Cloud applications continue to gain momentum in enterprise applications as buyers are attracted to fast deployment speeds, low upfront costs. Sourcing executives must scrutinize the long-term value of these investments. Today's cloud investments represent millions of dollars of annual IT spend for some larger consumers of cloud.
Cloud applications continue to gain momentum in enterprise applications as buyers are attracted to fast deployment speeds, low upfront costs. Sourcing executives must scrutinize the long-term value of these investments. Today's cloud investments represent millions of dollars of annual IT spend for some larger consumers of cloud.
Cloud applications continue to gain momentum in enterprise applications as buyers are attracted to fast deployment speeds, low upfront costs. Sourcing executives must scrutinize the long-term value of these investments. Today's cloud investments represent millions of dollars of annual IT spend for some larger consumers of cloud.
Cloud applications continue to gain momentum in enterprise applications as buyers are attracted to fast deployment speeds, low upfront costs. Sourcing executives must scrutinize the long-term value of these investments. Today's cloud investments represent millions of dollars of annual IT spend for some larger consumers of cloud.
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Making Leaders Successful Every Day
June 23, 2011
The ROI Of Cloud Apps by Liz Herbert and Jon Erickson for Sourcing & Vendor Management Professionals 2011 Forrester Research, Inc. All rights reserved. Forrester, Forrester Wave, RoleView, Technographics, TechRankings, and Total Economic Impact are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective owners. Reproduction or sharing of this content in any form without prior written permission is strictly prohibited. To purchase reprints of this document, please email clientsupport@ forrester.com. For additional reproduction and usage information, see Forresters Citation Policy located at www.forrester.com. Information is based on best available resources. Opinions reect judgment at the time and are subject to change. For Sourcing & Vendor Management Professionals EXECUTI VE SUMMARY Cloud applications continue to gain momentum in enterprise applications as buyers are attracted to fast deployment speeds, low upfront costs, and ongoing exibility to scale up or down as needs change. But as rms spend more and more of their closely guarded IT dollars on cloud applications, sourcing executives must scrutinize the long-term value of these investments. Todays cloud investments represent millions of dollars of annual IT spend for some larger consumers of cloud. is report analyzes the longer-term, ve-year cost of ownership and value for cloud applications across four categories: customer relationship management (CRM), enterprise resource planning (ERP), collaboration (including email), and IT service management. TABLE OF CONTENTS Buyers Like Cloud Apps Low Upfront Costs But Question Longer-Term Value Four Factors Determine The ROI Of Cloud Applications Key Benets: Cloud Applications Drive Faster Time-To-Value Key Costs: Cloud Applications Require More Focus On Vendor Management Risk Analysis: As Cloud Market Evolves, Buyers Should Expect Consolidation And Shakeout Business Value Of Speed And Flexibility Varies By Type Of Application Cloud Means Faster Ability To Change Technology, Flexibility To Quickly Scale RECOMMENDATIONS Smart Contract Negotiation Strategy Can Increase The Value Of Cloud Apps Supplemental Material NOTES & RESOURCES Forrester interviewed client references from the following vendors: Appian, Ariba, Epicor, Microsoft, Mimecast, Netsuite, and Ultimate Software in industries ranging from healthcare to electronics to manufacturing. We used this information to create an ROI model based on our TEI analysis framework. Related Research Documents Evaluating Application Fit With Cloud May 5, 2011 Packaged Apps In The Cloud: Cost Of Ownership Models Evolve Toward The Transparency Of SaaS July 23, 2010 June 23, 2011 The ROI Of Cloud Apps A Total Economic Impact Analysis Uncovers Long-Term Value In Cloud Apps by Liz Herbert and Jon Erickson with Duncan Jones and Rory Stanton 2 3 9 10 9 7 2011, Forrester Research, Inc. Reproduction Prohibited June 23, 2011 The ROI Of Cloud Apps For Sourcing & Vendor Management Professionals 2 BUYERS LIKE CLOUD APPS LOW UPFRONT COSTS BUT QUESTION LONGERTERM VALUE Cloud applications, also known as soware-as-a-service (SaaS), are taking the soware market by storm. 1 Cloud giant salesforce.com boasts nearly 100,000 companies in its CRM-centric client base; SaaS keeps growing at rapid pace across sectors like ERP (NetSuite, Workday, and Business ByDesign), IT service management (CA, BMC, HP, and Service-now.com), and email (Google, Microso Oce 365, and IBM Lotus Live). Buyers gravitate to these solutions because of their low upfront costs and fast speed of deployment. Many SaaS solutions also oer a more user friendly UI than their on-premises competitors due to their more recent introduction or the providers ability to rapidly update the UI through automatic, seamless upgrades. For example, salesforce.com has evolved its original eBay-like look-and-feel to todays more modern Facebook-like design. Our recent budgets survey shows that 51% of rms plan to increase spending on soware-as-a-service, while only 9% plan to decrease spend (see Figure 1). But, despite such bullish growth and near-term spikes in spend on SaaS, the subscription model raises questions about its longer-term nancial impact. Figure 1 SaaS Spend To Increase In The Next Twelve Months Source: Forrester Research, Inc. 59277 How do you expect your rms/organizations total SaaS spending to change over the next 12 months? Base: 305 North American and European IT services decision-makers from enterprises with 1,000 employees or more Source: Forrsights Services Survey, Q3 2010 Decrease more than 10% 1% Decrease 5% to 10% 8% Stay about the same 39% Increase 5% to 10% 40% Increase more than 10% 11% Dont know 1% Software-as-a-service (SaaS) 2011, Forrester Research, Inc. Reproduction Prohibited June 23, 2011 The ROI Of Cloud Apps For Sourcing & Vendor Management Professionals 3 FOUR FACTORS DETERMINE THE ROI OF CLOUD APPLICATIONS Cloud is certainly fashionable at the moment among business leaders, but few understand its full implications. Sourcing executives should therefore cut through the fog of misinformation and objectively evaluate the nancial impact on business when considering the adoption or avoidance of cloud applications. How? Companies can use a simplied version of Forresters Total Economic Impact (TEI) model to systematically consider: 1. Benets. How will your company benet from cloud applications? 2. Costs. How will your company pay, both in hard costs and resources, for cloud applications? 3. Risks. How do uncertainties change the total impact of cloud applications on your business? 4. Flexibility. How does this investment create future options for your organization? is report looks at four representative scenarios in categories where Forrester sees high demand for cloud applications: CRM, ERP, collaboration, and IT service management. For each scenario, we analyzed the total economic impact (TEI) of an organization moving from an existing on-premises application to a cloud-based alternative. Key Benets: Cloud Applications Drive Faster Time-To-Value Organizations that are implementing cloud applications can expect several benets, mostly around deployment speed, subscription pricing models that align with usage, accessibility, and usability. e scale, timing, and duration of these benets can be estimated by considering one or more key metrics and the value to the organization of improving those metrics over time (see Figure 2). Ongoing benets include: Faster deployment speed. Cloud applications appeal to business buyers because cloud enables them to roll out solutions much more quickly than with on-premises; many SaaS deployments take only days or weeks. Why so fast? Cloud solutions are ready to go users need only a login and an Internet connection to get going; there is no need to procure hardware or do testing. Also, implementation is usually quicker, with a lighter, more iterative approach to conguration versus the heavy upfront customization that oen characterizes on-premises deployment. is faster speed also applies to ongoing enhancements. An avid user of cloud applications told us: e end users dont want to wait, they want to get the thing done. [We use cloud to] deliver tailored solutions with great appeal to the end user. e pace of the stu we deliver is so much quicker. Reduced support needs. Cloud applications clients oen can reduce or eliminate IT support; the SaaS provider typically includes a help desk in the subscription, and technical support needs are lower since the provider does all the patching and bug xing. Additionally, many cloud-based 2011, Forrester Research, Inc. Reproduction Prohibited June 23, 2011 The ROI Of Cloud Apps For Sourcing & Vendor Management Professionals 4 applications were built for business and have simpler, more self-service-oriented user interfaces. For example, many companies have reduced internal IT sta by moving email to the cloud, since their subscription payment covers all necessary support, infrastructure and archiving costs. 2 Simpler, more frequent upgrades. Cloud applications oer seamless, automatic upgrades, typically two to four times per year. is means that users get access to the latest features and functionality faster than in an on-premises deployment where upgrade cycles oen take three to 10 years. e more frequent, more incremental upgrades also mean that rms typically have no consulting costs or change management issues during upgrades. One cloud application client we spoke with who uses NetSuite told us that he would have had to use consultants to upgrade the on-premises code whenever there was an upgrade. With SaaS, our upgrades happen seamlessly. ere are eciencies that we get because we always have the best version of the soware. Better utilization. Pay-as-you-go applications typically yield better adoption for three reasons: 1) rms pay for what they need, eliminating the shelfware problem typical of on-premises deals, so SaaS providers have a nancial incentive to encourage deployment and promote use; 2) cloud applications are typically geared toward more of a business audience, meaning they are easier- to-use and built to have a familiar (think Facebook-like) look-and-feel; 3) cloud vendors oen deliver proactive health check reports that provide statistics about usage, making it easier for companies to identify employees who may need more training or incentive to use the apps. Figure 2 Key Benets Of Cloud Applications Source: Forrester Research, Inc. 59277 Dimension Software-as-a-service helps by . . . Reduced cost of adoption Quicker adoption On-premises cost avoidance Reducing the licensing, training, and support costs of adding additional users. Decreasing the time to ramp up new users, maximizing their productivity from using the application. Improved adoption Enabling more users to use the application. - Lllmlnatlng malntenance costs. - Peduclng full-tlme help desk and server support, and transferring sta to higher value, proactive roles. Improved exibility Reducing spend on excess capacity. Key Costs: Cloud Applications Require More Focus On Vendor Management Cloud applications reduce or even eliminate the high upfront costs for hardware and licenses that rms spend for on-premises projects. ey typically reduce customization costs in favor of lighter- weight, point-and-click conguration and more pre-built best practices in the applications. Instead they require ongoing subscription costs to rent the soware and oen greater costs for multivendor orchestration and ongoing vendor management. Organizations implementing cloud applications can expect (see Figure 3): 2011, Forrester Research, Inc. Reproduction Prohibited June 23, 2011 The ROI Of Cloud Apps For Sourcing & Vendor Management Professionals 5 Ongoing subscription costs. e primary cost associated with cloud applications is the ongoing rental fee for using the application, oen per user per month or usage-based. Typical usage metrics include storage (i.e., number of documents) or throughput (i.e., number of transactions processed). e rent versus own model for cloud means lower upfront costs, but for some deployments these costs will cross over, ultimately becoming more expensive than a license- plus-maintenance alternative. Vendor management. Cloud applications require more focus on contracting, SLAs, and performance management. Contracts can be anywhere from month-to-month to ve years long; rms must focus more on contract renewals and negotiations than in on-premises cycles. Some technology solutions are emerging to help with vendor management of cloud vendors, including performance management solutions like HP Cloud Assure and Gomez. However, these technology solutions come with a price tag as well. Cloud orchestration costs. Many cloud solutions focus on a specic module, such as recruiting or goals management for employees. e cloud landscape does not oer very many full suite solutions. is means that rms oen face a fragmented, multiple application landscape as they move more and more technology to the cloud. In a recent survey, we found that 26% of cloud subscribers plan to increase the number of cloud vendors they work with over the next year (see Figure 4). 3 is multivendor environment means additional costs for areas like integration, provisioning, end user support, upgrade management, testing, and workow. Figure 3 Key Costs Of Cloud Apps Source: Forrester Research, Inc. 59277 Upfront costs Recurring/annual costs - |mplementatlon - Slngle slgn-on conguratlon - Thlrd-party process consultlng - Thlrd-party content development - Competency development - Lxternal content (competencles) - Subscrlptlon - Change management - Testlng and certlcatlon - Lnd user support and admlnlstratlon - |ntegratlon - Tralnlng 2011, Forrester Research, Inc. Reproduction Prohibited June 23, 2011 The ROI Of Cloud Apps For Sourcing & Vendor Management Professionals 6 Figure 4 SaaS Suppliers Are Multiplying Source: Forrester Research, Inc. 59277 Stay the same 37% Decrease number of suppliers 4% Increase number of suppliers 26% Not sure 10% Not using a third party for this work 22% Source: Forrsights Services Survey, Q3 2010 Base: 1,007 North American and European IT services decision-makers from enterprises with 1,000 employees or more (percentages may not total 100 because of rounding) How do you expect your number of SaaS suppliers to change in the next 12 months? Risk Analysis: As Cloud Market Evolves, Buyers Should Expect Consolidation And Shakeout No change or avoidance of change is without risk. Factoring this uncertainty into the analysis converts an optimistic, and potentially unachievable, plan into one with higher accuracy. Initial estimates can be rened by factoring in two key risks: Vendor viability as the market shakes out. e advent of cloud platforms, such as Azure and Force.com, has lowered the barrier to entry for solutions. Many cloud startups can get going with a small team of coders with little or no startup costs or venture capital. As a result, cloud applications proliferate but some may have a short life span, either because of failure or acquisition. While acquisition can sometimes be a benet that adds stability and investment, it can also be a risk that leads to changes in contracts, changes in pricing, or even a shutdown of the acquired technology (as happened with Googles acquisition of Plannr). Overall, vendor viability risks are high as this early market moves at such a fast pace. Vendor lock-in. Cloud applications are usually easy to get started. But in the longer term some rms nd it can be dicult and expensive to switch vendors. In some cases, users become hooked on user-friendly cloud applications. Business users may strongly resist switching from an application they like. Also, most vendor switches will require data migration and implementation costs to move to a new solution (whether cloud, hosted, or on-premises). 2011, Forrester Research, Inc. Reproduction Prohibited June 23, 2011 The ROI Of Cloud Apps For Sourcing & Vendor Management Professionals 7 BUSINESS VALUE OF SPEED AND FLEXIBILITY VARIES BY TYPE OF APPLICATION To arrive at a quantitative assessment of the economic implications of cloud applications, Forrester evaluated the key drivers of benets, costs, and risks for an organization moving from on-premises to the cloud. We provide examples of the ROI calculation for three soware categories: 1) business productivity apps including email; 2) CRM; and 3) ERP, including human resource management. Beyond considerations common to most types of SaaS, rms must consider application-specic issues as well, including: Impact of soware usability. Solutions with large, uid user populations will reap huge benets from an easier-to-use, intuitive design. For example, CRM products have a high churn end user population of sales teams. In these cases, usability is a signicant factor that can materially reduce training time and cost and increase end user adoption, and thereby improve ROI (see Figure 5, see Figure 6, and see Figure 7). Other applications, like IT applications or nance applications will usually be less aected by UI design, since they are used by a smaller population that will likely undergo application and process-specic training upon hire. Breadth of application footprint. e amount of application functionality will determine hardware and IT sta that can be retired or redeployed (costs saved). If the cloud solution replaces a large on-premises application (such as an HR suite like Ultimate Soware or a full ERP like NetSuite or Business ByDesign), organizations will save IT resource and support costs. But if the cloud application is more of an add-on or replaces only a portion of a larger enterprise application, the reduction in hardware, support, and IT sta will be small. Value of upgrades. Seamless, automatic upgrades matter more for some cloud application categories than others. New, rapidly evolving categories will benet signicantly from frequent feature/function enhancements, as will those like security and compliance that need frequent content updates. Conversely, rms might be less inclined to care about new functionality in mature, stable spaces such as accounting. 2011, Forrester Research, Inc. Reproduction Prohibited June 23, 2011 The ROI Of Cloud Apps For Sourcing & Vendor Management Professionals 8 Figure 5 Model: Total Economic Impact Analysis Summary CRM Source: Forrester Research, Inc. 59277 Year 1 Year 2 Year 3 Year 4 Year 5 Total Present value Total benet $925,104 $1,015,713 $1,087,261 $1,170,779 $5,045,258 $3,766,700 Total cost $777,555 $793,106 $808,968 $825,148 $4,128,478 $3,143,096 Net cash ow $147,548 $222,606 $278,292 $345,632 $916,780 $623,604 Cumulative cash ow $70,250 $292,856 $571,148 $916,780 NPV ROI Payback $846,402 $923,701 -$77,299 -$77,299 $623,604 20% Between 12 and 24 months Figure 6 Model: Total Economic Impact Analysis Summary ERP Source: Forrester Research, Inc. 59277 Year 1 Year 2 Year 3 Year 4 Year 5 Total Present value Total benet Total cost Net cash ow Cumulative cash ow NPV ROI Payback $11,242,226 $10,448,209 $794,017 $8,375,573 $7,920,401 $455,172 $2,038,992 $2,011,192 $27,801 -$291,405 $2,252,645 $2,051,416 $201,230 -$90,176 $2,449,698 $2,092,444 $357,254 $267,078 $2,661,231 $2,134,293 $526,939 $794,017 6% More than 2 years $1,839,659 $2,158,865 -$319,206 -$319,206 $455,172 Figure 7 Model: Total Economic Impact Analysis Summary Business Productivity Applications Source: Forrester Research, Inc. 59277 Year 1 Year 2 Year 3 Year 4 Year 5 Total Present value Total benet Total cost Net cash ow Cumulative cash ow NPV ROI Payback $5,359,504 $4,128,478 $1,231,026 $4,004,053 $3,143,096 $860,957 $986,696 $777,555 $209,141 $192,228 $1,078,537 $793,106 $285,431 $477,659 $1,151,342 $808,968 $342,373 $820,032 $1,236,142 $825,148 $410,994 $1,231,026 $906,787 $923,701 -$16,914 -$16,914 $860,957 27% Between 12 and 24 months 2011, Forrester Research, Inc. Reproduction Prohibited June 23, 2011 The ROI Of Cloud Apps For Sourcing & Vendor Management Professionals 9 CLOUD MEANS FASTER ABILITY TO CHANGE TECHNOLOGY, FLEXIBILITY TO QUICKLY SCALE In addition to the tactical benets described previously, moving to cloud allows organizations to more quickly make changes to their technology, including the ability to quickly scale up or down. is exibility that is created has a business value to the organization. Cloud application owners can: Rapidly scale investment up or down as needs change. Cloud applications allow rms to quickly scale out, into new groups or regions; this is oen referred to as elasticity. ey also allow rms to scale down some cloud applications such as RightNow Technologies and Business ByDesign provide the quarterly or annual option to reduce unused seats (of course with the caveat that the per-seat price may increase with lower volume). Cloud applications also should ensure that there is always latent capacity available; rms no longer need to plan when to add infrastructure. Enable business users to take a more active role in technology. Some of clouds biggest advocates are business users. ey feel empowered by cloud technologies that support point- and-click customization, meaning that business users can make modications to the UI, workow, or reports, without having to rely on IT. 4 ese business users see cloud technologies as more exible because they can enact changes in real-time in line with business demands. R E C O M M E N D AT I O N S SMART CONTRACT NEGOTIATION STRATEGY CAN INCREASE THE VALUE OF CLOUD APPS Sourcing executives can help their organizations get even more value out of cloud purchases by: Determining the right deal length. Sourcing executives should consider planned usage as well as the evolving vendor landscape to determine the right deal length. If they are making a signicant bet on the application, they should favor longer deals. They also may like to lock-in a low rate through a longer (three to ve year) deal in a maturing market like CRM. If they are in fast-growth mode or have other signicant variability, sourcing executives should opt for shorter deals that give them room to change course. Similarly, in markets that are still quickly evolving, sourcing executives should sign shorter deals; new options and acquisitions mean that they will want to consider alternative options more frequently. Opting for the best-value license category. Cloud applications now oer more advanced pricing. Some vendors oer multiple tiers of applications (that vary by functionality or performance and disaster recovery commitments) and multiple licensing options, such as enterprisewide license options that eliminate explicit user-based pricing. With price tags getting into the millions annually for more complex cloud deployments, sourcing executives should help their rms navigate the licensing options to gure out which will create the best deal overall. They also need to consolidate contracts and put an end to one-o contracting by business, which prevents organizations from getting volume discounts. 2011, Forrester Research, Inc. Reproduction Prohibited June 23, 2011 The ROI Of Cloud Apps For Sourcing & Vendor Management Professionals 10 Minimizing hidden costs. Cloud contracts often restrict storage, API calls, mobile device access, or sandbox test environments. Sourcing executives should try to understand their planned usage (as best as possible) and negotiate for these to be included. Similarly, some cloud vendors charge extra for third-party SaaS escrow or for disaster recovery; sourcing executives should determine their needs based on tolerance for risk and sensitivity of data. SUPPLEMENTAL MATERIAL Methodology Forrester Research uses a dened methodology for analyzing and evaluating the costs, benets, and risks of a proposed solution. is methodology, termed Total Economic Impact (TEI), provides a holistic view of the decision by including an analysis of costs, benets, exibility, and risk. By including an assessment of risk, TEI provides a realistic view of expected outcomes, rather than one shaded by early optimism and enthusiasm. 5 Unlike a cost- or technology-based analysis, TEI does not rely on industry averages or factors that are applied to all organizations, but is a methodology for evaluating projects. e TEI methodology forces the determination and quantication of relevant metrics in light of an organizations current state and future goals. Firms can use the TEI model as a proactive and predictive tool ENDNOTES 1 Forrester recently analyzed more than 120 soware product markets to determine SaaS current and potential impact. While we found that SaaS will minimally aect many markets, it will create many changes in sourcing decisions for some key markets. SaaS as a disruptive technology occurs in soware products that represent about 25% of total global soware market, especially in customer relationship management, human resource management, IT management, and security soware. Moreover, SaaS is becoming a sustaining technology for many incumbent vendors, as SaaS products complement licensed soware products either by serving niches where licensed products have not been adopted or by addressing unmet needs. Overall, SaaS will more than double from 7% of soware spend in 2010 to 16% in 2013. See the January 26, 2011, How SaaS Will Change Technology Sourcing Strategy report. 2 Email isnt cheap, and its only getting worse for most companies as business and technical factors combine to drive costs higher and higher. Employees are demanding larger inboxes as sending larger les becomes more commonplace. Regulation and litigation drive investments in archiving and eDiscovery platforms. Increasing use of mobile devices to access email also drives investments to manage access. Cloud-based providers have practically untouchable economies of skill and scale that translate into attractive pricing for companies spending far more than theyd like on email today. See the March 22, 2011, Market Overview: Cloud-Based Email Vendors report. 3 Forresters Forrsights Services Survey, Q3 2010, was elded to 1,007 IT executives and technology decision- makers located in Canada, France, Germany, the UK, and the US from enterprise companies with 1,000 or more employees. is survey is part of Forresters Forrsights for Business Technology and was elded from August 2010 to September 2010. 2011, Forrester Research, Inc. Reproduction Prohibited June 23, 2011 The ROI Of Cloud Apps For Sourcing & Vendor Management Professionals 11 4 Source: Josh Berno and Ted Schadler, Empowered: Unleash Your Employees, Energize Your Customers, Transform Your Business, Harvard Business Review Press, 2010 (http://www.forrester.com/empowered). 5 For an in-depth discussion of TEI and the individual elements within the methodology, please see the August 4, 2008, e Total Economic Impact Methodology: A Foundation For Sound Technology Investments report. Forrester Research, Inc. (Nasdaq: FORR) is an independent research company that provides pragmatic and forward- thinking advice to global leaders in business and technology. Forrester works with professionals in 19 key roles at major companies providing proprietary research, customer insight, consulting, events, and peer-to-peer executive programs. For more than 27 years, Forrester has been making IT, marketing, and technology industry leaders successful every day. For more information, visit www.forrester.com. Headquarters Forrester Research, Inc. 400 Technology Square Cambridge, MA 02139 USA Tel: +1 617.613.6000 Fax: +1 617.613.5000 Email: [email protected] Nasdaq symbol: FORR www.forrester.com Ma k i n g L e a d e r s S u c c e s s f u l E v e r y D a y 59277 For information on hard-copy or electronic reprints, please contact Client Support at +1 866.367.7378, +1 617.613.5730, or [email protected]. We oer quantity discounts and special pricing for academic and nonprot institutions. For a complete list of worldwide locations visit www.forrester.com/about. Research and Sales Oces Forrester has research centers and sales oces in more than 27 cities internationally, including Amsterdam; Cambridge, Mass.; Dallas; Dubai; Foster City, Calif.; Frankfurt; London; Madrid; Sydney; Tel Aviv; and Toronto.