Enterprise software vendors face deflation: Advantage SaaS

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.