused, the chief information officer and IT staff can more effectively function as technology strategists to the rest of the company, working with business 46

58 units to understand their business needs and advise them on how to use technology best to accomplish their objectives. Far from being made obsolete by SaaS, the IT department has an opportunity to contribute to the success of the enterprise more directly than ever before. 5.7 Disadvantages of SaaS Service Model for Turkish SMEs Some of the key disadvantages of SaaS are documented below: Security and confidentiality: While working from anywhere / anytime is an important aspect of SaaS this also implies that sensitive data has to be stored online on third party servers. This can be an issue in some of the functions for example, accounting, etc. Risk of data loss: The SaaS provider has to be chosen wisely as there is an inherent risk of losing valuable data if the vendor goes out of business. Dependence on high speed internet: A high speed internet connection is must for SaaS, while this is not a big challenge in developed nation, it can be a serious limitation in developing nations with poor infrastructure and unreliable connectivity. Thus firms should choose wisely understanding the connectivity bottleneck. Low predictability of cost: Based on a survey by Gartner, current customers were least satisfied with the lack of predictability of cost in SaaS implementation. This primarily is because of the unpredictability in post-sales support and maintenance services. Not all applications have SaaS versions yet: Many firms need very industry specific business applications which do not have a SaaS version presently. 47

59 SaaS versions may not be as powerful as non-saas ones: SaaS versions are usually stripped down versions of a powerful non-saas product. According to Forrester Research s MEA and Turkey Cloud Computing Survey show in Figure 5.11, the top 3 barriers and concerns to moving cloud computing in Turkey are Lack of Cloud Knowledge and Understanding, Security, and Integration with Existing Systems, respectively. Figure 5.11 The Major Concerns And Barriers To Cloud Adoption Source: Forrester Research MEA and Turkey Cloud Computing Survey. (2011). Another survey from Saugatuck shows that focus is on data security and privacy, and data and transaction integrity in Figure

60 Figure 5.12 Key Concerns in Deploying Cloud based Business Solutions Source: Saugatuck Technology Report. (2010). Software-as-a-Service Managing Key Concerns and Considerations, Services/~/media/Category/CRM/SalesLogix/Assets/Collateral/SaaS_Concerns_and_Consid erations_072610_sage.pdf Cloud Computing Knowledge and Understanding Here is a relatively new survey revealing that small businesses are not that ready to go cloud (at least, they go cloud probably for the wrong reasons): SB Authority Market Sentiment Survey commissioned by Newtek Business Services. The survey reveals that small business owners need to learn more about cloud computing and everything that comes with it. The survey is based on a poll of about 1,800 small business respondents, telling us pretty much the big picture of what is going on in cloud computing for small business right now (the survey s May 2011 results): 71 percent of respondents have never heard about cloud computing. Of the rest 29 49

61 percent who have heard about cloud computing, 74 percent can t describe what cloud computing is. Regarding the knowledge about IT security, 78 percent of respondents think that their data is secure; they don t have complete documentation on critical data, information, software and hardware that are stored on-premise IT system. In relation to that, 71 percent of respondents confess that the important data, software and hardware they have are not being backed up off-site. The question is, when disaster strikes, will small business owners be able to recover the all important data? What about if their system is hacked and get their important data and information stolen? What if their entire business is going down because the cloud they adopt is proven to be not as stable and/or secure as the think? It seems that small business owners need to learn more about the cloud and collaborate with more cloud-savvy and IT security-savvy people including hiring one or two. The cloud computing with all the benefits and caveats that come with it can help small businesses to secure their important data, hardware and software both off-site and on-site. That being said, small business owners need to understand that they need to secure their data on and off the cloud typically done by creating backups on on-premise IT system and vice versa (Ivan, 2011) Security Leveraging a SaaS solution does not exempt that organization from the required regulatory controls of data compliance. SMEs need to manage compliance through controls and audits, especially when data may be hosted in a different country and with a different subcontractor like a hosting provider. Ensure that business is not breaking any country laws related to transfer of customer data or access/sharing of customer data. Also make certain that business has access to the data, and there is an established medium for the distribution of data to its organization should it con-sider 50

62 moving to another solution. Ensure that the SaaS provider has demonstrated controls and acceptable adherence to those controls has been attained. Anyone considering SaaS must look closely at providers security and privacy services, and ask specifically about Sarbanes Oxley or COBIT audit certification. Firms in the healthcare industry considering a SaaS solution should also ask about HIPAA compliance in regard to the Privacy Rule (Saugatuck Technology Inc Report, 2010) System Integration Capability To maximize their benefit, SaaS solutions need to integrate with existing enterprise systems. Depending on the business requirements and the integration capabilities of the chosen SaaS product, the integration approach may not be trivial. While a comprehensive API offered by SaaS is a must-have, in most cases a custom SaaS integration layer will be needed to comply with SOA principles and to facilitate integration with existing systems. SaaS integration projects are not much different than typical integration projects. Unless the integration requirements are very simple, it makes more sense to use an integration product as the foundation of the SaaS integration layer, instead of custom-building such a layer. In most cases there may be a standard integration product used within the organization and more than often, this same product should be used for integrating the SaaS solution. An Enterprise Service Bus (ESB) is often a good integration product that will address most of the integration needs. In other cases, the SaaS Integration layer may be comprised of one or more integration products Ability to Move Among SaaS Providers and Ability to Change Deployment Models When Necessary Given the amount of customization that the company has invested in, it is becoming increasingly clear that there is no easy answer and no free lunch. One of the 51

63 reasons that the company had decided to implement SaaS was the assumption that it would be possible to migrate from one SaaS application to another. However, while it might be possible to migrate basic data from a SaaS application, it is almost impossible to migrate the process information. Switching from one SaaS solution to another is not so different from switching from one on-site application to another. The main issue regarding the SaaS vendor is to make sure that the data can be transferred to the hands of the enterprise at any time. Today the most common methods are to enable the export of reports in a CSV format and to download the full database. Even in this simple case the actual migration in the SaaS case will be easier because the company doesn t need additional sets of hardware infrastructure for the migration to take place. Furthermore SaaS vendors develop import tools so that a new customer will can easily migrate the data, whether it is in a raw spreadsheet or even in the format of other SaaS vendors. For example, moving documents and data from one vendor s application to another requires both applications to support common formats. The file formats involved will depend on the type of application. Standard APIs for different application types may also be required. However, this is the same issue of on premise applications, so we can say that there is nothing cloudspecific to these requirements Availability and Reliability As SMEs)evaluate cloud computing solutions, vendors often tout availability, or uptime, commitments. Understanding the metric, and how to compare vendor claims, is critical when selecting a solution. Availability is generally expressed as a percentage %, 99.99%, and so on. With 8760 hours in each year, 99.9% availability equates to 8.75 hours (0.1%) downtime each year, or an average of 45 minutes per month. Similarly, 99.99% availability equates to 45 minutes of downtime each year, 52

64 or about 5 minutes per month. Simple yes, but the devil is in the details. Most vendors caveat availability commitments by excluding schedule maintenance windows. For some vendors, this means regularly scheduled windows; for others this means any non-emergency maintenance activities with advanced notice. When comparing availability claims, business need to account how availability is calculated. The qualities that make SaaS an attractive model for acquiring and consuming applications can introduce a host of new wrinkles for organizations that choose them. A key issue revolves around application reliability, which includes ensuring both the availability and sufficient performance of the applications on which organizations depend. For one thing, SaaS vendors deliver their wares over the public Internet, which means these applications perform differently from applications that run on local clients or over an organization's internal network. What's more, the fact that SaaS applications are hosted and maintained by external parties means that companies have less visibility into the workings of these services than they do with applications hosted on-premises. Because of the nontraditional delivery method and relatively black box operation of SaaS applications, IT departments must approach their responsibilities around ensuring application reliability a bit differently from what they are probably accustomed to doing. A successful strategy for ensuring SaaS reliability must include attention to users expectations and needs, the health of the network, the architecture and practices of potential SaaS vendors, and the tools and services that can be used to measure and monitor the SaaS applications that the organization consumes. 53

65 5.7.6 Adaptability and Task Productivity The following concerns should be addressed as part of SaaS evaluation. How easily can business modify the application? This can be as simple as adding fields or building dashboards, or as advanced as a programming platform. How effectively can the users accomplish their goals? How many cases-per-minute or entries-per-day can workers do, and how many errors do they make? Regulatory and Compliance Issues Some industries are subject to regulatory law in different parts of the world, which imposes various reporting and recordkeeping requirements that the potential SaaS solution candidates cannot satisfy. Consider the regulatory environments in all the different jurisdictions in which the organization operates and how they affect its application needs. Sometimes, technical and financial considerations also can have legal ramifications, such as whether candidate SaaS providers will be able to meet the internal and public standards for data security and privacy in order to avoid legal exposure. Consider any legal obligations business has toward its customers or other parties, and whether SaaS will allow it to continue to meet them Impact on IT Roles and Responsibilities Adding SaaS to the enterprise IT mix can cause a fundamental shift in the IT department's role as a provider of information services. Business units are sometimes caricatured as being afraid of change, but IT departments are not immune to organizational politics, either, and institutional resistance to SaaS can come from IT itself, as easily as from elsewhere in the company. In the past, the nature of software deployment has put chief information officers (CIOs) and their staffs into the role of gatekeepers who could exercise a veto over any proposed software deployment by 54

66 simply declaring that they would not host it in the data center. With SaaS as an option, control of the data center does not necessarily equal control over the entire enterprise-computing environment and this can cause the gatekeepers to fear a loss of control: A "rogue" vice president could just subscribe to a SaaS application for their department, bypassing IT entirely. Of course, a CIO who relies upon control of the data center to control the greater computing environment has governance problems, anyway. Successful CIOs engage with business units, educate them about the impact of certain purchases on their future agility, and work with them to determine whether their needs would be best met by on-premise software or SaaS. By performing this consulting role, as discussed above, the IT department can add value directly to the business by matching up business units optimally with technology IT Governance Issues Performing due diligence is a routine part of any successful IT infrastructure deployment project, so the basics should already be familiar to business. Some factors, however, deserve special consideration. Some areas to address in a typical due-diligence checklist include the following items. Data-security standards: Moving critical business data "outside the walls" introduces a risk of data loss or inadvertent exposure of sensitive information. Assess organization s data-security needs, and ensure that the provider has measures in place to meet the standards it set. SLA guarantees: The management contract between business and the SaaS provider takes the form of service-level agreements (SLAs) that guarantee the level of performance, availability, and security that the SaaS vendor will provide, and govern the actions the provider will take or the compensation 55

67 it will provide in the event that it fails to meet these guarantees. Ensure that these SLAs are in place, that the guarantees they make are sufficient to meet the business needs, and that they provide a sufficient level of mitigation in even the worst-case scenario. Migration strategies: At some point, business might want to migrate away from a SaaS application to another solution, so it's important that business is able to take its existing data out of the application and move it to another one. Ask the prospective SaaS provider about any data-migration strategies and procedures it uses, including any provisions for data and code escrow. In-house integration requirements: Ensure that migrating to SaaS will meet any functional and data-integration requirements the organization has in place. Reporting services: Because SaaS involves giving up direct control of some of the organization data, accurate and useful reporting is especially important. Determine what reporting services the provider offers, and whether they are compatible with your business-intelligence requirements Different Cloud Computing Standards among Cloud Providers Cloud computing is at a relatively early stage of development, yet many standards development organizations, consortia, and trade associations are busy creating cloud computing standards. As a result, there are likely to be multiple standards in some areas, while other areas are missing standards entirely. It is this challenge that the IEEE Cloud Computing Initiatives, CPWG 1 and ICWG 2, aim to address. Cloud computing is an evolving term, with a variety of innovative approaches. Like other

68 rapidly evolving industries, the definition of cloud computing is also changing rapidly. It is akin to saying that even today; the definition of a "TV" is still changing with the advent of Internet-connected devices, new formats, and Stereo Video. Or like asking what a "phone" is? The average answer today will look more like an iphone or Android mobile device, rather than the historic wired audio-only devices made by Western Electric. And yet, all along in product lifecycles, standards for elements of those products are very important. IEEE P2301 is a meta-standard, a set of profiles consisting of other standards, publications, and guidelines, from many organizations. It will provide profiles of existing and in-progress cloud computing standards in critical areas such as application, portability, management, and interoperability interfaces, as well as file formats and operation conventions. With capabilities logically grouped so that it addresses different cloud audiences and personalities, IEEE P2301 will provide an intuitive roadmap for cloud vendors, service providers, and other key stakeholders. When completed, the standard will aid users in procuring, developing, building, and using standards-based cloud computing products and services, enabling better portability, increased commonality, and greater interoperability across the industry. IEEE P2302 is like other standards, except that it is focused on the Intercloud problem and there are no other efforts that we know of focusing on this particular issue. IEEE P2302 defines essential topology, protocols, functionality, and governance required for reliable cloud-to-cloud interoperability and federation. The standard will help build an economy of scale among cloud product and service providers that remains transparent to users and applications. With a dynamic infrastructure that supports evolving cloud business models, IEEE P2302 is an ideal platform for fostering growth and improving competitiveness. It will also address fundamental, transparent interoperability and 57

69 federation much in the way SS7/IN did for the global telephony system, and naming and routing protocols did for the Internet. Cloud computing will change everything. It is one of the three aspects of the 'perfect storm' of technology waves currently sweeping across humanity, the other two being massive deployment of very smart mobile devices, and ubiquitous high-speed connectivity. The cloud will tie all of these coming advancements together. We re truly embarking on a new age of innovation. says, David Bernstein, IEEE P2301 and IEEE P2302 WG chair, and managing director, Cloud Strategy Partners. Since its inception, the Internet has gone through radical changes driven by the twin engines of continued technology advancement and evolving user expectations. Cloud computing today is very much akin to the nascent Internet a disruptive technology and business model that is primed for explosive growth and rapid transformation. But without a flexible, common framework for interoperability, innovation could become stifled, leaving us with a siloed ecosystem. By leveraging its uniquely deep and broad technological resources and expertise, IEEE is helping to minimize fragmentation and ensure that cloud computing realizes its full potential. Steve Diamond, chair, IEEE Cloud Computing Initiative. Looking to the future, cloud computing standardization efforts may well mirror what we saw for the standardization efforts around the Internet. Some of the standards may be too early or too late and some may prove to be inadequate, duplicative, or inappropriate. Ultimately however, standards will evolve or be developed to address the key challenges of the market as it develops. There will be bumps in the road, but cloud computing will be the fourth major computing paradigm, and the development of standards will have a key role in facilitating the development of the marketplace, just as it did for the Internet (Pushp, 2011). 58

70 6 TURKISH ICT MARKET ANALYSIS In this section we will analyze Turkish ICT Market to understand market dynamics for SMEs to get knowledge about pains and background. 6.1 Analysis of Current IT Usage, Risks, and Issues in Turkish ICT Market According World Bank Research study (Seker & Correa, 2010), in Turkey small and medium size enterprises account for almost 77 percent of employment and play a crucial role in the economy. However, the analysis of firm dynamics in Turkey shows that medium-size firms ( workers) are the slowest growing group in the economy. Moreover, small and medium size enterprises grow at a slower rate in Turkey than in several comparator countries in the Eastern Europe and Central Asia region. There are numerous factors that can affect firm growth. The levels of technology and human capital, the development level of the country, or the environment in which the firms operate are very crucial for growth. Especially for the developing countries where infrastructure, financial, or regulatory services don t function smoothly, firms can be discouraged to grow. SMEs that may lack the capacity to cope with these distortions could be severely affected ICT in Turkey and SWOT Analysis of the ICT Market According to Invest-In-Turkey web site 3 operated by The Republic of Turkey Prime Ministry Investment Support and Promotion Agency -Invest in Turkey, between 2010 and 2013 ICT spending is forecasted to rise by 16% a year. The ICT sector has become an essential part of the economy, in particular social life, since it is directly

71 or indirectly affecting the ever-changing business world. Turkey is well aware of the fact that this sector will have a much more influential role in the future than it currently has. Searches for solutions brought about by this development and growth, which are appropriate for the requirements of today, and the efforts to enable today s economic and social life to acquire these most up to date and fast solutions instantly, together form the basis of information and communication technology, since these solution searches basically require the utmost efficient utilization of both time and physical resources. In this regard, Turkey has increased its interest in the ICT sector further, and started the necessary studies so as to have a voice in the sector in the future. The following Table 6.1 lists the SWOT Analysis of the Turkish ICT Market from the government perspective as it is shared in an official web site. Table 6.1 SWOT Analysis of Turkish ICT Market Strengths Demand for high-technology telecommunication services, as well as a large Turkish population, are expected to increase total ICT spending Huge potential for growth considering the young population compared to Western countries Companies that have R&D activities in TDZs are exempt from income tax for these activities Government institutions are one of the biggest IT buyers Share of IT in total public investment is growing Opportunities Increasing budget allocation by government for public IT investments Mobile phone subscriptions are expected to grow The ability to train highly qualified, young and dynamic computer engineers and software developers in ever-increasing numbers Weaknesses High (though reducing) software piracy rate High taxation (VAT and Special Communication Tax) in the mobile sector Threats Underdeveloped collaboration culture of R&D and innovation in the sector Source: Deloitte ICT Invest in Turkey Report, (2010), US/infocenter/publications/Documents/ICT.INDUSTRY.pdf The greatest indicators of these efforts are the new initiatives and R&D Law issued for the investors. 60

72 In Turkey, during the last ten years, ICT equipment has grown 130 percent, software 500 percent, the services sector around 500 percent, consumer materials around 200 percent, information technologies 225 percent, telecommunication equipment around 75 percent, bearer services around 275 percent, and communication technologies around 225 percent. Turkey s large population, as well its demand for high-tech telecommunication services, are expected to increase the total ICT spending to the level of USD 10.5 billion in 2014, up from USD 7.2 billion in Meanwhile, mobile penetration rates are expected to increase further. There has been a research conducted by TUBISAD 4 about the ICT Sector in Turkey. The following Figure 6.1 shows that most of the ICT budget is spent on Hardware in Turkey in 2010 instead of Services or Software. Figure 6.1 Breakdown of ICT Spending in Turkey Source: TUBISAD Report. (2010). ICT Sector in Turkey,

73 The following Figure 6.2 shows the Hardware Expenditure between 2005 and 2011 in Turkey. Figure 6.2 Hardware Expenditure in Turkey Source: Economist Intelligence Unit Report. (2011). If we compare a developed country such as Canada with Turkey, we can obviously see in the following Figure 6.3 that, the ratio of Hardware, Software, and Services spending is different than Turkey. It can be easily deduced as the Turkey matures in terms of ICT, the ratio of Hardware and Software spending will be reduced to a lower figure than the Services spending based on percentage. Looking at the segments in the IT sector, hardware sales always take the biggest chunk from the IT market as opposed to the EU countries. Software development and services segments are expected to skyrocket with the support of the government policies and initiatives such as Technology Development Zones (TDZ), new R&D laws, and Silicon Valley of Turkey project. 62

74 Figure 6.3 ICT Canada Projected Spending on Hardware, Software, Services and Communications 2010 to 2013 (WITSA) Digital Plant, 2010, (Forecast in US$) Source: WITSA Digital Planet Report. (2010) Internet and FaceBook Usage in Turkey and Europe Broadband penetration is forecast to reach about 16%. Given the high percentage of young people in Turkey's growing population, growth in Internet subscriptions and e- commerce is likely to be strong. As with telecoms services, growth in will be driven by rising incomes (in the second half of the forecast period) and sales of personal computers (PCs), as well as the availability of online services through cable-tv and wireless applications. The Internet and its many uses are becoming increasingly familiar, and computer literacy is growing in Turkey. A major project by the Ministry of Education to introduce computers and the Internet throughout the school system is currently under way. The following Table 6.2 lists the internet penetration between 2006 and 2013 (expected). 63

75 Table 6.2 Internet Penetration in Turkey Internet ('000) Internet penetration 100 people) Broadband subscriptions ('000) users (per Broadband subscriptions (per 100 people) 14,048 19,614 25,238 30,525 34,761 38,565 41,894 45, ,848 4,535 6,206 7,752 9,020 10,137 11,135 12, Source: Estimates and Forecasts of Economist Intelligence Unit provided by The following Table 6.3 lists the Internet and Facebook Usage in Europe by June 2011 from the statistics of Internet World Stats web site. 64

76 EUROPE Table 6.3 Internet and Facebook Usage in Europe, June 2011 Population 2011 Internet Users Internet Penetration(%) Users % in Europe Facebook Subscribers Facebook Penetration (%) Norway 4,691,849 4,431, % 0.90% 2,466, % Denmark 5,529,888 4,750, % 1.00% 2,720, % Sweden 9,088,728 8,397, % 1.80% 4,403, % United Kingdom 62,698,362 51,442, % 10.80% 29,880, % Ireland 4,670,976 3,042, % 0.60% 2,004, % Macedonia 2,077,328 1,057, % 0.20% 878, % Belgium 10,431,477 8,113, % 1.70% 4,255, % Serbia 7,310,555 4,107, % 0.90% 2,866, % Finland 5,259,250 4,480, % 0.90% 2,023, % Turkey 78,785,548 35,000, % 7.30% 29,459, % Portugal 10,760,305 5,168, % 1.10% 3,869, % Albania 2,994,667 1,300, % 0.30% 1,062, % France 65,102,719 45,262, % 9.50% 22,713, % Switzerland 7,639,961 6,152, % 1.30% 2,655, % Hungary 9,976,062 6,176, % 1.30% 3,358, % Slovakia 5,477,038 4,063, % 0.90% 1,831, % Slovenia 2,000,092 1,298, % 0.30% 660, % Czech Republic 10,190,213 6,680, % 1.40% 3,334, % Italy 61,016,804 30,026, % 6.30% 19,806, % Greece 10,760,136 4,970, % 1.00% 3,407, % Croatia 4,483,804 2,244, % 0.50% 1,413, % Austria 8,217,280 6,143, % 1.30% 2,574, % Spain 46,754,784 29,093, % 6.10% 14,409, % Bulgaria 7,093,635 3,395, % 0.70% 2,156, % Lithuania 3,535,547 2,103, % 0.40% 949, % Netherland 16,847,007 14,872, % 3.10% 4,513, % Bosnia- Herzegovina 4,622,163 1,441, % 0.30% 1,118, % Germany 81,471,834 65,125, % 13.70% 19,459, % Poland 38,441,588 22,452, % 4.70% 6,363, % Romania 21,904,551 7,786, % 1.60% 3,424, % Latvia 2,204,708 1,503, % 0.30% 288, % Moldova 4,314,377 1,333, % 0.30% 200, % Russia 138,739,892 59,700, % 12.50% 4,648, % Ukraine 45,134,707 15,300, % 3.20% 1,492, % Belarus 9,577,552 4,436, % 0.90% 299, % TOTAL 809,805, ,852, % % 208,907, % Source: Internet and FaceBook Usage in Europe by 30 June 2011, The following Figure 6.4 illustrates Top 10 Internet Usage in Europe per population. 65

77 Figure 6.4 Top 10 Internet Countries in Europe, March 31, 2011 Source: Europe Internet Usage Stats and Market Report by 31 March 2011, The following Table 6.4 demonstrates how the Internet Usage increased in Turkey since Table 6.4 Internet Usage and Population Statistics in Turkey YEAR Users Population % Pop ,000,000 70,140, % ,500,000 73,556, % ,220,000 74,709, % ,000,000 77,804, % Source: Turkey Internet Usage Stats and Market Report 2000-to-2010, OECD Outlook for SMEs in Turkey Organization for Economic Co-operation and Development (OECD) report about Turkish SME Market states that a major priority area for SME policies has been to strengthen SMEs technological capacity, particularly in the area of ICT. Wide use of microcomputers could enhance dissemination of the information published by the 66

78 government to promote exports. Increased Internet use could help industrial SMEs to procure raw materials and capital goods more efficiently, thus trimming their costs and boosting their productivity. These positive effects have been clearly demonstrated in the North American and European markets. The Internet can also help SMEs to advertise their products and simplify purchasing decisions for businesses and consumers alike. Computers can also help SMEs control production processes and manage inventory. After the customs union with the European Union was put in place, Turkish SMEs faced pressure to raise their technical level and acquire know-how in order to meet European competition and take advantage of opportunities in the domestic market. However, they did not fully take advantage of these opportunities for a number of reasons. First, even if rapid progress has been made in recent years, investment in ICT remains low in Turkey. Second, the support policies that would have been necessary for their technological development were not available, owing to a lack of public funding. Moreover, to be fully effective, technical standards should have been raised prior to the opening of the borders. Furthermore, an unfavorable economic environment and the drop in domestic demand following economic crises in a climate of heightened competition slowed SMEs technological development. Their lack of technical skills keeps SMEs from deriving the full benefit of any cost advantages they might have domestically or for export, notably during periods of devaluation of the Turkish lira. Finally, businesses needs in terms of technology do not automatically result in demand on their part, either because of a lack of resources, owing to their small size, an internal lack of understanding of their requirements or a poorly functioning market. This obviously has negative repercussions for technical consulting firms operating within Turkey that are able to provide needed support. It should be noted that small manufacturing 67

79 business throughout the world are often reluctant to use technical consultants (OECD Report, 2004) Report Stating Turkey's SMEs Lag in IT Nearly 60 percent of small and medium size enterprises in Turkey do not have an address while only one fourth of all SMEs have a corporate website, a new research conducted in 2010 by TUBISAD (Turkish Informatics Industry Association), found (TUBISAD Report, 2010). The research, which was conducted in 25 provinces around Turkey and consists of interviews with 1,645 managers, was published in Istanbul Wednesday. Turgut Gürsoy, TUBISAD chairman said the results of the survey are significant and indicate the lack of IT awareness among Turkish SMEs is a countrywide challenge. "One of the most striking findings of the study is that more than half of Turkish companies do not use . At the same time, one fourth of the firms do not even have a Web site. Today there are in fact still some listed companies in Turkey that do not have a Web site. This is quite an important issue," Gürsoy said. Özgür Erdem, director of TUBISAD s SME development project, noted the minuscule exposure of Turkish SMEs complicates Turkey s economic growth. Turkey envisions exporting goods worth $500 billion and pulling in $50 billion from tourism but half of the SMEs do not even have Internet pages. It is not possible to realize these financial goals without information and communications technology. SMEs here need to start using more IT solutions. Turkey needs to solve this issue, Erdem said. 68

80 According to the survey, 67 percent of all respondents said their companies do not have regular needs for technology. Of the remaining 37 percent who are considered to need technology, one third noted that, although they need technology, they do not know how to use it. Ibrahim Özer, member of the TUBISAD board, said this again shows information technology penetration is still at its infancy among Turkish SMEs. And this is actually not solely the problem of the ICT sector but of all of Turkey. SMEs are investing in machines and other equipment but not IT. Turkey s new commercial code, which has not yet been adopted into legislation, requires all companies in Turkey to have Web sites. Gürsoy noted that the new commercial code should be adopted into legislation. "In fact, 74 percent of the companies researched were not even aware of this requirement The new code enables SMEs to grow. It will reduce the gray economy, increase transparency, introduce e-signatures and e-bills, and also encourage mobile working. Nazım Özdemir, chairman of TUBISAD s SME development project, said the lack of IT use at Turkish SMEs is partly due to lack of resources. But there is also no professional personnel for the purpose. The problem in Turkey is also employers do not comprehend how useful computers are, he said. 6.2 Turkey Cloud Computing Survey Results The following survey results in Figure 6.5 shows the areas how the SMEs are currently leveraging cloud based solutions. 69

81 Figure 6.5 Currently Leveraging Cloud Computing Source: Forrester Research MEA and Turkey Cloud Computing Survey. (2011) The following survey results in Figure 6.6 shows the areas how the SMEs are currently leveraging cloud based solutions. Figure 6.6 Leveraging Cloud Computing In These Areas Currently Source: Forrester Research MEA and Turkey Cloud Computing Survey. (2011) 70

82 The following survey results in Figure 6.7 shows in which sectors SMEs plan for cloud based initiatives in future. Figure 6.7 Cloud Computing Initiative In Place Within The Organization Source: Forrester Research MEA and Turkey Cloud Computing Survey. (2011) 6.3 SWOT Analysis of Using SaaS for Turkish SMEs The SaaS business model has many advantages but also disadvantages. The following SWOT analysis describes the strengths, weaknesses, opportunities and threats that come with SaaS (Orminski, 2008) Strengths of SaaS Reduced effort: In compare with the classical software license model there is no complex providing of the software in the company anymore. The software that is used as a service is functional on every standard computer with internet connection. So there is no need for a high IT knowledge or high investments to expensive IT hardware because the software is installed on the hardware infrastructure of the service provider. He cares for the right hardware environment and services to keep the software running which 71

83 simplifies the software management so that the companies can keep concentrating on their core businesses. Reduced costs: Only the standard software that is really needed will be in usage in the company. So there will only be paid a calculable monthly rent that depends on the amount of usage of the software. In addition there are no royalty-payments for the software. This avoids the problem of an under- or over-licensing and with it a lower capital tie because of the high starting investments for the software license. The included services lead to a lower tie of important human resources of the IT department because the service provider cares for everything that has to deal with the provided software. So there is a double transfer of cost risk from the customer to the provider. But the market researcher from IDC think that the cost advantages in the beginning will be over after three till five years because a software that is bought will be decreased anytime, rented software costs will run month for moth. But in this calculation is missing the hidden costs of all the service activities like maintenance that will be a huge part of the costs. Market researchers from Gartner found out that with SaaS there is a saving potential up to 30% in comparison to an on-premise software solution. Always up to date: The SaaS customers will always be up to date with its software products. The service provider will always offer the newest version of the software product. This can lead to a strategic advantage towards the market competitors because of a possible improvement of the business processes. Higher security: The service provider cares for the highest security of the personal data that were given to him from the customer. Normally the 72

84 customers are not very high experienced concerning data security because it is not their core business. A professional external IT service supporter has got this experience so he can better care for the security so that nobody else than the customer himself can reach his data. The danger of losing data is also lower because of a professional backup solution that is a part of the integrated service level agreement. Fast implementation: The rented software could be implemented and used in a very shorter time period that a classical in-house solution. This is because SaaS is used in an internet browser as a web service so that there is only one standardized web interface whereat the SaaS application is connected with the existing IT infrastructure. Worldwide use on the way: SaaS products can be used worldwide and not only on the computer where the software is installed. The SaaS product runs in the data center of the provider with all data that is central stored. So the user is able to connect to the software and his data from every computer or mobile terminal with an internet access. This makes the work much more flexible and avoids the problem of redundant data on several computers that regularly have to be synchronized Weaknesses of SaaS Customizing restrictions: One single software product that is perfectly suitable for everybody will hardly be to realize. That is why many customers customize the used software or enlarge it with the help of add-ons. But the most of these specialized add-ons and other customizations are not integrable into SaaS because the formula for its success lies in the simplicity for a general usage which stands in contrast to an ample customizing. This 73

85 limitation of customizing could be the biggest danger for the distribution of SaaS but it avoids repeating the same mistake that was made with application service provider. Data availability: The advantage of using SaaS over the internet line is one of its biggest disadvantages at the same time. SaaS is dependent of the internet availability. If there is a server breakdown there will be no possibility to run the software anymore in the company. This could mean a huge loss because of a possible production or service default. Projectplace, Europes leading SaaS provider, told that they had an excellent uptime in 2006 with an availability of %. That meant that they were only 11 minutes offline in the whole year. But also if there is just no possibility to connect to the internet, then there is no chance to use the software or to get to the needed data because the software and the data are not offline usable like a local installed software product with local saved data. Data security: If a corporate decides to use SaaS they save all their data that is used with the application in an external data center that is run by the service provider. So there must be a huge mutual trust between the customer and the provider that must be arranged by the provider with a convincing security concept against third-party access and data losses. But it must be also guaranteed that the internet line is secure. Otherwise it would be possible to intercept the data on the line. Projectplace tells that their internet connection is multiple encrypted and since the company foundation in 1998 they have never been hacked. Performance: The performance of the provided software product is always dependent and limited to the performance of the available internet 74

86 connection. This means that there will never be a real time access to the data. This could become dangerously for a company if the internet connection is not or just slowly responding and so critical business processes cannot be done. Business process support: SaaS is a kind of standard software. That means that the specific organization of a company will not be reflected in the software. That could denote that a company could lose its strategic advantage in the market because their special business processes will not be perfectly supported with the SaaS application. Over or under-functionality: SaaS is a standardized product that is offered in one form for many different users. Specific requirements cannot be mapped because of the one-to-many principle. This leads often to overfunctionality or under-functionality for the most of the users affiliated with payments for unused functions. The possibility of a perfect fitting SaaS product is quite low Opportunities of SaaS Better service quality: IT services are not the core business of companies. That means that they are mostly not high experienced concerning IT services. It is more a must for them. A specialized professional IT service provider is high experienced and therewith able to offer a much better IT service quality to the customers. Always the newest software version: The SaaS customer normally gets the newest software versions at first without extra payments for the updates because they are a part of the service agreements of the SaaS providers that are included in the monthly rent. This could mean an important strategic 75

87 advantage towards the market competitors because the SaaS customer has access to newer functions that could advance his business processes. Free cash flows: Using software as a service means that the customer only pays a monthly rent. There are no expensive investments for a software license, for the own IT service department or for a new hardware infrastructure. So there are scalable payments that are not as high especially at the beginning of the software introduction as in the classical license model. These free cash flows can be used for improving the core business processes. More flexibility: The customer has got only low starting investments for the purchasing of the software so there is less fixed capital. With a short running SaaS contract the customer is able to change the applications and the software provider in a short period unlike with an on-premise software solution where the purchased software must be used over a long period, at least until it is depreciated. This aspect is supported by the easier integration in running systems so it needs less time to implement a new SaaS product because of the standardized web interface. So the software can be selected because of its economic functionality and not because of its integration ability into the running systems Threats of SaaS Border-crossing data storage: Every company that uses SaaS must make itself sure that the stored data possibly will not be saved in the same country where the company is founded. So in legal questions there could be another law in charge than the home law, so it could become very difficult to clarify the question of guilt. 76

88 Data losses: All the user data are saved on an external server in the data center of the software provider. If some data were lost the corporate is not able to take the recovery of the data in its own hands. It is dependent of the service provider. That is why the security level with the amount of backups and the recovery time must be detailed fixed in the SLA. Data synchronization: In a case of a change of the software provider to another it must be ensured that all the data that is stored in the data center of the provider will be at first synchronized to the server of the new provider and that there will be no readable data left on the old server. Like in the case of data losses there must be a huge mutual trust between the service provider and the customer. The customer is doing good to check the service provider well before responding a contract with him. The provider is doing good to do everything to win the customers confidence, otherwise the customer could change the provider. Missing local IT support: The in-house IT department knows its internal customers and supported IT normally as the best. In addition they are nearby their customers and therewith able to offer their physical IT service in a very shorter time than an external IT supporter, especially in an emergency case when every second is important. In the SaaS business model the IT services will be outsourced to an external IT service supporter that will often not be nearby the company. Dependency to the provider: If the SaaS provider goes suddenly bankrupt or is not able to provide its software products anymore for any other reason it must be ensured that the customer will still be able to run his business normally. Otherwise could be a total dependency to the service provider in 77

89 such cases which could lead to the death of a company if the data have been important for running the business. Long contract terms: One huge advantage of SaaS is the flexibility that SaaS offers to the customers. Long running contracts with the software provider will take the flexibility out of the SaaS concept. 78

90 7 DECISION MODEL FOR SELECTING SaaS PROVIDER In this section, the qualitative and quantitative methods will be explained and demonstrated with fictitious or anonymous SMEs. A further research would be helpful to measure how viable these methods are in different vertical businesses. 7.1 SaaS Provider Qualification Checklist Software-as-a-service (SaaS) is rapidly gaining popularity as an alternative to onpremise software. The key advantages that SaaS claims to offer are listed below (Stevens, 2009). Lower cost: For smaller companies or those anticipating rapid growth, the pay-as-you-go model offered by SaaS is more cost-effective than an onpremise solution, at least in the short term. Also, there are no maintenance costs, and upgrades are almost always free. Fast Implementation: The implementation time for SaaS applications is typically shorter than it would be for an on-premise solution. Less Hassle: With SaaS, the provider handles all the management and maintenance (including hardware), which means no increase in IT head count. Less Risk: The risk of a failed implementation is extremely low. For all these benefits, SaaS should not be an automatic choice for any organization of any size. What follows is a check list of the important factors business should evaluate before jumping on the SaaS bandwagon (Stevens, 2009). TCO: Many companies are attracted to SaaS because of its presumed cost advantage. However, at least for enterprise scale companies, the TCO of an on- 79

91 premise solution may be lower if the time frame of the calculation exceeds 6 years. Functionality: The SaaS vs. on-premise comparison is almost never apples-toapples. Does the SaaS offering have exactly the same feature set as the onpremise version? If not, are any important features absent from either choice? Reliability: What SLAs can the SaaS provider offer? Are there penalty clauses in the contract for failure to meet SLAs? Ease of use: An application only has value if employees use it. Many CRM and sales force automation initiatives have failed because of low acceptance rates among users. If the potential SaaS initiative is in one of these areas, user friendliness is a critical success factor. Implementation time: Many companies consider SaaS because it promises a quicker implementation than on-premise solutions. In most cases, this claim is accurate, but not always. Internal resource issues: Is the internal IT department resource-constrained? If so, this is a major argument in favor of SaaS. Integration: Does business need to integrate the SaaS offering with any internal (on-premise) applications? If so, will this create problems? Will upgrades on either side pose problems in the future? How easy, fast, and effective can they be integrated? Access to data: How easy will it be for business to access data in the SaaS solution? Does it have strong import/export capabilities? Data security: This is an issue that has several components: 80

92 Security against theft: How strong are the SaaS provider s intrusion detection and other theft-prevention measures? What legal commitments is the provider willing to make? Back-up: Does the SaaS provider offer off-site back-up? How frequently is data backed up? Disaster recovery: How fast can the SaaS provider recover from a catastrophic failure? Vendor viability: There are literally hundreds of SaaS companies now in business. Some will surely go out of business, while others will be acquired by larger vendors that may or may not provide the same level of service, product road map and so on. Is that SaaS vendor being evaluated on a solid business footing? Exit strategy: Does the SaaS solution provide a painless exit strategy, both technically and financially? 7.2 Multi Criteria Based Cloud Service Provider Selection Scoring Model The following Table 7.1 represents SaaS vendor service selection scoring based on 10 SaaS evaluation criteria. For each SaaS service to be outsourced to SaaS Cloud Provider this table should be field for each SaaS Vendor Cloud Provider separately based on Qualitative Criteria. Then decision should favor the SaaS Cloud Provider having the highest rating. This multiple criteria based scoring model have been adopted from Hurwitz, Bloor, Kaufman, & Halper (2009). 81

93 Table 7.1 A Scoring Model for SaaS Vendor Service Selection Decision Criteria for SaaS Vendor Service Selection SaaS application needs to be generalized but also configurable enough to align with majority of the customer business needs. SaaS applications need sophisticated navigation and ease of use. The SaaS application needs be modular and service oriented. SaaS application needs to include measuring and monitoring so customers can be charged actual usage. SaaS application must have a built-in billing service. Importance (I) (%) Scor e (S) (1-9) Rating (R) R = IxS 10% % % % SaaS applications need published interfaces and an ecosystem of partners who can expand the company s 10% customer base and market reach. SaaS applications have to ensure that each customer s data and specialized configurations are separate and 10% secure from other customers data and configurations. SaaS applications need to provide sophisticated business process configurators such as workflows or data filtering 10% or data transformation for customers SaaS applications need to constantly provide fast releases of new features and new capabilities. This must be done without impacting the customer s ability to continue 10% business as usual. SaaS applications have to protect the integrity of customer data. 10% SaaS applications should be flexible to export all metadata and data to make it easy while switching a service to another SaaS vendor application or to on 10% premise Private cloud of the same vendor. TOTAL RATING SCORE over 9 100% Source: Hurwitz, J., Bloor, R, Kaufman, M., & Halper, F. (2009). Cloud Computing for Dummies, For Dummies Publisher, Indiana: Wiley Publishing, p Total Cost Of Ownership (TCO) The actual cost of owning technology resources includes the original cost of acquiring and installing hardware and software, as well as ongoing administration costs for hardware and software upgrades, maintenance, technical support, training, and even utility and real estate costs for running and housing the technology. The TCO model can be used to analyze these direct and indirect costs to help firms 82

94 determine the actual cost of specific technology implementations. The following Table 7.2 describes the most important TCO components to consider in a TCO analysis (Laudon & Laudon, 2011). Table 7.2 TCO Cost Components Infrastructure Component Hardware acquisition Software acquisition Installation Training Support Maintenance Infrastructure Downtime Space and energy Cost Components Purchase price of computer hardware equipment, including computers, terminals, storage, and printers Purchase or license of software for each user Cost to install computers and software Cost to provide training for information systems specialists and end users Cost to provide ongoing technical support, help desks, and so forth Cost to upgrade the hardware and software Cost to acquire, maintain, and support related infrastructure, such as networks and specialized equipment (including storage backup units) Cost of lost productivity if hardware or software failures cause the system to be unavailable for processing and user tasks Real estate and utility costs for housing and providing power for the technology Source: Laudon, K.,& Laudon, J. (2011). MIS Managing the Digital Firm 12th Edition, New Jersey: Prentice Hall, p IT Service Costing Model for On Premise IT Service cost modeling consists of identifying cost elements and their costs, discrete cost factors that comprise business services, and fairly allocating those costs to the services they support. Cost types include hardware, software, personnel, accommodation, external (non-discrete costs from external service providers), and 83

95 transfer (non-discrete costs from internal departments). Costs are further categorized as: (Pink Elephant report, 2005). Direct Costs: Clearly attributable to a single customer\service\location. These costs are directly related and are completely attributable to a specific customer or service. Indirect or Shared Costs: Incurred on behalf of all, or a number of customers\services\locations. These costs are shared across a number of customers and services and are allocated according to some driver such as head count or percentage. Unabsorbed or Overhead Costs: Are costs which cannot be directly attributed to a customer\service\location. These costs are not attributable to a customer or service. Examples of overhead costs are executive salaries, general administrative activities, etc. It is important to build a costing methodology which includes all three types of cost since a service which is only cost based on direct costs will be ultimately under recovered as depicted in the following Figure

96 Figure 7.1 A model for Calculating the cost of IT Services Source: Pink Elephant Report. (2005). Defining, Modeling & Costing IT Services, ng%20modeling%20and%20costing%20it%20services%20-%20final.pdf, p. 9 A non-it example of this principle would be the calculation of the total cost of a glass of milk. If somebody was only to account for the cost of the care and feeding of the cows his unit cost for the glass of milk might only cost 50 cents. However, when it layers in or allocates a percentage of the farm insurance costs, the mortgage and the lease payments on the farm equipment the total cost of his glass of milk may come to $1.10. In essence everything needs to be paid for eventually. Therefore while calculating the cost of on Premise application or service we need to consider several factors either direct or indirect (Pink Elephant report, 2005). The following Figure 7.2 illustrates how the principle of direct, indirect, and overhead costs all come together to provide a complete picture of service based costing. 85

97 Figure 7.2 IT Service Based Costing Source: Pink Elephant Report. (2005). Defining, Modeling & Costing IT Services, ng%20modeling%20and%20costing%20it%20services%20-%20final.pdf, p TCO Calculation Examples In the following sections, there several TCO calculations for several SaaS solutions as well as on premise solutions from many vendors and consulting companies. The reason for providing many examples for TCO is that there is no perfect of calculation TCO as parameters vary depending on the consultant s background, perspective, prejudices, understanding of cost items, and finally, knowledge of the tools. Therefore, the results may differ from vendor to vendor, customer to customer, and solution to solution TCO of SaaS vs. On Premise Using Simple Approach The TCO advantage of SaaS is really around the ability to understand the differences between leveraging a single traditional in-the-datacenter application, vs. leveraging a similar or same application on-demand. Thus the math consists of understanding the 86

98 X-year costs of hardware, software, and operations, vs. the subscription-only cost of SaaS. The ROI of SaaS is really around the ability to understand the differences between leveraging a single traditional in-the-datacenter application, vs. leveraging a similar or same application on-demand. Thus the math consists of understanding the 3-year costs of hardware, software, and operations, vs. the subscription-only cost of SaaS. For example, let s say business is looking at a new ERP system and wants to compare traditional enterprise software vs. SaaS-based services. Considering a 3- year horizon the numbers look a bit like this (Linthicum, 2011): ERP Software: $1,000,000 Hardware: $300,000 Consulting/install: $500,000 Operations/yr: $600,000 Thus, the number over 3 years looks like this (leaving some of the small costs out for now): Year 1: $2,400,000 Year 2: $600,000 Year 3: $600,000 Or, let s say $3,600,000 or $1,200,000 per year. Although most ERP installs are famous for going over budget, let s give this one the benefit of the doubt. Again, we re assuming a new install for both SaaS and the traditional model. Okay, now the same scenario using SaaS: ERP SaaS Subscription: $10,000/mo 87

99 Hardware: $0 Support (Internal): $10,000/mo Operations/yr: $0 The numbers over three years look like this, again in our experience. Subscription prices vary a lot, but in this model we are not sure that matters much when considering the outcome. Year 1: $240,000 Year 2: $240,000 Year 3: $300,000 We assume the cost of the subscription goes up in year 3, which we suspect will be correct for most SaaS providers. Thus, we re at $780,000 or $260,000 per year. So, the TCO saving is really the monies saved by using SaaS over traditional software, which is significant given the case study I painted above. However, there are many other considerations, such as the amount of customization required, security and compliance issues, performance, etc., and all need to be factored into the ROI (Linthicum, 2011) TCO Of SaaS vs. On Premise Using another Simple Approach What does this mean in terms of the revenue model for vendors and how customers should think about weighing the costs between traditional perpetual licenses and SaaS-based license? Look at these numbers over a five-year period. It can be complex to work out all the details, but here is a general rule: (Hurwitz, Bloor, Kaufman, & Halper, 2009, p. 143) Take the initial cost for the traditional software purchase. 88

100 Add an annual fee of 20 percent for maintenance and support. Consider IT costs (including support services and hardware renewal, and so on. (For example, does the data center have enough room for the new CRM application? Will business need to add support staff or new management software?) If business buys a traditional software product, it will cost organization a one-time fee of $100,000. Now business has to add an annual fee of 20 percent for maintenance and support. If business looks at the costs over five years, for example, it may determine the following: Software will cost $100,000; maintenance expenses will add another $100,000 over five years, for a total five-year cost of $200,000. Business has to consider all the related infrastructure costs. Many SMEs lack or don t want the data centers that their larger counterparts have. Larger companies that can calculate the long-term impact of adding applications are also looking seriously at the SaaS cloud model. If business goes the SaaS route, here s what it is looking at: It determines that to support 50 users, it will cost the business between $10 and $150 per user, per month. That figure includes support, general training, and data center services. Even if business takes the high-end estimate of $150 per user, the cost of using the CRM SaaS application for those 50 users for 5 years will run about $37,500 far less than the $200,000 cost of on-premise software, even when business adds other costs (such as customization of business processes within the application and personnel training) (Hurwitz, Bloor, Kaufman, & Halper, 2009, p.144). 89

101 7.3.5 The SaaS vs. On Premise TCO Calculator Total Cost of Ownership is a key metric for maintaining software solutions. This simple calculator presents rough TCO calculations for both Software-as-a-Service and on-premise application implementations. The purpose of this calculator is to let business quickly compare the total cost of ownership (TCO) of a software-as-aservice (SaaS) solution to the TCO of an on-premise solution. The values this calculator provides are approximations, and can in no way obviate the need for a careful cost/benefit analysis. But they can serve as a first step in determining whether the potential delta between the two approaches is large enough to warrant further investigation. Costs are divided into two categories: up front and ongoing. While SaaS marketing materials sometimes imply that there are no significant up front expenses for SaaS, this is usually not the case, and these initial costs should be taken into account. The calculator presents two results: TCO, and annual costs, which is the sum of the annual licensing/subscription fees, annual management costs, and the total cost of start-up and upgrades amortized over the number of years in the calculation (Stevens, 2008). In the following example in Figure 7.3, a fictious SaaS solution vs. on premise solution is compared based on some assumptions for 250 users. For on premise solution, the capital and operational expenses are much higher than the SaaS solution. For the on premise solution, there are many direct and indirect costs incurred such as hardware, software, maintenance, operations, backup, archive, storage, datacenter. In the SaaS solution there are subscription costs plus an initial startup cost such as migration and training if it could be. 90

102 Comparison Data ON PREMISE SAAS UPFRONT UPFRONT Software Initial consulting Consulting Initial integration Integration Feature surcharge Training TOTAL Hardware ONGOING ~ ANNUAL OPEX Server (acquisition) Cost per seat 85 Storage (acquisition) Number of seats 250 Other Total subscription fee TOTAL Storage surcharge ONGOING ~ ANNUAL OPEX Management Software TOTAL License Fees Maintenance & management UPGRADES Operating Expenses Estimated fee per upgrade Server/storage power, cooling, etc Upgrade frequency (months) 12 Server maintenance 500 Total no. of upgrades 1 Upgrades Consulting/deployment (each) Annualized cost TOTAL TOTAL Figure 7.3 The SaaS vs. On Premise TCO Calculator Comparison Data Source: Stevens, M. (2008). IT Business Edge The SaaS vs. On Premise TCO Calculator, Based on the calculations, the SaaS solution TCO is much less than the on premise solution TCO as illustrated in the figure 7.4 below. 91

103 COST On Premise ON PREMISE vs.saas Start-Up Cost Amortization 2 Annual Operating Expense in years Annual Cost $ TCO: $ SaaS Start-Up Cost Amortization 2 Annual Subscription Fees Managemenrt Annual Cost $ TCO: $ On Premise 0,62 SaaS 0,38 On Premise SaaS Figure 7.4 The SaaS vs. On Premise TCO Calculator Results Source: Stevens, M. (2008). IT Business Edge The SaaS vs. On Premise TCO Calculator, TCO Calculation Comparing SaaS With On Premise Solution Enterprises are recognizing and gradually realizing value from moving computing from their premises to the cloud. Companies that were the producers of their own computing in-house capabilities are now becoming designers and strategists around their vastly expanding computational requirements, as well as consumers of the computing power and applications, from 3rd party producers, that help make their companies competitive. The reasons are simple. First, in order to be relevant and justify their cost, IT professionals need to be doing things that drive an 92

104 organization s top line and bottom line, not just keeping the hardware and software running. So if a cloud service provider can provide a business-ready alternative more securely, more efficiently, and at a competitive price, then IT organizations should be investigating those alternatives and redeploying IT staff to more business-critical projects. Second, as the workforce continues to become more remote, more mobile, and more reliant on multiple devices, the cloud is the right architecture to deliver services to employees anywhere, anytime, on any device, to keep them productive and enable them to collaborate. Today s cloud services have the points of presence, the scale, and the focus on mobile devices needed in today s location-flexible world; most on-premises solutions do not. For both reasons, IT organizations focused on business growth should ask the question, can we run this in the cloud first, and then look for reasons why a workload should remain on-premises (Lipsitz, 2011) TCO for Office 365 vs. On Premise Cloud computing heralds a new era of how IT solutions are designed. IT solutions in the cloud no longer rely heavily on infrastructure back in a physical server room. This infrastructure is now burdened off to the service provider. Every business will now have the ability to roll out and modify applications faster, at a lower cost, with less training, and less effort required to support these applications than traditional inhouse / on-premises applications. With the powerful support of applications such as Office 365, businesses will focus more on the development of its products and services rather than its system logistics. In the following Figure 7.5, there is a comparison for the Total Cost of Ownership (TCO) of Office 365 vs. Office On- Premise (OfficeOnlineIntheCloud, 2011). On one hand, the 3 year and 5 year TCO for Office 365 SaaS solutions are 36,000$ and 60,000$ respectively, for 100 users. On the other hand, the 3 year and 5 year 93

105 TCO for on premise solutions are 666,052$ and 1,289,928$ respectively, for 100 users. TCO differences for Office 365 SaaS and on premise are dramatic. TCO Calculator: Office 365 Base Information Legend Users 100 Blue Text: Manual Entry Black Text: Formula Office 365 Solution Unit Cost Year 1 Year 2 Year 3 Year 4 Year 5 5 Year TCO 3 Year TCO Office 2010 SUB-TOTAL $ 3,000 $ 3,000 $ 3,000 $ 3,000 $ 3,000 $ 15,000 $ 9,000 Exchange 2010 SUB-TOTAL $ 3,000 $ 3,000 $ 3,000 $ 3,000 $ 3,000 $ 15,000 $ 9,000 Lync 2010 SUB-TOTAL $ 3,000 $ 3,000 $ 3,000 $ 3,000 $ 3,000 $ 15,000 $ 9,000 SharePoint 2010 SUB-TOTAL $ 3,000 $ 3,000 $ 3,000 $ 3,000 $ 3,000 $ 15,000 $ 9,000 Office 365 Solution Hardware $ - $ - $ - $ - $ - $ - $ - Office 365 Solution Software/Services $ 12,000 $ 12,000 $ 12,000 $ 12,000 $ 12,000 $ 60,000 $ 36,000 Office 365 Solution Operations $ - $ - $ - $ - $ - $ - $ - Office 365 Solution Deployment/Migration $ - $ - $ - $ - $ - $ - $ - Office 365 Solution TOTAL $ 12,000 $ 12,000 $ 12,000 $ 12,000 $ 12,000 $ 60,000 $ 36,000 On-Premise Solution Unit Cost Year 1 Year 2 Year 3 Year 4 Year 5 5 Year TCO 3 Year TCO Office 2010 SUB-TOTAL $ 40,000 $ - $ - $ 40,000 $ - $ 80,000 $ 40,000 Exchange 2010 SUB-TOTAL $ 44,500 $ 4,450 $ 4,450 $ 44,500 $ 4,450 $ 102,350 $ 53,400 Lync 2010 SUB-TOTAL $ 317,500 $ 23,812 $ 23,812 $ 317,500 $ 23,812 $ 706,436 $ 365,124 SharePoint 2010 SUB-TOTAL $ 179,700 $ 13,914 $ 13,914 $ 179,700 $ 13,914 $ 401,142 $ 207,528 On-Premise Solution Hardware $ 127,100 $ 12,710 $ 12,710 $ 127,100 $ 12,710 $ 292,330 $ 152,520 On-Premise Solution Software/Services $ 454,600 $ 29,466 $ 29,466 $ 454,600 $ 29,466 $ 997,598 $ 513,532 On-Premise Solution Operations $ - $ - $ - $ - $ - $ - $ - On-Premise Solution Deployment/Migration $ - $ - $ - $ - $ - $ - $ - On-Premise Solution TOTAL $ 581,700 $ 42,176 $ 42,176 $ 581,700 $ 42,176 $ 1,289,928 $ 666,052 Figure 7.5 TCO For 100 Users SME, Office 365 vs. On Premise Source: OfficeOnlineIntheCloud TCO Tool. (2011). TCO Calculator, TCO for CRM On Demand vs. CRM On Premise On one hand, the 3 year and 5 year TCO for Online CRM SaaS solutions are 202,500$ and 316,500$ respectively, for 30 users. On the other hand, the 3 year and 5 year TCO for on premise solutions are 289,000$ and 411,000$ respectively, for 30 users. This is shown in Figure 7.6 below. TCO differences for Online CRM SaaS and On Premise are dramatic. 94

106 TCO Calculator: Comparison of CRM Solutions Base Information Legend Assumptions Users 30 Blue Text: Manual Entry License Price Software Maintenance (% of License Cost) [On-Premise only] 15% Black Text: Formula On-Premise will upgrade/install every 24 months Software Support (% of License Cost) [On-Premise only] 5% On-Demand will constantly be on the current cersion SaaS Model (On-Demand) Unit Cost (Annual) Year 1 Year 2 Year 3 Year 4 Year 5 5 Year TCO 3 Year TCO License Price per User $ 850 $ 25,500 $ 25,500 $ 25,500 $ 25,500 $ 25,500 $ 127,500 $ 76,500 License Software Maintenance/Support Plan $ - $ - $ - $ - $ - $ - $ - $ - Server License $ - $ - $ - $ - $ - $ - Database Design/Programming/Reports, etc $ 50,000 $ 50,000 $ 5,000 $ 5,000 $ 5,000 $ 5,000 $ 70,000 $ 60,000 PC Hardware Costs $ 1,500 $ 45,000 $ - $ - $ 45,000 $ - $ 90,000 $ 45,000 PC SW Installation/Upgrade $ - $ - $ - $ - $ - $ - $ - $ - Server Hardware Costs $ - $ - $ - $ - $ - $ - $ - $ - Server SW Installation/Upgrade $ - $ - $ - $ - $ - $ - $ - $ - Additional IT Administrator Staff/Support $ - $ - $ - $ - $ - $ - $ - $ - Network/Backup Costs $ - $ - $ - $ - $ - $ - $ - $ - Training $ 10,000 $ 10,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 14,000 $ 12,000 Mobile Integration $ - $ - $ - $ - $ - $ - $ - $ - Service Support Plan $ 3,000 $ 3,000 $ 3,000 $ 3,000 $ 3,000 $ 3,000 $ 15,000 $ 9,000 $ 316,500 $ 202,500 License Model (On-Premise) Unit Cost (Annual) Year 1 Year 2 Year 3 Year 4 Year 5 5 Year TCO 3 Year TCO License Price per User $ 500 $ 15,000 $ - $ - $ - $ - $ 15,000 $ 15,000 License Software Maintenance/Support Plan $ 100 $ 3,000 $ 3,000 $ 3,000 $ 3,000 $ 3,000 $ 15,000 $ 9,000 Server License $ - $ - $ - $ - $ - $ - Database Design/Programming/Reports, etc $ 50,000 $ 50,000 $ 5,000 $ 5,000 $ 5,000 $ 5,000 $ 70,000 $ 60,000 PC Hardware Costs $ 1,500 $ 45,000 $ - $ 45,000 $ - $ 45,000 $ 135,000 $ 90,000 PC SW Installation/Upgrade $ 500 $ 15,000 $ - $ 15,000 $ - $ 15,000 $ 45,000 $ 30,000 Server Hardware Costs $ 7,000 $ 7,000 $ - $ 7,000 $ - $ 7,000 $ 21,000 $ 14,000 Server SW Installation/Upgrade $ 2,000 $ 2,000 $ - $ 2,000 $ - $ 2,000 $ 6,000 $ 4,000 Additional IT Administrator Staff/Support $ 12,000 $ 12,000 $ 12,000 $ 12,000 $ 12,000 $ 12,000 $ 60,000 $ 36,000 Network/Backup Costs $ 5,000 $ 5,000 $ 2,500 $ 2,500 $ 2,500 $ 2,500 $ 15,000 $ 10,000 Training $ 10,000 $ 10,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 14,000 $ 12,000 Mobile Integration $ - $ - $ - $ - $ - $ - $ - $ - Service Support Plan $ 3,000 $ 3,000 $ 3,000 $ 3,000 $ 3,000 $ 3,000 $ 15,000 $ 9,000 $ 411,000 $ 289,000 Figure 7.6 TCO For 100 Users SME, CRM On Demand vs. CRM On Premise Source: OfficeOnlineIntheCloud TCO Tool. (2011). TCO Calculator, TCO for On Premise and Office 365 online using Microsoft s tool The following tool shown in Figure 7.7 is obtained from Microsoft to calculate TCO for Office 365 vs. on premise. Thus, it reflects the vendors outlook for the calculations. The following example shows the basic calculations for 250 users of KOBI123. The package that s used is Office E1 package which includes only online versions of Office (Word,Excel, PowerPoint), , Lync, and SharePoint. 95

107 Figure 7.7 Microsoft Office 365 TCO Tool, Initial Page Source: web site of Microsoft. (2011). Based on these calculations, there are some questions related to companies ongoing ICT costs to collect more information from the company regarding on premise solution costs. It also asks questions related what the currently has installed on premise to calculate upgrade costs to the new versions of the software. This is shown in Figure 7.8 below. 96

108 Figure 7.8 Microsoft Office 365 TCO Tool, Inputs Page Source: web site of Microsoft. (2011). In the result sections it is shown 6 year TCO breakdown for on premise and Office 365 solutions including hardware, Microsoft software, 3 rd party non-microsoft software, Operations, and Deployment costs. For 250 users, for 6 years, average TCO per year for on premise solution is 184,228$ whereas average TCO per year for Office 365 is 107,319$ as shown in Figure

109 Figure 7.9 Microsoft Office 365 Tool, Results Page Source: web site of Microsoft. (2011). In the following Figure 7.10, breakdown for each year for all cost items both for on premise and Office 365 are compared. The most highlighted difference is TCO per user per month for on premise is 61.41$ whereas TCO per user per month for Office 365 is 35.77$ which means the SME will save more than %42 percent in terms of cost if it uses Office 365 instead of using it on premise. 98

110 Figure 7.10 Microsoft Office 365 Tool, Cost Comparison Page For Office 365 vs. On Premise Software Source: web site of Microsoft. (2011). 7.4 Return On Investment (ROI) It is imperative to objectively evaluate the financial impact on business when considering the adoption or avoidance of SaaS. How? Companies can systematically consider: (Herbert & Erickson, 2009). Benefits: How will the company benefit from SaaS? Costs: How will the company pay, both in hard costs and resources, for SaaS? 99

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