To SaaS or not to SaaS, a Utility-Based Decision

March 3, 2007

I remain skeptic about any attempts to break out SaaS value/price in a pure TCO, like in this article by Barry Rosenberg and Craig Wright on techweb. If nothing else, simply because of the (human) random nature of choosing between intangibles such as security, mobility, usability, … which are all perceptions.

Whereas I agree with the authors that the key challenge in comparing licensed to hosted software is establishing a common measuring tape to avoid comparing apples and pears, I don't agree that it's possible to quantify such measuring tape as a TCO model, simply because of the random nature of perception.

The choice process in deciding between licensed software and SaaS is not very different from the one we go through to choose between a Mac and a PC, between buying a house and a flat, between choosing to drive to work or taking a train, etc. The decision maker is forced in these cases to make a choice based on things that are simply not rationally comparable. In the case of SaaS, we must compare licensing costs to convenience of upgrades; in-house security-tight infrastructure to SLAs and trust models on hosted services; ubiquitous presence to speed of use; and a long list of other incomparable properties. While it is true that each decision maker, each CIO, will have different a measuring tape, no CIO will be able to put down the choice of SaaS vs licensed software as a TCO decision.

The choice of software hosting model (in-house vs off-house/SaaS) is a random utility-based decision, which can be modeled using random utility models (RUM). RUMs are not only necessary for SaaS vendors to be able to adequately price their services, they are also a good modeling technique for decision makers to be able to compare between otherwise incomparable choices.

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