Enterprise software vendors face deflation: Advantage SaaS

Enterprise software vendors face deflation: Advantage SaaS

Summary: New technologies such as NoSQL and SaaS providers almost always save money over on-premise deployments, but there are a few wrinkles. Customization negates price advantages and some collaboration tools like Box will cost more.


Legacy enterprise software vendors are caught in a deflationary pricing cycle, but there are multiple nuances worth noting. In a research report on pricing model disparities, Cowen & Co. analyst Peter Goldmacher found:

  • Data management tools such as Hadoop and NoSQL can save customers 70 percent to 80 percent relative to data warehousing tools from Teradata and Oracle.

  • SaaS apps such as Salesforce and Workday can save you money in the early years relative to an on-premise deployment from Oracle or SAP, but you could wind up paying more out over the duration of a deal. The outcomes range from 50 percent savings to spending more on SaaS vs. on premise.

  • Box is more expensive than on premise options in many cases, but collaboration customers are willing to pay up to access files remotely from mobile devices.

Goldmacher's report is long and we're not going to outline every detail in this post. But the key word to note throughout is "disruption." In many cases, there's just no way a legacy software provider can compete on pricing with a up-and-comer looking to grow at any costs. Goldmacher said:

Eventually, every budget-strapped IT department will be in the market to update their enterprise software or be forced to free up dollars in order to invest in other value-added projects. On premise legacy systems are therefore ripe for displacement if these cost savings are actually being realized from SaaS and emerging database alternatives.

The price comparisons are based on list prices, company presentations and hardware costs. Service engagement fees and staff retraining were excluded. Goldmacher said his methodology probably favors the incumbents, but it wasn't much help.

emerging vs legacy chart
Click to enlarge

A few takeaways:

  • SaaS has a lot of variability in cost savings because high end deployments are complicated and often customized. In cases where software is customized, SaaS can become more expensive.

  • Goldmacher found Workday has consistent savings over Oracle HCM, but Salesforce can be priced near parity with Oracle over three years. In some cases, Oracle is cheaper over a long time frame.

  • Box is priced at a premium to legacy on premise tools like SharePoint.

  • If SaaS has to be customized, the pricing difference is much closer to on-premise. In most cases, SaaS provides a 50 percent cost savings up front.

  • SAP comparisons were excluded because Goldmacher didn't have enough data on license, maintenance or implementation costs. "We note that SAP implementations generally tend to be larger and more expensive than the comparable Oracle installations due to SAP’s more configurable but more complex software," he said.

Ultimately, the missing part of the analysis is the value of agility. An on-premise deployment can save money over a long period of time, but is going to require a significant upgrade down the road. In theory, a SaaS deployment will always have updated functionality. That agility is worth something, but arguing for it may be tricky. After all, management teams — especially CIOs — are rarely in place for a decade.

Topics: Enterprise Software, CXO, Cloud, Oracle, Salesforce.com

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  • SaaS is not good for most

    From the article:

    "SaaS apps ... can save you money in the early years relative to an on-premise deployment ... but you could wind up paying more out over the duration of a deal. The outcomes range from 50 percent savings to spending more on SaaS vs. on premise."

    What this is NOT saying is that you will be paying for that SaaS forever. No more purchase the boxed software one time then use it until you no longer have the computers that will run it. Classic example is the fact that many people and companies who purchased Windows XP are still using it, years later. How much would they have paid had that XP been SaaS with a monthly charge?

    Some software needs upgrades, no denying it. But look at software such as MS Office. It does the basic job but also has so much functions and capability that it far exceeds the needs of the average user. I am using Office 2003, and it still does all that I require and far more. Why should a company pay monthly or yearly for software that will need no upgrades in the foreseeable future in order to meet their needs?

    This whole SaaS thing is being forced down our throats by MS and other software houses (think Adobe) because it will vastly increase their profits. About a year ago, Ed Bott posted an article here that showed how MS will increase its profits several times over if everyone goes to SaaS. They have already begun making single purchase Office less attractive by increasing the price. They would be happy to eliminate all legacy software and make all of us rent it or at least buy apps from their store.

    Then there is the bandwidth problems and increased cost, Internet outages, and the fact that you are locked in to using their software. They will control you. They will make you pay for upgrades whether you want or use them. They will increase the monthly cost whenever they feel like it. They can even discontinue the software. Then where would you be?

  • It all depends

    For some businesses, setting aside a monthly, known budget amount is a good idea. The initial cost is lower, they keep up-to-date with modern software methods, and they know exactly how much their software costs them each month.

    On the other-hand, few small/mid sized businesses realize the need to set aside capital for the day when they'll need to upgrade. All of a sudden they find themselves needing to upgrade everything at a very steep cost. How much is the interest on a new business loan going to cost them over 5-8 years?

    I think it all depends on the business and how knowledgeable and realistic they are about IT budgeting. If they must get something with heavy customization, they'll probably have to keep things in-house, but if the software is written properly and the customer can adapt their business processes to the software, SaaS can be easier and possibly cheaper to use.

    Remember though, that there is a big difference between home-users and business-users. Office 2003 might be fine for a small-business, but if you need to share Office Docs between business partners, 2003 simply won't cut it any longer.
  • Paradigm shift - Do the advantages out weigh the disadvantages

    Years ago as CTO of a major publishing firm I was faced with a costly upgrade of one of our mission critical systems. Every budget season I was reminded that total cost of ownership of a badly dated system was getting to be expensive. (Read: maintaining that Win-XP for ever is not practical).

    Knowing that with SaaS I will be getting update/ upgrades that are included in the monthly fee is like getting to drive a late model car every couple of years without having to worry about getting rid of the old one and/ or having to find parts for it!

    As CTO/CIO we need to think about all those internal/ external customers who beg us for the
    new capabilities that we say no to since our long-term investment has not hit its ROI yet.

    Owning is only good if what you own appreciates in value and not become obsolete every 16months!