Remember the good ol’ days of selling software, when you could talk to customers about the virtues of ROI, or Return on Investment? ‘Our new software can cut your costs by 90%, make you more strategic and you will get that raise you were looking for!’
Funny thing, that was only about 6 months ago. Even Software-as-a-Service sales professionals were skilled at ROI selling but now ROI is out and TCO, or Total Cost of Ownership is back in.
The reason for the change is that buyers don’t care about investments or benefits, they are only concerned with reducing and managing costs. So this should be really good news for SaaS providers because their solutions not only provide ROI but clear TCO advantages. Some of these advantages include:
- No hardware required: web servers, application servers or firewalls
- No software required: database, infrastructure or security software
- No IT team required: DBA’s, IT managers, security guys, etc.
It seems like most companies have already thinned their workforces, frozen their budgets and trimmed unnecessary spending in an effort to reduce costs. What you are going to see next is IT Cost Swapping. This is when you start doing a line item review of all of your IT and business costs and realize that your customer is probably paying a huge amount annually for ERP maintenance to your friends at Oracle and SAP and not getting much in return. In a recent CIO magazine article about the upcoming SAP maintenance fee increase from 17% to 22%, a Forrester survey of over 200 SAP customers found that over 85% saw little or no value in these annual fees. So it is a stroke of genius to raise the costs as the economy goes into the toilet, right? Well SAP isn’t alone, Oracle is also planning on a large price increase in 2009 which could be as large as 10%. In fact Oracle said that their maintenance revenue was the most profitable component of their business, that’s because it’s pure profit!
A smart Cost Swap Strategy could involved a portfolio analysis of all of your customer’s ERP software and building a plan to replace older on-premise ERP products with up-to-date SaaS products. The advantage with this approach is that your customer can get the benefits of modern software, while actually reducing their overall IT cost structure. For more Cost Swapping ideas, drop me an email at: kevin@montclairadvisors.com.
I’ve been involved in “ROI Selling” for many years and I have always felt that most people using it have been more involved in finding ways to use the term than understand it. Reductions in Total Cost of Operation are a much clearer indication of results and for most people easier to grasp than ROI.
And along with that, the terms CAPEX (Capital Expenditures) and OPEX (Operational Expenditure) have finally reached the lexicon of SaaS sales. When looking at a product that requires a capital investment in addition to maintenance against a product with a subscription or transactioal fee that can be handled as an expense – if the features balance out the SaaS app has a lot on the financial side to recommend it.
I totally agree! As an SaaS vendor, we’re doing our most to reduce our TOC – including but not limited to: making generic services that can be used across the entire stack as opposed to per customer basis [thus reducing our per-customer cost], improving our ability to see into our environment and figure out issues as they arise [through centralized logging and system monitoring] as well as automating deployments and upgrades [thus reducing person-hours per customer].
Having sold hosting, ASP, MSP and SaaS for nine years now, TCO and ROI have always been in the eye of the beholder. If a CIO is strategic, or the business unit owner of the software (HR dept for example) has more clout internally, then they are more likely to justify a vendor based TCO analysis or ROI business case. Otherwise, the long quagmire (no Family Guy pun intended) of comparing hardware, staff, data center costs and the like will always be reverse engineered to support the I.T. Director who has been tasked with “investigating” the potential cost savings of outsourcing. I have seen many extended sales cycles wasted on a TCO analysis, managed by I.T., which resulted in a reduction to the I.T. staff and “power base”. At the end of the day, a TCO or ROI analysis will only support the direction which decision makers want to take. Now, in today’s next generation of SaaS particularly around the Big 2 ERP vendors, I think your point is accurate. I.T. was probably the last “fan” of traditional on-premise investment but with escalating maintenance, snail paced high price upgrades, and viable alternatives entering the market, the decision makers can no longer support this way of doing business.
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