Cost of hosted software higher than expected

Researchers say on-premises software is cheaper in many cases

The widespread belief that hosted business applications prove more cost-effective than on premise alternatives was challenged last week after two new studies suggested larger hosted software deployments rarely worked out cheaper than traditional delivery models.

Speaking at a roundtable event on hosted software yesterday, Bob Tarzey of analyst firm Quocirca said research found that on average on-premise software offered a lower total cost of ownership over five years than hosted alternatives, despite the widespread perception that the opposite is usually the case.

"Quocirca’s research has shown that even when all costs were taken in to consideration, such as server hardware and software, staff, maintenance and the actual cost for software licences, over a period of five years the cost of ownership of an on-demand subscription is rarely less than the cost of deploying software on-premises," he said. "The motivation to go for on-demand comes from other areas such as convenience, security, business continuity, speed of implementation etc."

The research is supported by a similar study by Forrester Research, due to be published later this month, which assessed the total economic impact over 10 years of software as a service compared with on-premises deployments. The study found that while hosted software was more cost-effective for firms with 50 to 100 seats there was little financial difference between the two delivery models for firms with 250 to 500 seats; and for larger companies with over 500 seats it generally became cheaper to use on-premises software.

Ray Wang of Forrester said the results had proved surprising. "I would have thought hosted software would have scaled up differently and it would be cheaper the more you had, but actually the subscription fees add up," he said. "It becomes like hiring a car over a long period [rather than buying it]."

Todd Rowe of business intelligence (BI) software vendor Business Objects, which itself launched a hosted software offering earlier this year, agreed hosted software could prove more expensive, claiming the company had spent more using Salesforce.com than it would have done with an on-premises CRM system from Siebel.

However, Steve Garnett, president for the Europe Middle East and Africa at Salesforce.com, dismissed the research, and insisted he was not aware of any scenario where on-premises software alternatives were more cost-effective than Salesforce.com's on-demand offering. He argued that when the total cost of ownership was calculated, including productivity gains associated with online services and the low utilisation of much on-premises software, hosted software worked out cheaper.

"[These findings] are just not true," Garnett claimed. "Otherwise all our customers would have less than 500 users and we have plenty of customers like Cisco, Nortel and Merrill Lynch with thousands of users… It's like saying all these customers return-on-investment calculations are wrong."

Other supporters of hosted software argue that even if the model may prove less-cost effective in the long term it does allow firms to avoid the large up-front capital investment typically required by on-premises deployments. But Wang insisted that larger firms looking to use hosted software solely to improve cash flow could also consider leasing arrangements with traditional vendors.

However, despite differing opinions about the cost of on demand software experts agreed there are plenty of other advantages to the model. Craig Sullivan, senior director of product management at hosted business apps provider Netsuite, said hosted software offered firms improved security and business continuity, greater ease of customisation, the ability to better share data and functionality with partners and customers, and the opportunity to focus on their core business.

"Hosted software is expanding beyond a cost story and becoming a revenue-generation story for firms," added Rowe. "It allows firms to operate their businesses faster and more effectively."

Experts agreed these advantages could cause hosted software to overtake on-premise applications as the dominant software delivery model within the next 15 years. Van Diamandakis of online web conferencing specialist WebEx argued that with hosted applications set to dominate the mid-market and making continued progress among larger enterprises it is a matter of time before this is the dominant form of software delivery.