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The ROI of SaaS vs. on-premise CRM

Determining whether to deploy on-premise or on-demand technology can be a difficult task, but recent findings from Forrester Research offer a method and provide a mixed result.

When vendors such as and RightNow emerged on the enterprise application scene, offering CRM via the Software as a Service (SaaS) model, traditional software vendors argued that the model made little sense for large enterprises.

After seeing successful deployments and losing business to the SaaS upstarts, however, both Siebel and SAP came out with SaaS offerings of their own. Now, recent research from Cambridge, Mass.-based Forrester Research suggests that on-demand deployments do offer an economic advantage for smaller organizations, while on-premise is still a better choice for large enterprises.

"It's really changed my opinion on Software as a Service," Ray Wang, Forrester analyst, said. "[For companies with 50 to100 users] it's a slam dunk. Even for those with 250 to 500, they have to think [whether] they want to retain all the IT staff that aren't critical to the business."

Wang researched the ROI of SaaS and on-premise deployments using Forrester's Total Economic Impact (TEI) methodology. The method includes factors beyond just costs, such as benefits, risks and flexibility of the deployment. The research also took into account more than just CRM applications and included security, supply chain, and ERP applications.

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Enterprise companies have begun to embrace SaaS CRM, with citing customers like ADP and Merrill Lynch. Just last week, UCG, a provider of business-to-business information, announced that it was rolling out SaaS ERP and CRM from San Mateo, Calif.-based NetSuite Inc. to 700 users.

Yet Forrester finds that larger firms may still get a better deal with on-premise tools.

For companies with 100 to 249 employees and 50 users, according to Wang, SaaS applications provide better TEI through a 10-year lifecycle of ownership, as well as lower cumulative costs. In addition, businesses with 250 to 499 employees and 100 users also see better TEI over a 10-year cycle with SaaS applications. These organizations tend to delay upgrade cycles because of integration and customization efforts, and see the advantage of SaaS around year seven of a deployment. In businesses with 500 to 999 employees and 250 users, on-premise applications show TEI advantages in year six and total cumulative cost advantages in year seven.

Forrester uses some common assumptions based on its experience with clients, Wang said. In general, on-premise deployments have greater up-front costs, including hardware maintenance, upgrades and support costs, on top of license fees. SaaS applications often include fees for extra features such as mobile and offline access, industry-specific functionality, extra storage and premium support. The benefits of SaaS include independence from IT, quicker upgrades and deployments, and improved usability. On-premise tools show more pronounced integration benefits. On-premise applications provide greater integration, stronger customization and tailored configuration capacity, but SaaS tools reduce IT staffing requirements, effectively making the flexibility category a wash, according to the report.

Actual results will vary for different companies, but the report provides a guideline for enterprises struggling to measure the ownership costs of the two deployment models. The report suggests that firms should assess tools over a 10-year period, factor in the total number of centralized users, and consider emerging hybrid models.

"It's good to use the right framework," Wang said, "and have a way to discuss SaaS as a deployment option."

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