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5 reasons CFOs are embracing on-premise software

For the past several years the concept of cloud computing has been heating up and with the explosion of players like Salesforce.com it would seem that every business is either on the cloud or about to move to the cloud.

In working for a technology firm that has provided Software as a Service to both CRM and ERP customers for nearly 10 years we have seen an increase in these types of customers, but not wholesale migrations. In fact, there have been more instances in the past two years where we have seen customers going in the other direction.

Conventional wisdom would say that there has to be some significant reason that companies would go against the grain of what everyone seems to be talking about so I decided to spend some time in conversation with a few of the executives at some of these customer sites to understand why, in significantly challenging times, they would make the move away from SaaS and burden themselves with the cost of supporting these technologies internally.

There were many interesting insights taken from these conversations but for this article I decided to concentrate on the main themes taken from these interviews because I think there are valid points made by these customers. Of course this isn’t scientific and every organization has a unique situation but I think they are all considerations that should be taken into account the next time you decide on what type of solution is right for you.

Real Cost of Ownership – What exactly does “real” mean when it comes to small and mid-sized businesses? For many of the CFOs I spoke with the sheer cost on a year over year basis, when analyzed over a long period of time, is very expensive. One even told me that his analysis assumed no growth in the organization because when he scaled the business the percentage of allocation to running his systems never went down and he never gained economies of scale. The best way one of them put it is that by staying with a SaaS product they had essentially taken on a silent partner that would always be taking a portion of their profits with no room for negotiation.

What It Means to Integrate – My expertise is primarily in the world of Customer Relationship Management (CRM), but I have been integrating these applications to ERP systems for over a decade. Nearly all of the people I discussed why they moved one or more applications on premise were because of the need to “integrate”. A number of the more recent projects I have seen involved bringing specifically CRM internal because the ease and cost to integrate systems on the same network is exponentially easier with today’s technology than working through the cost of integrating with many cloud environments. Anecdotally, one VP of sales told me that he knew he had to change something when he figured out that a standalone CRM without customer data was a bigger bottleneck than no CRM at all.

Maintaining a Level of Control – It is funny how each one of these points plays off of the other, but the integration issue actually brought out several scenarios that were driving the desire to bring and manage applications internally. The challenge that several of these companies faced was the constant upgrading of the SaaS platforms every 90 or 180 days. The same company that said that CRM was no good to them without integrated data said that they had a tough time keeping their CRM specific modifications tested and working with each upgrade and could not imagine what type of internal resources it would take to constantly test and maintain their integrations. The perception is that with internal applications that upgrades and integration changes can be managed more cost effectively.

Why Not My Own Cloud – This is not a unique concept but one that my firm has been discussing for years. The entire concept of a “cloud” is that the service works like your lights or water or any other utility that you use. Like those other services there is profit built into the bill and it is much easier for us to pay this rather than digging our own well or generating power. Now that the concept of virtualization is very affordable to small and medium size businesses the ability to have backups and failover for internal systems is much more achievable. From a financial perspective one CFO told me that when they looked at the cost of virtualization and capitalizing the expenditure it had significant impact on their operating results for the next five years.

Uniqueness Equates to Value – Going back to economics 101 and Adam Smith it is very hard to outperform the market for any significant period of time. As technology and markets evolve everyone comes back to the pack. This concept in business technology makes it even harder for a small or medium size company to have exponential growth when the systems that are used tend to have limitations or do not extend to capture the unique attributes of the organization that wants to use these applications. One CFO eloquently suggested that if they use the same systems in the same way that their competitors use then how is it possible to ever pull ahead. Deploying systems on premise with more flexibility enables the company to foster competitive advantage.

As you can see the topic is quite fascinating and I am sure we will continue to see an ebb and flow between SaaS and on premise and even the next concept of PaaS (Platform as a Service) that will squeak somewhere in between. For now I hope you have more to think about before deciding on your direction with your next business application project.

by Danny Estrada on June 8th, 2010

About the Author
Danny Estrada is the CRM Practice Director at NetaWork and founder of the Practical CRM Blog. Danny guides the vision for delivering CRM capabilities to existing customers and also helps work with internal teams on best practices and methodology for customer relationship management personnel. Danny has been consulting with sales and service teams for the past 20 years.

Sunday, June 20th 2010
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