The Money Behind SaaS & Total Cost of Ownership (TCO) of Cloud Hosting
Hosted offerings can be valuable for many reasons, however they can be extremely expensive if you do not understand the details behind the pricing. Most people have little experience with this type of calculation so they just look at value and toss up their hands. Offerings are getting mature though and you can get a great quality and price if you take a bit of time to understand how the costs work.
Playing off My recent “Know Your Role” post, today I’ll dig into the dollars behind SaaS, which generally fits into the vendor hosted model since at least today most of the AEC Space Tech Vendors do not offer third party programs for hosting providers like Microsoft, Citrix and others do. In doing this we I will break apart the cost of hosting service in general.
Note: The focus here is Hosting + Software, I am not considering implementation or any consulting services, those would arguably be the same regardless of hosting methodology. Also, the numbers are completely made up based on my general industry experience (which is a lot). Insert your own numbers to evaluate or dissect your providers, better yet ask them to do it for you so you can see the breakout.
Vendor traditional license only is $3,000 + Annual support and maintenance of 20% or $600. If we stretch that out over 36 months, then we are looking at a unit cost of $4,800 over 3 years.
Vendor hosted model is $300/month/license. I’ll use that example instead of per user because this way we can accommodate named, concurrent or whatever license type you have. (for licensing clarification check my recent article on licensing).
To determine the cost of hosting, divide the $4,800/36 months and you get $133.33/license/mo. Subtract that from the $300/license/mo bundle and you get the cost of hosting only which is $166.67.
Now that you know how to do this you can negotiate better with any hosting provider type. The result will be delivery of hosting services that are an extension of your existing IT rather than buying licenses bundled in a way you can’t easily scrutinize and compare to traditional IT cost management.
Beyond the calculation, here’s a few more tips:
Scalability: One advantage to SaaS can be the NIST cloud characteristic of scalability (up or down). This would allow you to fluctuate monthly or hourly in some cases and realize some cost averaging over time in line with demand. However if you are locked into annual or multi year minimums, this benefit is lost.
Usage: You are likely going to get charged whether you use the licenses or not. You can either use this knowledge to negotiate better based on a percentage of usage that is realistic, or it is a concurrent model you can buy less and then scale up once you see the utilization rates. Typical rates for concurrent usage are 4:1 or better so if you own 100 concurrent licenses and only have 200 system users, then you are paying $166.66/2 or $83.33/user/mo for hosting. It’s highly likely some of the users never log in, so the umber is probably even higher. Monitor this as well and avoid annual agreements that prevent you from scaling unless the discounting justified this waste.
Software + Services: If you can negotiate it, split the software cost from the hosting cost as shown in the initial calculation on this post. Once you have this you can then try to treat the licenses and hosting fees separately. For example you may own 100 concurrent licenses but if you are only paying for systems users, then you could easily adjust down to 50 during down times and easily back to 200 in up times.
Multiple Applications: If you are looking to have more than one application hosted the SaaS model typically goes through the roof because you are paying the fundamental platform fees over and over for users that access multiple applications. This is where understanding the “System User” vs. the license or application user comes in handy.