Consider all the costs before you commit to software as a service.

Holden Humphrey Co. is a small, Chicopee, Mass.-based wholesale lumber distribution company with 24 employees—none of whom work in IT.

In conjunction with its preparations for Y2K, the company decided it needed an upgrade of its computer systems, but it didn't want to hire IT personnel. "I realized that we are not in the computer business, nor do we want to be," says Lance Humphrey, the company's president. "We need to focus on what we do best, so we opted to pay someone else to do that for us." Holden Humphrey put virtually all its systems on a hosted model. Now, the company pays roughly $1,000 a month to give nine employees remote access to its inventory management, accounting and CRM systems.

While Humphrey says the renting option isn't inexpensive, he says he couldn't even begin to estimate the costs of handling the systems in-house. "We would have had to hire some computer guys, and a manager to look over their shoulders—when you're done paying for all of that, it makes the subscription model seem really affordable," he says.

It often seems that way at first. However, the cost of renting the software could surpass the cost of buying the license outright over time, something you may want to consider if you plan on being in business for a while.

"Since a lot of these pricing models are volume based, charging per transaction, it means the cost of the software rises with usage," says Andrew Bartels, an analyst with Forrester Research Inc. "It's not a fixed-cost environment, as is the case when you buy software."

Michael Lubanski admits this is a possibility. Lubanski is director of enterprise monitoring for Towers Perrin, a global management consulting firm that subscribes to Mercury Interactive Inc.'s software to monitor the uptime of 200 external client-facing Web-based applications. "I am sure there is a point in the future," he says, "where the line will cross and the cost of the subscription will be more. But I think that point is pretty far away." For now, he adds, the value of subscribing is clear.

"It would have been very expensive to purchase a software license, and a high investment is always going to be tough to get through management," he says. Plus, "a subscription makes it easier to show ROI" because of the small monthly cost.

But companies should never base the decision to rent rather than buy software purely on cost, says Sheryl Kingstone, a Yankee Group analyst. "If it's a money issue, you can do financing plans. You don't buy a car up front for $30,000; you finance it." There are other balance-sheet issues to consider before choosing a subscription service over buying a license.

"If you buy a subscription, it can only hit your expense line," says Gartner's Correia. If you buy the license, on the other hand, it becomes a corporate asset, and you can deduct the depreciation. "One of the reasons some enterprise software won't move to the subscription model is because companies put a lot of resources into developing their programs, and they are assets," she says.

This article was originally published on 05-05-2005
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