In a new report, IDC Energy Insights addresses the utility industry's software capex vs opex issue head-on with a financial model to highlight the quantitative as well as the qualitative nuances around this issue. The utility industry's practice of providing a rate of return on capitalized investments provides a disincentive for the industry to invest in cloud solutions. IDC Energy Insights provides a financial model to demonstrate the capex versus opex effects of typical customer information systems (CIS) for a utility with one million customers, deployed as a software-as-a-service versus on premise. The new report, Business Strategy: Making the Case for SaaS in Utilities (Doc #EI258590), complements report Perspective: Cloud and the Capex Conundrum in the Utility Industry (Doc #EI251305) and explores the issues raised in the previous report in much deeper detail.

Among industries adopting the SaaS deployment model, the utility industry has been among the slowest. IDC Energy Insights warns that utilities and utility CIOs should not let what should be a technical decision turn into a capex/opex allocation funding decision. In an effort to highlight the issues in the utility industry, IDC Energy Insights takes the example of one of the most difficult system implementations that a utility can undertake — a customer information system (CIS) — to compare on-premise deployments with SaaS. As a result, the total cost of ownership (TCO) reveals some interesting insights for the capex/opex model in the utility industry.

Major findings from this report include:

  • A financial analysis of the TCO comparing on premise with SaaS for the second most complex business application at a utility shows that cloud has a substantial advantage over on premise at the right subscription price.
  • The hard-to-quantify benefits of SaaS (strategic agility, better use of resources and user adoption, continuous updates, and quicker time to value) will sway decision making in favor of the cloud.

According to IDC Energy Insights, IT vendors are putting their best development efforts and intelligence into cloud-based offerings. Increasingly, these offerings are coming with pre-integration to other cloud-based offerings. In the next five years, the utility industry will be faced with fewer and fewer attractive alternatives in on-premise offerings.

"Today's technology advancements are being developed in cloud applications first, and not necessarily in on-premise applications," said Jill Feblowitz, Vice President, IDC Energy Insights. "At a time when utilities need to evaluate and adopt current and emerging technologies more aggressively, regulators, shareholders, stakeholders, and ratepayers need to take a closer look at the true economic impact of the traditional capex/opex model to determine whether the numbers, in fact, make sense for all parties."

After careful evaluation, IDC Energy Insights found the decision to adopt the SaaS deployment model is not as simple as whether the cost gap between the SaaS solution and the on-premise version is greater than the rate of return that could be earned on the capitalization of the on-premise solution. The technical and financial merits of the SaaS model have been clearly demonstrated across industries. In the utility industry, however, there are nuances and complexities to the SaaS versus on-premise discussion. Utilities are waiting for the regulators to clarify. Regulators are waiting for utilities to make the business case. IDC recommends all parties need to take a more assertive approach to accommodating the innovation inherent in the cloud model for long-term success.