According to Gartner, a global IT research firm, the annual cost to own and manage software applications can be up to four times the cost of the initial purchase. As a result, companies end up spending more than 75% of their total IT budget just on maintaining and running existing systems and software infrastructure.

The Software-as-a-Service (SaaS) revolution allows companies to subscribe to software applications and outsource operating the back-end infrastructure to the SaaS vendor. In most cases, the SaaS vendor can do this much more cost effectively; providing overall cost savings for the company. As a result, companies can spread their IT budget across many more applications to support and grow their business operations, which will in turn contribute to the bottom line.

The Gartner White Paper educates end-users and decision makers on Software-as-a-Service (SaaS), where it differs from traditional software, and what the key benefits are when deploying SaaS applications. In addition, this document also provides the reader with a comprehensive look at the Total Cost of Ownership (TCO) analysis any decision maker should complete before making a choice between a SaaS or a traditional software deployment.

The key cost drivers for any software implementation are the cost of the software application, the hardware required to run the application, and the people services required to design, deploy, manage, maintain, and support the application.

Traditional software pricing is limited to the cost of the software application, in most cases an upfront fee in exchange for a perpetual user license. It is up to the customer to determine the cost of the hardware and the people services.

SaaS applications are charged on a subscription basis. The subscription fee includes the cost of the software application, the hardware, and the people services.

This difference in pricing models can make an apples-to-apples TCO comparison “tricky”. Software and hardware costs are well understood, but the people resources associated with traditional software applications are often underestimated or omitted in a TCO analysis.

As a result, the usage driven subscription cost of SaaS applications can seem to be the more expensive solution over a multi-year period. However, when these people resources are correctly associated, deploying a SaaS application becomes – in many cases – the more cost effective option.