Costing Of

PGPWE 17 Authored by: Group 2

▪ Abhishek Banerjee - PGPWE17002
▪ Kumar Saurabh - EFPM09005
▪ Praduman Kumar - PGPWE 17036
▪ Vikas Anand Sharma - PGPWE 17058
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Contents
Objective 4
Software as a Service- Introduction to Project 4
Explanation of costs components and the flow of costs 4
Pricing Strategy 6
Basis of Costing 7
Final Pricing and Conclusion 11

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Objective
Software as a Service- Introduction to Project
The Project is aimed at understanding and describing typical costing of a Software as a Service (SaaS)
project. With the advent of cloud based software applications the businesses are moving from On –
Premise ( customer data center hosted ) to cloud based Software deployments.

Our Project provides a view of SaaS costing for a trade promotion management and optimization
software hosted on the MS Azure cloud for mainly CPG companies across the globe. The excel sheet
attached details the entire costing and pricing of the SaaS quote to be supplied to a client.

The main reasons for the same are listed below as :

1. End to End managed environments by vendors provide higher Service Levels. Typical service
levels range from 99.5% to 99.9% based on critical nature of the applications
2. Cost savings as the service providers are better able to manage the costs on software,
hardware and manpower efforts required for the deployment
3. Further cost savings by reducing need on onsite resources (mostly expensive resources in key
developed markets) and better talent utilization by service providers
4. Since the environments are completely under service provider control it leads to faster and
more effective support as information bottlenecks are removed and incident management
systems can directly interact with the deployment on real time basis.
5. Higher service level expectations have necessitated redundant environments but over larger
customer deployments on SaaS, the redundant resources are cross leveraged and used
judiciously sharing disaster recovery costs across multiple cost centers.

Explanation of costs components and the flow of costs

In this project we aim to discuss and elaborate a Software as a Service Costing for a typical application
in use across 60+ customers across APMEA, Western and Central Europe and North and South
America. As can be understood from the regions mentioned, this is a 24X7 platform with need for 3+1
shifts (8 hours per shift with 1 shift of buffer resources) of resources working across geos.

The Software as a service platform described in our project has four major cost drivers, namely:

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1. The Software- Built by 30+ years of R&D and maintained rigorously with Major upgrade every
36 months and minor releases released every 3 months.
2. The Cloud Infrastructure – The software is hosted on MS Azure cloud infrastructure as uses
the cloud for IaaS (Infrastructure as a Service). The costs vary per data center and the choice
of the right data center and right hardware specifications drives this costs.
3. Support and Security- The Support and Security teams are geo collocated in a hub and spoke
model with India acting as a hub and skeletal teams present in every geo to interface with
clients. They are responsible for maintaining the high (99.5%) service levels and uptimes
failing which upto 50% penalties ( and more in case of significant breach) can be imposed on
the company
4. Implementation Service- The onsite consulting team has experience levels starting from 10
years and ranging to 25 years. These are high paid resources and therefore their time is used
across multiple projects to spread costs. Only a percentage of their efforts is factored for each
project based on complexity and rigor required.

A simple flow diagram of the costs and their overall summary is provided below in a graphical
format for understanding

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Pricing Strategy
The pricing strategy used for a typical SaaS Project is target costing and the same takes
into consideration the below factors to arrive at the target price and margin:
a. Overall costs- Both CAPEX and OPEX
b. Target Prices
c. Target Margin
d. Sales and General Administration Expenses
e. Contingency
A typical Summary Sheet is pasted below to explain the pricing strategy. The final
workings are also pasted as an Annexure to this project report.

Target Prices

Total Costs

Overall Margins

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Basis of Costing
The 4 cost drivers and subcomponents of costs are provided below:
1. The Software: Apart from Software License cost, this cost also includes the annual
maintenance of software (20% of license cost) and the cost of pre built data managers or
canned reports. The annual maintenance cost percentage is factored based on the historical
efforts required to manage software incidents and support required per customers. The total
support team cost is then distributed across the customer base of 60+ customers and
therefore the overall AMC percentage is arrived at.
2. A further view of additional AMC support cost is provided below which is again an excerpt of
the sample file submitted.

3. Infrastructure cost: Infrastructure cost is decided based on size of setup required. We have
categorized three sizes namely Small ( Upto 25 Users), Medium (25-50 Users) and Large (50-
100 users). Infrastructure comprises of five costs namely Production, Sandpit, Testing,
Qlikview and Connection breaker. Additionally Ericom cost is also added to it.

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4. The infrastructure setups are decided based on inputs chosen by the client in terms of no. of
users, availability requirements, region of deployment, azure data center chosen, redundancy
and others as shown below:

5. Cost on Service & Security - Service and Security team is geographically located to interface
with clients and responsible for high service levels and uptimes .

Service Cost: Service Cost is considered as Set up cost and Annual Cost in three categories as
Small , Medium and Large again depending on input parameters provided in the input sheet

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 Set up cost has been taken into consideration based on -
1. Application ( Azure set up (days) , On demand test Set up (days), Application Support
(Hours/month ) , On demand infra (Hours/Month )
2. Cloud Operation Center Onboarding , VM Setup
Annual Cost has been taken into consideration based on - Production With DW ,
Sandpit , Test of Server, Qlik , Annual Link Cost .

Security Cost - Security cost is based on ongoing cost 50 VMs, No of resources and number of months
.

6. Implementation Cost: The implementation basis is divided into 4 categories; Fast Start-
Gold, Fast Start-Platinum, Custom-Medium and Custom-Complex. The cost for all these

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 categories differs for different regions. In the given sample, the implementation category is
“Custom-Medium” for the Americas region.

7. Further in the sheet it can be seen that for every input provided there is a
implementation revenue and cost which is calculated based on per hour rates,
time and effort required for implementation and Go Live and Hypercare support

days as shown below:

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Final Pricing and Conclusion
The final pricing approach is a target pricing approach and uses the above to find the margins against
a target price. These margins are arrived by following the steps as mentioned below:
A. Total Revenue from Target Prices of Software
B. + Total Revenue from Target Prices of Services
C. A+B = Total Revenue (R)
D. Total costs of Software License
E. Total costs of annual maintenance services
F. Total costs of implementation services
G. Total costs of support and security services
H. E+F+G+H= Total Operational Costs ( TOC)
I. Sales and General Admin Expenses @ 15% of Revenue (R)- SGA
J. Contingency @ 5 % Of Revenue (R)- Contingency
K. Overall Deal Margin= R-TOC-SGA-Contingency

We have used a target pricing of 1200 per user to arrive at the below conclusion for a specific project
example. The sheet attached will also provide details of the calculations shown below.

As can be observed from the sheet below, the target pricing based margin is overall above 30% which
is acceptable for most SaaS Projects in the ITeS Space. The further optimization of costs can be
undertaken to further increase the overall margins.

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 Total Revenue

Total Costs

Operating Margin

Deal Margin

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