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The Economics of Cloud Computing

In the last couple months I’ve been dealing with a number of projects where moving to a Software-as-a-Service solution was an option. With SaaS solutions, it’s very important to do a proper analysis of the technical, financial and risks for solutions.

While most SaaS solutions claim to be significantly cheaper than their on-premise solutions, doing a full analysis over the life of the product might surprise you. For commodity services such as email, it’s often safe to assume the hosted solution will be cheaper. For specialty products, this changes significantly. At first it may look cheaper, but be sure to look deeper.

On Premise Solution Hosted (SaaS) Solution
Server Hardware Monthly Fee
Software Licensing
Software Maintenance
Backup Hardware/Software
Hardware Maintenance (annual)
Server Setup
Server Support
Implementation costs Implementation costs
Software Support Software Support

Note that server and software support costs may not be line items if you already have the resources on hand do to it without additional costs.

When you list the costs like this, it looks like pricing would clearly be on the side of the SaaS solution. The part that’s often missed is that you have to calculate these costs over the life of the product/service. For most software, assume 3 to 5 years.

It’s also important to understand if your company prefers operational or capital costs and if there is a desire to include a net present value calculation on the costs. If you’re doing an NPV, you’ll find your SaaS “savings” reducing quickly!

One of my clients was really surprised to see how much more, over 5 years, a “less expensive” SaaS product really cost. Especially when we factored in upgrading their ADSL line to ensure connectivity (this is a mission critical system).

It has to make you wonder about economics on some solutions – and we haven’t even started to talk about risk, overall support costs and the like. Do your research and develop a real cost model so you can be sure about your decision.

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