When the economy takes a downward turn, company IT budgets are usually one of the first casualties. This is the case with the current recession, as evidenced by an October 2008 CIO Magazine survey in which 40 percent of 234 IT chiefs surveyed said they are cutting spending, essentially freezing new IT initiatives, if not scrapping them altogether.
However, technology is a critical element of business, and despite the current economic climate, the need for reliable IT remains the same—especially when it comes to IT Maintenance or fundamental business applications such as email or customer relationship management (CRM). As companies across all industries face tough decisions about where to put their limited funds, here are three key reasons why the hosted or “software as a service” (SaaS) model makes a great deal of sense.
Financing
Most companies rely on some form of financing for technology purchases (hardware or software), either through a vendor-sponsored payment plan, a specialty leasing agent or a straight bank loan. When credit markets are tight, it’s difficult for many organizations, particularly smaller ones, to secure tech financing. And tight credit markets go hand in hand with a precarious economy.
The impact of the financing crunch on smaller businesses is twofold. First, it is simply harder to secure loans. In October 2008 the CIO Executive Council reported that nearly 20 percent of 31 CIOs surveyed postponed or cancelled purchases specifically because of unfavourable credit terms, demonstrating how difficult, if not impossible, it now is for many companies to implement on-premise IT deployments—and foster growth—because they just can’t afford them. And in a down economy, while overall costs are important, day-to-day cash flow is vital. That means that even when financing is available, the jump in upfront payments can be a deal breaker for many smaller companies.
Second, when money is tight, few companies want to—or can afford to—take on unnecessary risk. And for IT executives, risk comes in the form of long-term commitment to a particular hardware or software purchase. If a company is able to secure tech financing in a difficult credit market, the costs have increased, reducing the overall ROI of the technology acquisition. That translates into increased pressure for the investment to result in a successful IT initiative.
Flexibility
A word commonly used by the media in a down economy is “uncertainty.” Uncertainty about the markets. Uncertainty about employment. Uncertainty about the future. Despite endless analysis and predictions from expert (and highly paid) financial pundits, the truth is that no one really knows when things are going to get better. While the frenzied speculation keeps media outlets around the world in business, speculation is exactly what it is. In July 2008 the ever provocative Huffington Post featured a blog entry by Margaret Heffernan called “The Recession Narrative: Pundits Know Nothing.”
For smaller businesses, the one certainty about uncertainty is that it demands flexibility around IT infrastructure and applications. In this case, flexibility means the ability to accommodate growth and reductions. While in-house software can scale up as your company grows, it doesn’t work the other way around. The same goes for the associated hardware.Take Microsoft Exchange for email. If a company with 500 employees uses an in-house Exchange server, in addition to buying all the hardware (primary and backup servers, networking equipment, storage), it must also buy 500 client access licenses (CALs ), plus pay for ongoing support. Each CAL costs around £70 and is non-refundable. As the company grows, it must purchase a new CAL for each employee, even if that person is a seasonal or temporary hire for the holidays, a common situation when businesses can’t afford to staff permanent positions. Most (if not all) employees need email accounts, regardless of how long they are going to be around to use them.
For on-premise deployments of CRM software, user licenses are even more expensive. For example, a single user license for Oracle’s Siebel CRM Professional for mid-sized companies costs £350 for a base application (sales option, service option or marketing automation). Add-on modules for additional functionality run from £60 up to £2500 per module per user, and support is an additional annual per-user fee.
If that same company suddenly needs to lay off 20 percent of its workforce, it now has 100 CALs that it can’t use, plus an undetermined number of Oracle/Siebel licenses it can’t use (assuming not every employee uses all elements of the company’s CRM system). That’s a lot of money down the drain for a smaller business, especially when money is already tight. The flexible SaaS model, on the other hand, is based around scaling the software up or down with your business. Hosted solutions allow you to add users on demand and remove them on demand. You pay on a monthly basis only for active users. And in a down economy, the likelihood of having to lay off active users goes up, which is why this approach makes sense when business is slow.
A SaaS model also allows you to add and remove software, not just users, on demand. For example, you could lease SharePoint just for a special six-month project. Or you could decide that your business just can’t afford mobile connectivity for every user right now. In an on-premise solution, you have already paid for the functionality, so you’re in a “use it or lose it” situation. In the SaaS model, you can turn off mobile connectivity, and then turn it back on in three months when cash isn’t as tight.
The flexibility of a SaaS model also results in faster time to ROI. With in-house software, you have to buy everything, set it up, test it, etc. It may be a long time before your company sees any value from it. With SaaS, you see instant results, or at least much quicker results. This is always important, but it increases in importance in a down economy.
Staffing
While layoffs may be inevitable in a down economy, your customers will expect the same level of attention, service and quality they have always received. Successful companies recognize this and go above and beyond to preserve customer loyalty by showing them that it’s business as usual, even when it’s not.
Moving to a hosted or SaaS model allows you to reduce headcount without impacting the customer experience. How? Because it eliminates the need for expensive in-house IT experts. Going back to the example of Microsoft Exchange, proper maintenance requires at least one full-time, trained IT professional, which can easily cost six figures in annual salary and benefits. Freeing up that money will allow you to save positions that will have a direct impact on your customers.
In September 2009, The Office for National Statistics (ONS) revealed that unemployment grew by 210,000 to 2.47 million in the three months to July - the highest level since 1995. The latest figures take the unemployment rate to 7.9%, up from 7.8%, according to the ONS. The Centre for Economics and Business Research recently predicted that unemployment could reach 4 million - worse than the record high in the 1980s under Margaret Thatcher’s leadership. While the accuracy of those predictions has yet to be determined, the current reality is bleak enough. When layoffs are unavoidable, a SaaS model can help preserve the positive experience your customers have with your company.
Conclusion
In any economy, there’s no question that SaaS solutions are a smart option for smaller companies. They can be up and running quickly. They don’t require a degree in computer science to administer. They are reliable. They can scale with a business. They even reduce an organization’s impact on the environment.
Article by CalmResponse