Cloud applications continue to gain momentum in enterprise applications as buyers are attracted to fast deployment speeds, low upfront costs, and ongoing flexibility to scale up or down as needs change. But as firms spend more and more of their closely guarded IT dollars on cloud applications, sourcing executives must scrutinize the long-term value of these investments. Today’s cloud investments represent millions of dollars of annual IT spend for some larger consumers of cloud. Forrester's report analyzes the longer-term, five-year cost of ownership and value for cloud applications across four categories: customer relationship management (CRM), enterprise resource planning (ERP), collaboration (including email), and IT service management.
Cloud applications, also known as so$ware-as-a-service (SaaS), are taking the so$ware market by storm. Cloud giant salesforce.com boasts nearly 100,000 companies in its CRM-centric client base; SaaS keeps growing at rapid pace across sectors like ERP (NetSuite, Workday, and Business By Design), IT service management (CA, BMC, HP, and Service-now.com), and email (Google, Microsoft Office 365, and IBM Lotus Live). Buyers gravitate to these solutions because of their low upfront costs and fast speed of deployment. Many SaaS solutions also o&er a more user friendly UI than their on-premises competitors due to their more recent introduction or the providers’ ability to rapidly update the UI through automatic,
seamless upgrades. For example, salesforce.com has evolved its original eBay-like look-and-feel to today’s more modern Facebook-like design. Forrester's recent budgets survey shows that 51% of firms plan to increase spending on software-as-a-service, while only 9% plan to decrease spend. But, despite such bullish growth and near-term spikes in spend on SaaS, the subscription model raises questions about its longer-term financial impact.
FOUR FACTORS DETERMINE THE ROI OF CLOUD APPLICATIONS
Cloud is certainly fashionable at the moment among business leaders, but few understand its full implications. Sourcing executives should therefore cut through the fog of misinformation and
objectively evaluate the financial impact on business when considering the adoption or avoidance of cloud applications. How? Companies can use a simplified version of Forrester’s Total Economic Impact™ (TEI) model to systematically consider:
1. Benefits. How will your company benefit from cloud applications?
2. Costs. How will your company pay, both in hard costs and resources, for cloud applications?
3. Risks. How do uncertainties change the total impact of cloud applications on your business?
4. Flexibility. How does this investment create future options for your organization?
Key Benefits: Cloud Applications Drive Faster Time-To-Value
Organizations that are implementing cloud applications can expect several benefits, mostly around deployment speed, subscription pricing models that align with usage, accessibility, and usability. Scale, timing, and duration of these benefits can be estimated by considering one or more key metrics and the value to the organization of improving those metrics over time.
Ongoing benefits include:
- Faster deployment speed
- Reduced support needs
- Simpler, more frequent upgrades
- Better utilization
Key Benefits Of Cloud Applications are: Reduced cost of adoption, Quicker adoption, On-premises cost avoidance,and Improved flexibility.
Risk Analysis: As Cloud Market Evolves, Buyers Should Expect Consolidation And Shakeout
No change — or avoidance of change — is without risk. Factoring this uncertainty into the analysis converts an optimistic, and potentially unachievable, plan into one with higher accuracy. Initial estimates can be refined by factoring in two key risks:
- Vendor viability as the market shakes out. #e advent of cloud platforms, such as Azure and Force.com, has lowered the barrier to entry for solutions. Many cloud start ups can get going with a small team of coders — with little or no start up costs or venture capital. As a result, cloud applications proliferate — but some may have a short life span, either because of failure or acquisition. While acquisition can sometimes be a benefit that adds stability and investment, it can also be a risk that leads to changes in contracts, changes in pricing, or even a shutdown of the acquired technology (as happened with Google’s acquisition of Plannr). Overall, vendor viability risks are high as this early market moves at such a fast pace.
- Vendor lock-in. Cloud applications are usually easy to get started. But in the longer term can be difficult — and expensive — to switch vendors. In some cases, users become“hooked” on user-friendly cloud applications. Business users may strongly resist switching from an application they like. Also, most vendor switches will require data migration and implementation costs to move to a new solution (whether cloud, hosted, or on-premises).
BUSINESS VALUE OF SPEED AND FLEXIBILITY VARIES BY TYPE OF APPLICATION
To arrive at a quantitative assessment of the economic implications of cloud applications, Forrester evaluated the key drivers of benefits, costs, and risks for an organization moving from on-premises to the cloud. We provide examples of the ROI calculation for three software categories: 1) business productivity apps including email; 2) CRM; and 3) ERP, including human resource management. Beyond considerations common to most types of SaaS, firms must consider application-specific issues as well, including:
- Impact of software usability. Solutions with large, fluid user populations will reap huge benefits from an easier-to-use, intuitive design. For example, CRM products have a high churn end user population of sales teams. In these cases, usability is a significant factor that can materially reduce training time and cost and increase end user adoption, and thereby improve ROI. Other applications, like IT applications or finance applications will usually be less affected by UI design, since they are used by a smaller population that will likely undergo application and process-specific training upon hire.
- Breadth of application footprint. The amount of application functionality will determine hardware and IT staff that can be retired or redeployed (costs saved). If the cloud solution replaces a large on-premises application (such as an HR suite like Ultimate Software or a full ERP like NetSuite or Business ByDesign), organizations will save IT resource and support costs. But if the cloud application is more of an add-on or replaces only a portion of a larger enterprise application, the reduction in hardware, support, and IT staff will be small.
- Value of upgrades. Seamless, automatic upgrades matter more for some cloud application categories than others. New, rapidly evolving categories will benefit significantly from frequent feature/function enhancements, as will those like security and compliance that need frequent content updates. Conversely, firms might be less inclined to care about new functionality in mature, stable spaces such as accounting.
R E CO M M E N D AT I O N S
SMART CONTRACT NEGOTIATION STRATEGY CAN INCREASE THE VALUE OF CLOUD APPS
Sourcing executives can help their organizations get even more value out of cloud purchases by:
- Determining the right deal length. Sourcing executives should consider planned usage as well as the evolving vendor landscape to determine the right deal length. If they are making a significant bet on the application, they should favor longer deals. They also may like to lock-in a low rate through a longer (three to five year) deal in a maturing market like CRM. If they are in fast-growth mode or have other significant variability, sourcing executives should opt for shorter deals that give them room to change course. Similarly, in markets that are still quickly evolving, sourcing executives should sign shorter deals; new options and acquisitions mean that they will want to consider alternative options more frequently.
- Opting for the best-value license category. Cloud applications now offer more advanced pricing. Some vendors offer multiple tiers of applications (that vary by functionality or performance and disaster recovery commitments) and multiple licensing options, such as enterprise wide license options that eliminate explicit user-based pricing. With price tags getting into the millions annually for more complex cloud deployments, sourcing executives should help their firms navigate the licensing options to figure out which will create the best deal overall. They also need to consolidate contracts and put an end to one-off contracting by business, which prevents organizations from getting volume discounts.
For more information go to Forrester.com for the complete study and survey.
