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June 24th, 2009 by Rian Gauvreau

10 Things Every Lawyer Should Know About Legal SaaS (Part 7): Total Cost Of Ownership

One of the challenges when doing an apples-to-apples comparison of a SaaS product versus a more traditional software offering is in determining which solution offers a lower total cost of ownership (TCO).  Naturally most attorneys are seeking to find the best compromise between performance and cost, however, given the radically different cost models introduced by SaaS providers, determining the financial implications of any solution (either traditional or non) has become markedly more complex. To help bring clarity to the issue, the following will expand on our series of earlier posts by exploring some important cost-related considerations for any practitioner deciding for (or against) a SaaS solution.

Cost of traditional software: When evaluating the TCO of a traditional software solution, consumers are accustomed to factoring-in the off-the-shelf price of the software license, occasionally accounting for the cost of annual software updates and renewals, along with any required annual maintenance and support contracts. What’s often overlooked in the TCO calculation is the ancillary expenses that frequently accompany the purchase of more conventional solutions. Whether its as easy as an upgrade to an existing workstation, the installation of a server, or the implementation or expansion of a network, the cost of investing in any software solution is seldom limited to the purchase itself. Likewise, the more complicated the solution, the greater the probability of maintenance and configuration complexities which adds to the overall TCO in the form of ongoing support of a technical professional. In calculating the TCO of traditional desktop software, the following costs should be factored in:

• Original software purchase
• Annual software renewal
• Technical support contract
• Server(s), networking infrastructure
• Virtual Private Network installation
• Backups, data redundancy
• IT consultant to install/implement software on server and workstations

For larger firms with existing IT overhead and infrastructure, or smaller firms with more specialized requirements better suited to more conventional solutions, the above cost model may be the most appropriate and affordable. However, for many solos and small firms contemplating the merits of a SaaS solution versus a more traditional counterpart the above considerations are important to recognize prior to making any commitments with long term implications and potentially sunk costs.

The cost of Software-as-a-Service: The SaaS model has turned the concept of software licensing on its ear by introducing a service-based structure where, rather than paying a large up-front fee for software ownership, customers pay a low monthly fee for access to a web-based solution. The clear benefit to this type of model being that it affords subscribers a predictable monthly/annual cost of software ownership, without any of the variable expenses that typically accompany non SaaS solutions. It also lowers the barrier to entry, not forcing new graduates, young firms, and cost-concerned attorneys to budget for the aforementioned (often expensive) up-front costs of software purchase and implementation. For most, getting started with a SaaS solution is as easy as launching a browser and inputting a credit card number – all of which can typically be done with the tools most firms/attorneys already have on hand. There’s no computers to upgrade, no servers to install, and no networks to maintain; all of which helps to make the TCO calculation weigh in favor of SaaS solutions. The TCO costs to be factored in for a SaaS provider are relatively minimal:

• Software subscription cost
• Technical support (which is often included in subscription cost for SaaS applications)

Ultimately there are valid arguments to be made both for and against each platform, and the appropriateness of each should be evaluated in the context of firm requirements, available infrastructure, existing investment and product fit. Though traditional software can come with many hidden costs, to some businesses the control and customizability of on-premises softare installations are a non-negotiable requirement. Similarly, where some may be averse to SaaS subscribership and its long-term low-cost perpetuity, the ease of implementation and maintenance, along with low incidence of collateral costs, make it a compelling alternative for small business.

When comparing the TCO of one solution to another, the total cost of ownership over three years is often used as the comparison metric to help smooth out any significant up-front investments and to incorporate long-term costs.

Independent reports have confirmed Software-as-a-Service delivers significant cost savings over traditional desktop software. A recent Forrester report compared the cost of using Google Apps for e-mail, a SaaS solution, versus Microsoft Exchange Server, a traditional client-server application. The Microsoft Exchange solution cost on average $25.18/month per user, while the Google Apps solution only cost $8.47/month per user. In other words, the TCO of SaaS was just 1/3 of the TCO of traditional software.

We’re obviously advocates of the Software-as-a-Service model at Clio, and believe it will become the dominant computing model for small businesses within 3-5 years. The ever-increasing richness and responsiveness of web applications, together with the compelling cost advantages over traditional software solutions, make it, in our view, the obvious choice for small- and medium-sized businesses.