The Compelling TCO Case for Cloud Computing in SMB Compelling TCO Case for Cloud Computing in SMB and ... Hurwitz Associates ... the Compelling tCO Case for Cloud Computing in SMB and Mid-Market enterprises ...

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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

  • Hurwitz white Paper

    Contents

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

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

    Figure1.Four-YearTotalOwnershipCostDistribution-NetSuiteandMicrosoftDynamicsGPandCRM.....................................................................................................2

    Section 1: SMB & Mid-Market Enterprises Face Difficult Business and Economic Challenges.............................................................................................................................3

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

    Figure 2. Key Benefits 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

    the Compelling tCO Case for Cloud Computing in SMB and Mid-Market enterprises

  • Hurwitz white Paper

    Executive Summary

    Cloudcomputingessentiallyeliminatestheneedforcustomerstobuy,deployandmaintainITinfrastructureorapplicationsoftwareindividually.Regardlessof theapplication,thecloudcomputingvendortakesresponsibilityforallof theinfrastructurerequiredtorunthesolution--servers,backup,software,operatingsystems,databases,updates,migration,powerandcooling,facilityspace,etc.,andassociated internal and third-party staffing costs. Because cloud computing vendors manageallof theircustomersonasingleinstanceof thesoftware,theycanamortizecostsoverthousandsof customers.Thisyieldssubstantialeconomiesof scaleandskill,andlowerstotalcostof ownership(TCO).

    Key findings from our analysis include:

    Overall TCO for NetSuites cloud-based integrated solution suite is significantly lowerthanacomparableon-premisesolutionconsistingof MicrosoftDynamicsGP and CRM. This holds true for both SMB and mid-market firms. The TCO forcloud-basedvs.on-premisebusinessapplicationsolutionswas:

    55%lowerfor52users 50%lowerfor100users 35%lowerfor200users

    ITInfrastructurecosts(hardware,softwareandon-goingmaintenancerequiredtoruntheon-premisebusinessapplications)accountforabout11%of thetotalcostof deployingon-premisebusinessapplicationsalmost$172,500inthe100userscenario(Figure1).Comparably,therearenoITInfrastructurerelatedcostsforcloud-basedbusinesssolutions.

    TotalCostforcloudcomputingisafull$730,745lessthanon-premiseforthe100userscenario.Withcloudcomputing,theoverallcostof runningthesolutionismorepredictablethanon-premise.Figure1showsthatapplicationsubscriptioncostsaccountedfor65%of thetotalsolutioncost,whereastheon-premiselicensecostonlyaccountedfor26%of totalcost.

    Spendingforapplicationimplementationandsupport(includinginternalITstaff and/or VAR, consultant or SI resources) is significantly higher for on-premisesolutionsthanforcloud-basedsolutions,asmuchas3.5timesmoreforthe100userscenario.

    Pre-integrated front and back office functionality in the NetSuite offering incrementallycontributestoreducingintegrationcomplexityandlowersapplicationimplementationcosts.

    the Compelling tCO Case for Cloud Computing in SMB and Mid-Market enterprises

  • Figure 1. Four-Year Total Ownership Cost Distribution - NetSuite and Microsoft Dynamics GP and CRM

    Source: Hurwitz & Associates

    Introduction

    Smallandmediumbusinesses(SMBs)faceatrickydilemmaintodayschallengingeconomic climate. Its no longer business as usual; companies need to figure out howtooptimizefortoday,andgetontracktocapitalizeonnewopportunitiesthatwillemergeastheeconomystartstogrowagain.Theyneedbusinesssolutionstohelp them to manage more efficiently day-to-day, and also provide them with the intelligencetheyneedtomovethebusinessforward.

    AsSMBsevaluatedifferentbusinessapplicationoptions,totalcostof ownership(TCO)isoftentopof mind.Manycustomershavebecomeinterestedinhowcloudcomputingorsoftware-as-a-service(SaaS)canhelplowertheircostsbyeliminatingupfrontcapitalinvestmentsandongoingmaintenancecostsassociatedwithon-premisesolutions.

    Inthisstudy,webeginwithabrief overviewof SMBrequirementsandchallenges,andprovidecontextonhowcloudcomputingisreshapingtheeconomicsandTCOof thebusinessapplicationslandscape.Then,weexamineandcomparethetotalcostof ownershipforplanninganddesign,infrastructurehardware,softwareandsupport,applicationsoftware,deploymentandtrainingcostsof MicrosoftsDynamicsGPandCRMtraditionalon-premisesolutions,withthoseof NetSuite,whichprovides an integrated front and back office SaaS solution. We conclude with our recommendationsforSMBcustomersevaluatingthesealternativecomputingmodels.

    Hurwitz white Paper 2

    the Compelling tCO Case for Cloud Computing in SMB and Mid-Market enterprises

    Overall TCO for NetSuites cloud-based integrated solution suite is significantly lower than a comparable on-premise solution consisting of Microsoft Dynamics GP and CRM.

  • Hurwitz white Paper

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

    Justlikelargerenterprises,SMBsandmid-marketenterprisesneedbusinesssolutionsthat help them to manage day-to-day operations and processes more efficiently. At the same time, they want insight and intelligence to successfully adapt to fluid business environment,andensurecompliancewithregulatoryrequirements.

    However,SMBshavesmallerbudgetsandfewerITstaff thanlargercompanies.Smallbusinessesof 50to100employeesmayhaveonlyonefull-timepersontypicallyanITgeneralisttosupportacomplexarrayof ITresourcesandusers.Inmediumbusinesses (100 to 999 employees), IT staffing grows, averaging about one full-time ITpersonforevery100employees.But,businessandITcomplexityoftenoutstripthe growth of IT resources, especially in mid-market firms, who face the complexities of managingseverallocations,multipleservers,anexpandingarrayof desktopsanddevices,andamoremobileworkforce.

    Asaresult,reactingtodailyapplicationavailability,maintenanceandsupportissuescanmaxouttheITstaff,leavinglittletimetodeploynewsolutionsoreventoupdateexisting ones. The difficult economic climate only heightens SMB requirements for easiertouse,fastertodeployandmorefunctionalsolutionstohelpthebusinesseffectivelynavigatethroughuncertaintyandimprovethebottomline.

    the Compelling tCO Case for Cloud Computing in SMB and Mid-Market enterprises

    Business and IT complexity often outstrip the growth of IT resources,especially in mid-market firms...

    Easing the upgrade process and improving operations

    When a new CEO came on board at this 50-person insurance rating, quoting and policy solutions in 2000, he was frustrated with the lack of communication and coordination within the firm. Everything was in silos, and it was difficult to communicate, according to the IT Director. We had internal people managing it, but they didnt understand all the different applications, and upgrades were difficult. In 2005, the firm implemented NetSuite, attracted by the cloud delivery model, and built-in integration capabilities. This provides us with the latest version, all the time, without downtime, she notes. Having one system and a unified dashboard has also helped us to improve service levels and increase customer satisfaction.

  • Section 2: Cloud Computing Shifts the TCO Discussion

    Cloudcomputinghassteadilygainedmarketacceptanceasanalternativetotraditionalon-premise solution deployment and maintenance because it offers several benefits tocustomers(seeFigure2).Thecloudcomputingmodelcanhelpcompaniesconservecashandfocuslimitedresourcesonthebusiness,insteadof reactingtoITinfrastructure-related fire drills. In the cloud computing model, vendors provide Web-basedaccesstoapplicationsasaservice,throughasubscriptionpricingmodel.Thiseliminatestheneedforcustomerstobuy,deployandmanageITinfrastructureandsolutions.Vendorstakeresponsibilityforeverything:theservers,storage,operatingsystem,database,businesssoftware,updates,migration,powerandcooling,datacenterspace,andsupportservices.Asaresult,cloudcomputingshiftstheITburdenfromthecustomertothecloudcomputingapplicationvendor.

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

    Source: Hurwitz & Associates

    Hurwitz white Paper 4

    Cloud computing shifts the IT burden from the customer to the cloudcomputing application vendor.

    the Compelling tCO Case for Cloud Computing in SMB and Mid-Market enterprises

    Feature Customer BenefitEliminate capitalcosts

    Vendor pays for shared multi-tenant infrastructure SMBs access solutions through a web-interface over theinternet Pay for usage on a per month/user basis

    Fasterdeployment andproductivity

    SMBs are up and running in 3-4 weeks vs. 3-4 months asthere is no need to acquire, install and test infrastructure Applications can be accessed from anywhere, anytimeand through any device Everyone in company has access to real-time information

    Streamlines useand 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 andfunctionality 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 customerservice

    Direct customer connection to resolve problems Incentive to achieve high customer retention and upselladditional solutions

    Better reliabilityand performance

    Enterprise class IT infrastructure that is affordable Vendor provides high-availability for business continuityand disaster recovery Vendor provides required data backup services Reduces power consumption and data center space Proactive support and management

  • Hurwitz white Paper

    Cloud computing vendors can provide these benefits because theyve built their solutionsasWeb-basedservicesfromthegroundup.Insteadof buildingtheirsolutionstorunin-house,asaseparate,individualinstancesforeachcustomer,theyarchitecttheirsolutionsforaone-to-many,ormulti-tenantmodel.Thismeansthattheycanrunthousandsof customersonasingleinstanceof thedatabaseandapplicationsoftware.Byoptimizingtheirsolutionsforthissharedenvironment,theycan achieve efficiencies throughout the solution lifecycle that would be difficult 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.Thismeasureistypicallyusedtocompareinvestmentsthatuncovernewtoplinerevenueandgrowthopportunities.However,ROItendstobemore subjective in nature than TCO, because ROI looks at business benefits, which oftencannotbemeasuredasobjectivelyascosts.

    Hurwitz&AssociatesviewsTCOasapreferredmethodtocomparetechnologyinvestments when two solutions provide roughly equivalent benefits over the solution lifecycle,buthavedifferenttypesof costsassociatedwithacquisition,maintenanceandoperation.Forthesereasons,aTCOcomparisonoffersamoretangibleassessmentof thetotalcostsinvolvedindeployingcloud-basedSaaSandon-premisebusinesssolutions.

    the Compelling tCO Case for Cloud Computing in SMB and Mid-Market enterprises

    The fact that there was little or no infrastructure or internal supportrequired drove us to a software-as-service solution.Security softwarefirm

    Lean and mean IT

    Headquartered in Slovakia, the U.S. division of this security software firm has grown from 1 to 135 employees over the past 10 years. The division had began by using multiple brands of packaged software for accounting, contact management and reporting functions. But as it grew, the organization wanted tighter integration across functions, better reporting, and an easier way to provide access to an increasing number of remote employees. It also wanted to keep upfront capital and ongoing support costs low. The fact that there was little or no infrastructure or internal support required drove us to a software-as-service solution, according the firms Business Systems Director. Since deploying NetSuite in 2006, the company has kept IT lean and mean, and the single system, real-time view of customers helps our sales and support teams to offer better service to customers.

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    Section 4: What does this TCO model include?

    TheTCOmodelthatHurwitz&Associatesusesinthisstudycomparesfunctionallysimilarcloudandon-premisebusinessapplicationsolutionsoveraperiodof 4years(theusefullifeof asolutionforbothhardwareandsoftwarewithouttheneedforamajorreplacementof solutioncomponents).TheTCOcalculationmodelincludesthefollowingcategoriesandcomponents:

    1. Evaluation and Selection:Solution evaluation & analysis:Evaluatefeaturesandfunctionalityof

    competitiveproducts.

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

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

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