The Compelling TCO Case for Cloud Computing-Correct

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  • 8/8/2019 The Compelling TCO Case for Cloud Computing-Correct

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    The Compelling TCO Case for Cloud

    Computing in SMB and Mid-Market

    Enterprises

    A 4-year total cost of ownership (TCO)

    perspective comparing cloud and on-premise

    business application deployment

    A Hurwitz wHite PAPer

    SanjeevAggarwal,PartnerLaurieMcCabe,Partner

    StudysponsoredbyNetSuite

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    Huriz whi Papr

    Conns

    ExecutiveSummary...............................................................................................................1

    Introduction...........................................................................................................................2

    Figure1.Four-YearTotalOwnershipCostDistribution-NetSuiteandMicrosoft

    DynamicsGPandCRM.....................................................................................................2

    Section 1: SMB & Mid-Market Enterprises Face Difcult Business and Economic

    Challenges.............................................................................................................................3

    Section2:CloudComputingShiftstheTCODiscussion.............................................4

    Figure 2. Key Benets of Cloud-based Business Application Solutions................... 4

    Section3:WhydoesTCOmatter?....................................................................................5

    Section4:WhatdoesthisTCOmodelinclude?..............................................................6

    Section5:AssumptionsforDevelopingtheTCOModel.............................................7

    Section6:TCOMethodology............................................................................................8

    Figure3.KeyFunctionsandFeaturesforMid-MarketCompanies............................9

    Section7:TCOComparisonforCloudvs.On-premiseBusinessSolutions.............9

    Figure4.100-UserTCOforNetSuiteandMicrosoftDynamicsGP/CRM..............10

    Figure5.TCOComparisonfor52-users,100-user,200-userforNetSuiteandMicrosoftDynamicsGP/CRM.........................................................................................12

    Section8:RecommendationsforSMBandMid-MarketEnterprises........................13

    Section9:Conclusions.......................................................................................................15

    th Complling tCO Cas for Cloud Compuing in SMB and Mid-Mark enrpriss

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    Executive Summary

    Cloudcomputingessentiallyeliminatestheneedforcustomerstobuy,deployandmaintainITinfrastructureorapplicationsoftwareindividually.Regardlessof theapplication,thecloudcomputingvendortakesresponsibilityforallof the

    infrastructurerequiredtorunthesolution--servers,backup,software,operatingsystems,databases,updates,migration,powerandcooling,facilityspace,etc.,andassociated internal and third-party stafng costs. Because cloud computing vendors

    manageallof theircustomersonasingleinstanceof thesoftware,theycanamortize

    costsoverthousandsofcustomers.Thisyieldssubstantialeconomiesof scaleandskill,andlowerstotalcostof ownership(TCO).

    Key ndings from our analysis include:

    Overall TCO for NetSuites cloud-based integrated solution suite is signicantlylowerthanacomparableon-premisesolutionconsistingofMicrosoftDynamicsGP and CRM. This holds true for both SMB and mid-market rms. The TCOforcloud-basedvs.on-premisebusinessapplicationsolutionswas:

    55%lowerfor52users 50%lowerfor100users 35%lowerfor200users

    ITInfrastructurecosts(hardware,softwareandon-goingmaintenancerequiredtoruntheon-premisebusinessapplications)accountforabout11%of thetotal

    costof deployingon-premisebusinessapplicationsalmost$172,500inthe100userscenario(Figure1).Comparably,therearenoITInfrastructurerelatedcostsforcloud-basedbusinesssolutions.

    TotalCostforcloudcomputingisafull$730,745lessthanon-premisefor

    the100userscenario.Withcloudcomputing,theoverallcostofrunningthesolutionismorepredictablethanon-premise.Figure1showsthatapplicationsubscriptioncostsaccountedfor65%ofthetotalsolutioncost,whereastheon-premiselicensecostonlyaccountedfor26%oftotalcost.

    Spendingforapplicationimplementationandsupport(includinginternalITstaff and/or VAR, consultant or SI resources) is signicantly higher for on-premisesolutionsthanforcloud-basedsolutions,asmuchas3.5timesmorefor

    the100userscenario.

    Pre-integrated front and back ofce functionality in the NetSuite offeringincrementallycontributestoreducingintegrationcomplexityandlowers

    applicationimplementationcosts.

    th Complling tCO Cas for Cloud Compuing in SMB and Mid-Mark enrpriss

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    Figure 1. Four-Year Total Ownership Cost Distribution - NetSuite and MicrosoftDynamics GP and CRM

    Sourc: Huriz & Associas

    Introduction

    Smallandmediumbusinesses(SMBs)faceatrickydilemmaintodayschallengingeconomic climate. Its no longer business as usual; companies need to gure out

    howtooptimizefortoday,andgetontracktocapitalizeonnewopportunitiesthat

    willemergeastheeconomystartstogrowagain.Theyneedbusinesssolutionstohelp them to manage more efciently day-to-day, and also provide them with theintelligencetheyneedtomovethebusinessforward.

    AsSMBsevaluatedifferentbusinessapplicationoptions,totalcostofownership(TCO)isoftentopof mind.Manycustomershavebecomeinterestedinhowcloudcomputingorsoftware-as-a-service(SaaS)canhelplowertheircostsbyeliminating

    upfrontcapitalinvestmentsandongoingmaintenancecostsassociatedwithon-premisesolutions.

    Inthisstudy,webeginwithabrief overviewof SMBrequirementsandchallenges,andprovidecontextonhowcloudcomputingisreshapingtheeconomicsandTCOof thebusinessapplicationslandscape.Then,weexamineandcomparethetotalcostof ownershipforplanninganddesign,infrastructurehardware,softwareandsupport,

    applicationsoftware,deploymentandtrainingcostsof MicrosoftsDynamicsGPandCRMtraditionalon-premisesolutions,withthoseof NetSuite,whichprovides an integrated front and back ofce SaaS solution. We conclude with our

    recommendationsforSMBcustomersevaluatingthesealternativecomputingmodels.

    Huriz whi Papr 2

    th Complling tCO Cas for Cloud Compuing in SMB and Mid-Mark enrpriss

    Overall TCO forNetSuites cloud-based integratedsolution suite issignicantly lowethan a comparablon-premise solutioconsisting ofMicrosoft DynamicGP and CRM.

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    Section 1: SMB & Mid-Market Enterprises Face Difcult Business

    and Economic Challenges

    Justlikelargerenterprises,SMBsandmid-marketenterprisesneedbusinesssolutions

    that help them to manage day-to-day operations and processes more efciently. At thesame time, they want insight and intelligence to successfully adapt to uid businessenvironment,andensurecompliancewithregulatoryrequirements.

    However,SMBshavesmallerbudgetsandfewerITstaff thanlargercompanies.Small

    businessesof 50to100employeesmayhaveonlyonefull-timepersontypicallyanITgeneralisttosupportacomplexarrayof ITresourcesandusers.Inmediumbusinesses (100 to 999 employees), IT stafng grows, averaging about one full-time

    ITpersonforevery100employees.But,businessandITcomplexityoftenoutstrip

    the growth of IT resources, especially in mid-market rms, who face the complexitiesof managingseverallocations,multipleservers,anexpandingarrayof desktopsanddevices,andamoremobileworkforce.

    Asaresult,reactingtodailyapplicationavailability,maintenanceandsupportissuescanmaxouttheITstaff,leavinglittletimetodeploynewsolutionsoreventoupdateexisting ones. The difcult economic climate only heightens SMB requirements foreasiertouse,fastertodeployandmorefunctionalsolutionstohelpthebusiness

    effectivelynavigatethroughuncertaintyandimprovethebottomline.

    th Complling tCO Cas for Cloud Compuing in SMB and Mid-Mark enrpriss

    Business and ITcomplexity oftenoutstrip the growtof IT resources,especially in mid-market rms...

    Easing the upgrade process and improving operations

    When a new CEO came on board at this 50-person insurance rating, quotingand policy solutions in 2000, he was frustrated with the lack of communicationand coordination within the firm. Everything was in silos, and it was dicult tocommunicate, according to the IT Director. We had internal people managingit, but they didnt understand all the diferent applications, and upgrades weredicult. In 2005, the firm implemented NetSuite, attracted by the clouddelivery model, and built-in integration capabilities. This provides us with thelatest version, all the time, without downtime, she notes. Having one systemand a unified dashboard has also helped us to improve service levels andincrease customer satisfaction.

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    Section 2: Cloud Computing Shifts the TCO Discussion

    Cloudcomputinghassteadilygainedmarketacceptanceasanalternativetotraditionalon-premise solution deployment and maintenance because it offers several benetstocustomers(seeFigure2).Thecloudcomputingmodelcanhelpcompanies

    conservecashandfocuslimitedresourcesonthebusiness,insteadofreactingtoITinfrastructure-related re drills. In the cloud computing model, vendors provide Web-basedaccesstoapplicationsasaservice,throughasubscriptionpricingmodel.This

    eliminatestheneedforcustomerstobuy,deployandmanageITinfrastructureandsolutions.Vendorstakeresponsibilityforeverything:theservers,storage,operatingsystem,database,businesssoftware,updates,migration,powerandcooling,datacenterspace,andsupportservices.Asaresult,cloudcomputingshiftstheITburdenfrom

    thecustomertothecloudcomputingapplicationvendor.

    Figure 2.Key Benets of Cloud-based Business Application Solutions

    Sourc: Huriz & Associas

    Huriz whi Papr 4

    Cloud computingshifts the IT burdfrom the custometo the cloudcomputingapplication vend

    th Complling tCO Cas for Cloud Compuing in SMB and Mid-Mark enrpriss

    Feature Customer Benefit

    Eliminate capital

    costs

    Vendor pays for shared multi-tenant infrastructure

    SMBs access solutions through a web-interface over the

    internet

    Pay for usage on a per month/user basis

    Faster

    deployment and

    productivity

    SMBs are up and running in 3-4 weeks vs. 3-4 months as

    there is no need to acquire, install and test infrastructure

    Applications can be accessed from anywhere, anytime

    and through any device

    Everyone in company has access to real-time information

    Streamlines use

    and management

    Web-based, self-service access to business solutions

    Vendor manages and updates infrastructure

    No software to maintain and upgrade

    Automated upgrades to new versions of applications and

    functionality

    IT focuses on higher value, more strategic initiatives

    Increase flexibility SMB can expand or contract services as their needschange

    Support a increasingly mobile workforce

    Easier to investigate solutions prior to acquisition

    Improve customer

    service

    Direct customer connection to resolve problems

    Incentive to achieve high customer retention and upsell

    additional solutions

    Better reliability

    and performance

    Enterprise class IT infrastructure that is affordable Vendor provides high-availability for business continuity

    and disaster recovery

    Vendor provides required data backup services

    Reduces power consumption and data center space

    Proactive support and management

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    Cloud computing vendors can provide these benets because theyve built their

    solutionsasWeb-basedservicesfromthegroundup.Insteadofbuildingtheirsolutionstorunin-house,asaseparate,individualinstancesforeachcustomer,theyarchitecttheirsolutionsforaone-to-many,ormulti-tenantmodel.Thismeansthattheycanrunthousandsof customersonasingleinstanceof thedatabaseandapplicationsoftware.Byoptimizingtheirsolutionsforthissharedenvironment,they

    can achieve efciencies throughout the solution lifecycle that would be difcult for on-

    premisevendorstoachieve.

    Section 3: Why does TCO matter?

    IntheITindustry,TotalCostof Ownership(TCO)isusedtocalculatethetotalcostof purchasing(orinthecaseof cloudcomputing,subscribingto),andof operatingatechnologysolutionoveritsusefullife.TCOprovidesarealisticandholisticmeasureof thelong-termcostsrequiredtoacquireandoperatetechnologysolutions.

    Returnoninvestment(ROI)isanothermethodtoevaluateandprioritizetechnologyinvestmentsinacompany.Thismeasureistypicallyusedtocompareinvestmentsthat

    uncovernewtoplinerevenueandgrowthopportunities.However,ROItendstobemore subjective in nature than TCO, because ROI looks at business benets, whichoftencannotbemeasuredasobjectivelyascosts.

    Hurwitz&AssociatesviewsTCOasapreferredmethodtocomparetechnology

    investments when two solutions provide roughly equivalent benets over the solutionlifecycle,buthavedifferenttypesof costsassociatedwithacquisition,maintenanceandoperation.Forthesereasons,aTCOcomparisonoffersamoretangible

    assessmentof thetotalcostsinvolvedindeployingcloud-basedSaaSandon-premisebusinesssolutions.

    th Complling tCO Cas for Cloud Compuing in SMB and Mid-Mark enrpriss

    The fact thatthere was little ono infrastructure internal supportrequired drove usto a software-as-service solution.Security softwarrm

    Lean and mean IT

    Headquartered in Slovakia, the U.S. division of this security software firm hasgrown from 1 to 135 employees over the past 10 years. The division had beganby using multiple brands of packaged software for accounting, contactmanagement and reporting functions. But as it grew, the organization wanted

    tighter integration across functions, better reporting, and an easier way toprovide access to an increasing number of remote employees. It also wanted tokeep upfront capital and ongoing support costs low. The fact that there was littleor no infrastructure or internal support required drove us to a software-as-service solution, according the firms Business Systems Director. Since deployingNetSuite in 2006, the company has kept IT lean and mean, and the singlesystem, real-time view of customers helps our sales and support teams to offerbetter service to customers.

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    Section 4: What does this TCO model include?

    TheTCOmodelthatHurwitz&Associatesusesinthisstudycomparesfunctionallysimilarcloudandon-premisebusinessapplicationsolutionsoveraperiodof 4years

    (theusefullifeofasolutionforbothhardwareandsoftwarewithouttheneedforamajorreplacementof solutioncomponents).TheTCOcalculationmodelincludesthefollowingcategoriesandcomponents:

    1. Evaluation and Selection:

    Solution evaluation & analysis:Evaluatefeaturesandfunctionalityofcompetitiveproducts.

    Vendor review and SLA analysis (as applicable).Reviewandauditvendorlicenseagreements,service-levelsandsecurityrequirements.

    2. IT Infrastructure hardware, software and support (primarilyrequiredforon-premisesolution;theseareincludedinthesubscription

    costsforcloudsolutions):

    Server and storage hardware and maintenance.Capitalexpenditurerequiredtoacquireserversandstoragetorunapplications,databases,andtestenvironment.Operatingexpensesformaintenance,space,powerandcooling.1

    Operating system, database, security,...