Hosted apps: the real cost can be alarming

There's more to software-as-a-service than meets the eyes, says Ephraim Schwartz

Does software as a service offer a graduated scale of functionality, or does it just pick your pocket?

A couple of weeks ago there was the launch of AppExchange, which exposes the APIs to third-party software providers — 160 of them at present. When certified, ISVs can plug their applications into the main application, giving users access to a plethora of unique features not available from Salesforce.

Here’s a taste of the programs you can plug in: Before the Call for AppExchange offers outbound telemarketing management for US$75 a user per month. BigMachines SPP (Selection, Pricing and Proposal) generates proposals for US$49.50 on the same basis. Selectica Fastraq improves speed and accuracy of product configuration, quoting, and pricing, for US$65 a seat per month. Sendia WorkSpace CRM provides wireless access to AppExchange applications from a handheld for US$49.95 per user each month and similarly, Sybase iAnywhere Sales Anywhere provides access to Salesforce from Windows Mobile for US$21 on the same terms.

I got to wondering, what if you were committed to the SaaS (software as a service) architecture and needed all 160 programs to run your business properly? With an average service fee of US$50 per user per month multiplied by 160 plug-ins, you get US$8,000 per user per month. Multiply that by 12 months and a dozen users and it comes to US$1,152,000 a year.

Ridiculous? Of course it is. However, therein lies a kernel of truth, not just about Salesforce, but for the entire SaaS model.

Although the fees are relatively low, consider the total cost of owning each service. Each AppExchange provider hosts the application on its own platform. Use just the above examples and you have five additional contracts to manage, SLAs to oversee, networks to deal with and invoices to review and pay.

As I said before, these applications exist because they offer features not available from Salesforce. Truth is, SaaS tends to be 100 miles wide and about an inch deep. Although you may not need 150 additional applications, you may be surprised at how many you do need.

I spoke with Fred Walters, chief executive and co-founder of AngelPoints, which has deployed Before the Call for AppExchange. He says CRM users will need anywhere from two to five additional applications in any one of the functional CRM areas to have a complete SaaS package.

Considering CRM has sales force automation, marketing and customer service, that means anywhere from six to 15 additional applications.

For example, in addition to the US$75 per user each month for its Before the Call application, AngelPoints offers a verification and lead-enrichment service for another US$25 a user per month. See what I mean?

Walters, being an AppExchange provider, counters that companies will be better off spending their money on multiple SaaS plug-ins, rather than spending it on bigger packaged apps.

So is it death by a thousand cuts, or does SaaS offer a graduated scale of functionality? You will have to decide. But before you do, consider this.

SaaS providers will very quickly face the reality that unless they are a provider of a major service with broad reach, they will not be able to charge even US$25 every month for each user. Expect prices for nice-to-have utilities to drop as low as US$5 per seat each month.

SAP recently announced what has long been rumoured: its SaaS for CRM solution. With SAP in the market with an SAP-class SaaS offering, my guess is that it will force other providers to redefine what the baseline for a service offering is. Stay tuned.

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