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Gartner Warns on SaaS's Hidden Costs

Adopting Software-as-a-Service (SaaS) might be widely seen as a way for enterprises to cut costs and speed deployment, but things may not always be as they seem, according to industry analyst firm Gartner.

Robert DeSisto, an analyst at Gartner, agreed that SaaS applications have a lower total cost of ownership (TCO) for their first two years because they do not require large capital investments for licenses or support infrastructure.

However, they lose that advantage from an accounting perspective beginning in the third year of a deployment, he said. That's because on-premises applications depreciate as a capital expense, while SaaS applications are booked as operating expenses and cannot be depreciated.

"With SaaS, the expense never goes down," DeSisto said. "If you do not have a major upgrade, which could be anywhere from 30 percent of the initial cost up, then there's an opportunity for [on-premises software] to be less expensive than SaaS."

Not everyone agrees. Raju Vegesna, chief evangelist at SaaS customer relationship management (CRM) Zoho, pointed out that there are a number of additional ways that using SaaS can save money. "With SaaS, upgrades, maintenance and support are included, so all customers pay for is the software," he said.

The disagreement comes as the latest exchange in the debate over how SaaS compares to traditional enterprise software. SaaS vendors have long pointed to the benefits of their approach, which they say is quicker to implement and removes the costly burden of installing, updating and supporting software deployed on-site or in the datacenter. As a result of that thinking, SaaS is seen by many as one of the few growth areas in IT.

But that depiction of SaaS may not truly represent the situation, DeSisto said.

For one thing, he said enterprises may be surprised at how long it takes to deploy SaaS, despite its widely touted reputation for a speedy roll-out.

"You can get something up and running very quickly with SaaS because you don't have to install the hardware, database, infrastructure and the like," DeSisto said. But he added that this is true only when a business doesn't need to integrate it tightly with other systems.

In that case, unless an enterprise spends time on integration work -- which DeSisto described as a fact of life for both SaaS or on-premises software, "you won't get the end desired state where the customer wants to be," he said.

Additionally, Zoho's Vegesna said SaaS can't help enterprises overcome another reason their deployments get delayed: sluggish internal business processes.

"You have to submit documents, then get internal approval, which can take anything from a few weeks or a few months," he said.

In addition to TOC and speed of deployment, pricing is another area where SaaS can disappoint enterprises, DeSisto said. While there's a common perception that SaaS relies on a utility model of pricing -- in which a business pays only for the computing resources it uses -- most vendors go a different route that can lead to unexpected expenses.

[cob:Special_Report]For instance, DeSisto said pointed to the Saas CRM giant Salesforce.com, which "doesn't use a utility model. You contract with them for a certain number of subscriptions for a period of time, and have to pay for those subscriptions whether or not you use them," he told InternetNews.com.

Spokespeople for Salesforce (NYSE: CRM) did not return requests for comment on DeSisto's remarks by press time.

However, not all SaaS vendors eschew the utility model. Zoho, which also offers a CRM SaaS application, follows utility pricing with discounts for enterprises with large numbers of users.

"We do everything online -- the customer just has to come in and adjust the number of seats he has, and we update everything on our back end," Vegesna told InternetNews.com.

But Serena Software, which offers a mix of on-premises and SaaS applications, takes an alternate route.

"At this point, we sell the licenses up front," Summer Ficarotta, Serena's product marketing manager, told InternetNews.com. "But we're exploring the possibility of charging on the strictly utility model."

Ficarotta said some vendors are leery of switching to the utility mode because it's difficult for them to map out how they should measure and charge for usage -- whether to base costs on the amount of CPU usage or another metric, like the number of transactions processed.

"It's always hard to move forward because people are afraid of losing revenue," she said.