White Paper Cost Savings
White Paper Cost Savings
White Paper Cost Savings
EXECUTIVE SUMMARY
www.idc.com
IDC believes that the rise of Cloud computing has the potential to be among the most
transformative developments in the world of information technology in the last 20
years. To date, Cloud computing is already having a significant impact on the way
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technology vendors are service-enabling and delivering applications, how CIOs think
about infrastructure and datacenter optimization, how vendors are building platform-
based BPO and other high-level service offerings, and how CIOs approach building
and deploying custom applications and objects via Cloud-based platform as a service
(PaaS). PaaS services bundle all stack components (hardware, infrastructure,
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storage) together with database, security, workflow, user interface, and other tools
that allow users to create and host powerful business applications, Web sites, and
mobile applications. The Force.com platform has emerged as an early leader among
providers in defining and delivering PaaS solutions.
Global Headquarters: 5 Speen Street Framingham, MA 01701 USA
To understand the business value of PaaS, IDC interviewed ten companies that used
Force.com to develop custom applications, and have been running the applications
for at least 12 months. These ranged from large to small enterprises located in the
U.S., Europe and Asia Pacific regions.
!"Faster to market. Custom applications were developed and deployed in 76% less
time and required 76% - 85% fewer developer hours;
!"Lower cost. Companies were able to reduce their three year TCO by 54%, saving
$560,000 per application;
!"Higher quality. Users of the custom applications built on the Force.com platform
reduced Annual Downtime by 97% and 60% less time dealing with the service
desk;
T ABLE 1
Benefit $7,088,954
Investment $863,359
NPV $6,225,595
ROI 721%
SITUATION OVERVIEW
IDC believes that the rise of Cloud computing is one of the most transformative
developments in how information technology services are created, delivered, and
accessed, in the last 20 years. Cloud computing stands alongside milestones like the
commercialization of the Internet in the 1990's, the advent of Java in 1995, and the
growth and standardization of the world wide Web (URLs, browsers, HTTP), as a
transformative advance in how we understand and consume information technology.
Pervasive system availability and connectivity, a characteristic of the Internet and
Web, is largely responsible for establishing the foundation for Cloud computing.
The result is that some Cloud-savvy IT organizations are being transformed to focus
on innovation and creating true business value, instead of maintaining a regime of
license renewal and break-fix infrastructure problems. Given the increasing reliance
of companies on a strategic and lean IT organization, IDC believes that Cloud
computing will grow in importance for these firms, and will be a key channel for how
IT services are delivered and consumed.
A key validation of the importance of Cloud computing is IDC's worldwide forecast for
Cloud computing shown in Figure 1. This forecast is segmented by spending for types
of service, including business applications as a service; application development and
deployment (a superset of platform as a service or PaaS functionality); infrastructure
and system management as a service; and core storage and server functions
delivered as a Cloud-based service.
FIGURE 1
25
20
15
($B)
10
0
Storage Server App dev & Infrastructure/system Business
deployment mgmt software applications
2008
2012
For the purposes of this paper, our focus is on the PaaS segment of application
development and deployment which speaks to how CIOs are using platforms to
develop innovative applications, and the rate at which dollars in the traditional
application development and deployment arena will shift toward Cloud delivery.
Growth in PaaS spending is important because it delineates the pace at which
vendors are offering new ready-to-use SaaS-based tools for creating new custom
applications, and the pace at which IDC expects buyers to turn to these services in
lieu of traditional, on-premise-based software development tools, and the additional
human, hardware, and other resources required to create and sustain the application
environments. These new discrete services, which bundle all necessary stack
components (hardware, infrastructure, storage, process automation, and tools),
together comprise what is emerging as a PaaS offering. IDC believes that these
platforms already provide a compelling alternative to traditional on-premise
application development which will increase over time as PaaS matures.
!"A container for hosting and management of user interaction and business logic.
!"A data tier that enables persistent data storage and access.
!"A development environment for maintaining user interaction and business logic.
This definition of a platform applies regardless of delivery model, and so this definition
applies equally to platforms that are traditionally licensed and platforms that are
provided as a service. Vendors including IBM, Microsoft, and Oracle are well known
for platform products delivered through a traditional on-premise licensing model.
!"Web Application PaaS like Google App Engine provide APIs and functionality
for developers to build Web applications that leverage its mapping, calendar, and
spreadsheets, or draw from YouTube and other services. Similarly, social
applications like LinkedIn and Facebook provide APIs so third-party professional
and non-professional developers can write new application functionality that can
draw from data mashups on the social site, and make these applications
available to a broad community of consumer and business users.
These easy-to-understand cost and business value attributes, when paired with the These easy-to-
understand cost and
architectural benefits highlighted above, help build the story around the allure of business value
PaaS. This is especially true during a time of intense budgetary pressures, when IT attributes, when
paired with the
organizations are bent on decreasing costs, and focusing on transforming from cost architectural benefits
centers into service centers, aiming to be more tightly aligned with the strategic goals highlighted above,
of the business, rather than merely "keeping the lights on." With PaaS, corporate IT help build the story
around the allure of
departments are becoming more able to focus on innovation instead of complex PaaS.
infrastructure, and can redirect a greater proportion of their IT budgets to creating
applications that provide near-term strategic value to their organizations.
As noted earlier, the Force.com platform is a leading PaaS. Force.com not only
delivers all the conventional benefits attributed to a PaaS, but also extends these
benefits as a result of the following product attributes.
!"Web site creation and management. Force.com sites lets users run Web sites
and Web applications that rely on forms or require integration with back-end
systems and analytics. Users can build in HTML, Flash, and JavaScript.
!"Integrated content library with search, user ratings, comments, and tagging.
!"Real-time analytics. Built-in reporting and dashboards that users can set up and
manage, with a library of standard reports and a report generation tool.
!"Granular security and sharing. Users can control which data each user can
access at the object, field, or record level and create custom rules across roles
and profiles that are enforced across the user interface, API, search results, and
analytics.
Study Demographics
IDC interviewed ten companies that had used Force.com to develop custom
applications and have been running the apps for at least 12 months. These are large,
medium, and small enterprises with a median 750 employees. They are located in the
U.S., Europe and Asia Pacific and come from the communications, manufacturing,
public sector, transportation, retail, healthcare and food industries. Custom
applications varied widely in both function and scale, from an ERP system enabling
20 users to manage the entire company to a customer-facing portal serving 250,000
users. In all companies these applications were deemed critical to their businesses
and in two cases these applications were the main revenue-generating activity.
T ABLE 2
Demographics
Companies 10
Three of the companies were migrating from traditional application development and
standardizing on Force.com. These companies had to make adjustments to the way
they were doing business and train their development staff.
!"At one behavioral healthcare provider, IT had historically been a utility. They
developed a system for a patient intake management system on Force.com.
Force.com enabled them to build five different discrete applications that addressed
200 different types of data and served different businesses. According to the
developer – "Because of these applications, the company is starting to utilize IT in a
more strategic capacity…not to just push information around…but to create value."
!"A consumer products company designed and built a public, consumer based
website that supported millions of visits in only 21 days and integrated with
Facebook and Twitter to promote volunteer and philanthropic events based on a
user's zip code.
Benefits Analysis
Companies enjoyed nearly $3.1 million a year in total benefits from using Force.com.
The benefits came from the following sources:
#" Staff savings – post deployment management -$1.0 million (34%). Decrease
in IT staff hours spent in application management to include troubleshooting
and application enhancements.
#" Business benefits - $.4 million (13%). Additional operational income resulting
from improving the time to market, performance and quality of the
applications.
Business benefits
($391,667)
Cost reduction
($28,490)
Staff savings —
application
development
Staff savings —
($1,613,566)
post-deployment
management
($1,037,891)
The companies in the study were able to reduce the time to develop their custom
apps by an average of 26 weeks (75%). But the savings were not just in terms of time
saved, but reduced effort as well. As Table 3 shows, using Force.com made each
phase of the application development process faster, simpler and more automated.
Application
development
FTEs per app
Overall, companies were able to reduce the labor costs per application by 76%,
saving $262,000 per application. Staff savings from optimizing application
development accounted for $1.6 million annually or 53% of total benefits.
In addition to saving IT staffing resources, companies were able to reduce the servers
and software infrastructure supporting internal application development. Although
only $28,000 a year, this savings is all capital expense - precious in an environment
where finding funding for new technology is not just about cost but more and more,
availability.
Finding that developing custom applications is now quicker and less expensive
prompted several companies in the study to increase the number of future custom
development projects. At the time of the study, companies had on average developed
2.5 applications. With Force.com, they are increasing the pace to add another 16 new
custom applications over the next two years. At this rate, companies on average will
save $1.15 million annually in application development labor costs.
Reducing the costs of application development may be the most significant benefit of
Force.com but it is certainly not the only benefit. At IDC, we focus on the full lifetime
of the application and look particularly at the costs to manage in the first several
months during the period when both the IT staff and the users are learning how to use
and manage the application; the effort and costs associated with upgrading the
application and the performance of the application as measured by downtime and
service desk operations for internal applications and in revenue impact for external
facing applications.
In the post-deployment period for any new application and especially custom
applications integrated into existing frameworks, IT managers must deal with a high
volume of service desk calls and application downtime issues related to "working the
bugs out". Force.com's highly optimized structure proved to yield more reliable quality
than traditionally developed applications. Service desk calls volume declined by 33%.
Call issues were more easily identified and resolved so time lost per call fell by 42%.
The net result was that IT time spent in service desk activities was reduced by 63%
compared to traditional applications. Downtime instances within the first 30 days of
deployment declined by 82%. Ongoing service performance has even fewer errors
and annual downtime is reduced to almost nothing (97% decline). Improved
application quality and reliability reduced IT management costs by $150,000 annually.
Combining the initial development costs with the annual costs over three years, we
can see that the companies in this study using Force.com PaaS were able to reduce
the total costs of their custom application development and management by 54%
compared to building the applications in-house using the traditional approach. Over a
three-year period, they were able to save a total of $560,000 per application.
1,200,000
1,000,000
346,436
800,000
34,650
($)
600,000
337,609
400,000 84,776
115,781
64,251
200,000 312,229
206,040
0
Traditional Force.com
Business Benefits
Time is money. The ability to generate custom applications in nine weeks had a
significant revenue impact resulting in an additional $3.9 million in annual revenue.
IDC converts this revenue to operating income by allocating 90% of the revenue to
the costs to generate the revenue. In this case $390,000 in additional operating
income is added to the costs savings from lowering the costs to develop deploy,
enhance and manage the applications generating the revenue. Companies saw the
time-is-money benefit in five ways:
5. New revenue. One company was able to create 24 new products and resultant
new sources of revenue.
One means of demonstrating the relative business benefits for each involves
comparing the results of investing approximately $1 million in application
development (effectively three developers working for two years) in each approach.
Figure 4 illustrates the results. As indicated, using the development investment ($1
million) with Force.com results in 12 delivered applications, an operating income
improvement of almost $23 million and costs of approximately $10 million. By
contrast, using the $1 million dollar investment for traditional development methods
results in only three applications (75% less) and consequently less operating income
impact (only $5.6 million) and more cost for those fewer applications. In this scenario
Force.com delivered four times as many applications and resultant business value at
less than half the cost.
ROI Analysis
Overall, the companies invested an average of more than $1 million ($244,000 per
application) over three years in the Force.com platform. Unlike most IT investments,
where the initial investment accounts for 50-70% of the total investment, only 27% of
the investment is made initially before the customer starts to see the benefits.
For customers, cost savings and revenue benefits averaged more than $3.1 million
annually. IDC accounts for the opportunity costs realized by not having invested the
initial amount in some other instrument yielding a 12% return. This results in a net
present value for the three-year benefits of $6.2 million ($633,000 per application)
(see Figure 4).
FIGURE 5
10,000,000
8,000,000
6,000,000
($)
4,000,000
2,000,000
0
Initial Year 1 Year 2 Year 3
-2,000,000
Cash flow
Benefits
Investment
Cumulative cash flow
This discussion points out the tradeoffs that must be made based on architecture.
Salesforce.com has to date focused the Force.com platform on support for a wide
variety of general-purpose business applications. This makes good sense as a
starting point for the Force.com component model so that it is relevant and attractive
to a significant portion of the developer community. We would expect salesforce.com
to continue enhancing Force.com in ways that extend the platform to address more
demanding application development needs. From discussions with salesforce.com,
we know this to be the case; however the phased nature of these enhancements
means that salesforce.com customers or prospects with specific needs should closely
evaluate the Force.com product roadmap.
CONCLUSIONS
How the IT industry develops applications, whether in corporate IT organizations or
the myriad of professional developer shops worldwide, is changing. The rise of Cloud
computing provides numerous strategic and tactical benefits, and for developers, the
low cost and instant browser-based access to very high-quality compute resources,
storage resources, application logic, and development and deployment environments
is driving a transformation in how IT shops will allocate resources, and how they will
approach common IT tasks, including custom application development, deployment,
and maintenance. The result is that Cloud-savvy IT organizations are seeing renewed
innovation and creating true business value, with a measurable cost-benefit.
Cloud-based PaaS platforms provide an early success story for how Cloud can Cloud-based PaaS
platforms provide an
transform a significant and common business process. For the firms interviewed by early success story
IDC, their ability to generate custom applications in 8-10 weeks – as opposed to a far for how Cloud can
transform a significant
lengthier several-month cycle -- had a significant positive impact in four key areas: and common
resource allocation, time to market, high customer satisfaction, and business agility. business process.
IDC believes that from the smallest 5-person firms to the largest IT organizations,
!"Even very small firms can have access to world-class infrastructure and tools.
!"These firms have a forecastable outlay for building a new business (or running
an established one), based on an "all-in" infrastructure and applications pricing
structure.
!"They can write code once for multiple platforms and form factors.
!"They can gain access to professional developer support tools and a Web-based
community of peers with similar goals.
2. Ascertain the investment made in deploying the solution and the associated
training and support costs.
3. Project the costs and savings over a three-year period and calculate the ROI and
payback for the deployed solution.
IDC uses the net present value (NPV) of the savings over three years in calculating
the ROI and payback period for the deployment. The NPV of the savings is
determined by subtracting the discounted three-year investments from the discounted
three-year benefits. IDC uses a 12% discount factor to allow for the missed
opportunity cost that could have been realized using that capital.
!"To quantify savings from IT efficiency, IDC multiplies time values by burdened
salary (salary + 28% for benefits and overhead).
!"Because the full benefits of the solution are not available during the deployment
period, IDC prorates the benefits on a monthly basis and subtracts the
appropriate amount for the deployment time from the first-year savings.
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