The acronym TCO stands for “total cost of ownership” – a phrase that reminds us that the cost of a technology solution is rarely just the price of the solution. Oftentimes, there are numerous other components that comprise the total cost.
But there is a fundamental problem when considering TCO for a technology solution: It assumes ownership.
That made sense in years gone by when organizations would purchase perpetual licenses for software. They owned those licenses. As long as they abided by the terms of the contract, they could deploy and operate the software in perpetuity, regardless of whether they continued to pay the vendor for annual maintenance or other related services.
However, these days, the subscription model is prevalent and is most often included in SaaS (software as a service) agreements. The major difference is that in a subscription model, the customer does not own licenses for the software. Rather, the customer is permitted to use the software as long as their SaaS agreement is in effect. The agreement usually includes vendor support services and ongoing hosting of an operating environment for the software.
Fundamentally, the shift to SaaS moves customers from being owners to being renters. And that makes software vendors “the landlords.”
The landlord controls pricing
The concept of TCO presumed there were choices a customer could make to reduce costs in one or more aspects of running and managing a software system. That’s a privilege of ownership. But when an owner becomes a renter, the balance of power shifts from the customer to the software vendor. The vendor then has control of setting the prices.
Some pundits suggest that in a SaaS world, TCO will instead come to stand for “total cost of operations.” That may be true, but it doesn’t indicate the shift from ownership to renting and ceding price controls to the vendor.
A more accurate term is TCC (total cost control). This highlights how the software vendor has control over the most significant cost components —the right to use the software, the computing power needed to run it and support services. (Thankfully, there is often still an option for a customer to choose a managed services provider other than the software vendor.)
No rent control
With the software vendor renting you the right to use the software, if they choose to, they could raise prices every year.
Research of 16,000 SaaS vendors showed that 73% increased prices in the 12 months between August 2022 and July 20231, with the average increase “well above inflation.”2 Cloud costs are higher than expected for 6 in 10 organizations and some 42% of CIOs and CTOs consider cloud waste a top challenge.3
Sure, the “invisible hand” of free market economics might provide some checks and balances, but the market pressure to keep prices from rising is proportional to the likelihood of customers switching vendors due to a price increase.
With large enterprise software systems, switching vendors isn’t easy. And the cost and impact to the business to do so is never insignificant.
Vendor lock-in and barriers to exit
The SaaS model, along with multi-tenant cloud deployment, is intended to lower barriers to entry with quick implementation and lower barriers to exit with low switching costs. This is true for smaller applications (sometimes called “departmental” or “function-specific”), where you might use one for a year and then choose to switch to another provider.
But for large-scale, complex ERP systems, there are huge barriers to exit. Switching costs are enormous, and such projects are usually extremely disruptive. In such cases, SaaS customers are essentially locked-in with their software vendor, as the costs and disruptions to switching vendors can prove prohibitive.
Reduce TCO and prevent vendor TCC
The good news is that by remaining an “owner” instead of a “renter,” you don’t have to give up cost control to a vendor “landlord.” You can take steps to retain control and flexibility in your technology solution costs:
- Keep your perpetual licenses for enterprise software for as long as you can.
- Extend the life and value of your existing software systems.
- Pursue a composable ERP strategy by keeping core ERP functionality and innovating around the edges with best-of-breed applications that are easier to swap out when needed.
- Get a complimentary SAP Roadmap Cost Comparison from a Rimini Street expert.
Learn more:
- Vodcast: Understanding RISE Contracts – Beware of the Bundle
- Article: Gartner says hold onto your wallets as SAP’s cloud pitch trades control for convenience – The Register
