Posted by:admin June 28th, 2012

Every meeting involving enterprise CXOs touches upon cloud applications at least once. The financial and administrative advantages of cloud apps versus on-premise apps is no doubt tempting but as revealed by Forrester’s report on the ROI of Clouds, it’s important for sourcing executives to consider the long-term cost of ownership before taking a decision.

According to Gartner, Goldman Sachs Research – Cloud CIO Survey, November 2011:

  • Spend on SaaS (Software as a Service) as compared to other software has gone up 6x times across enterprises.
  • At least 55% CIOs plan to increase spending on SaaS this year.
  • Chief drivers of adoption are scalability, business agility and cost.

Forrester’s report reveals that the ROI and breakeven point for SaaS solutions is largely dependent on the type of application sourced to the cloud. For example, SaaS is becoming a sustaining technology in niche markets whose needs are not adequately met by licensed software. It is a disruptive technology for what makes 25% of the global software market such as CRM, HRM, IT management and security services. The highest success of SaaS is seen in collaboration and ERP solutions.

What attracts enterprises to cloud solutions?

Cloud solutions are an attractive prospect for most enterprises because of the low upfront cost and speedy deployment. As the solutions are maintained by the cloud vendor, upgrades are quick and do not require change management from the enterprise’s side. At the same time, the upgrades bring the advantages of latest technology and fixes to the table, enhancing productivity.

Enterprises can reduce their IT support or deviate it to internal business-centric functions as cloud solutions come with tech support. They also don’t have to worry about infrastructural limitations when scaling up or down as SaaS solutions usually involve a per-user or enterprise level subscription fee that provides flexibility and agility.

Moreover, most cloud-based apps are designed with the non-techie end-user in mind. UIs are often similar to highly used websites such as Facebook or eBay to engender familiarity and ease of use. Business users feel more empowered as they can customize the UI, workflows, reports etc., without having to rely on IT personnel.

What are the costs associated with cloud applications?

Subscription fees are economical in the short-term but can accumulate into a total that exceeds the cost of using an on-premise solution in the long run. Enterprises have to renew contracts and SLAs every year. Sourcing executives have to look at the consumption, spend, and savings from the cloud application to negotiate the term and pricing in the contract for the best deal.

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As of now, there are very few full suite cloud solutions. This means that enterprises have to work with multiple cloud vendors furnishing various functions within the organization. This involves additional costs of integration, provisioning, upgrade management, end user support, testing, training, and workflow.

With the lowering barrier to entry for cloud solutions, many small players have entered the market. While their solutions may be effective and economical, they stand the risk of acquisitions by larger players or failing for lack of support or investment, etc.

Sourcing executives should look at all these factors and try to expose any other hidden costs associated with vendor lock-in, premature closure, migration support, etc., before finalizing a cloud vendor. It is best to lock-in at a lower rate for longer term if you’re dealing in mature markets such as CRM and sign shorter deals for fast evolving domains.

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