Software's Temperamental Star

Tom Kelly is a believer. The CFO and chief information officer of Kardia Health Systems has seen big savings from the technology known as "software as a service," or SaaS. Kelly has migrated nearly all of his company's traditional business applications to these Web-enabled solutions that are usually priced in a subscription model and typically cost $10 to $50 per user per month.

Kelly says the SaaS model helps him do more with less. As one example: "What we used to pay for five people's use of a traditional accounting software package now buys us not only financials but also dashboards, CRM, and e-commerce. There's just no comparison."

He loves being able to log on to the SaaS offering (from NetSuite) from anywhere, and welcomes the fact that the monthly price includes maintenance, support, and even hardware (on NetSuite's end). In fact, Kelly has now embraced SaaS offerings from other vendors, including Google, Salesforce.com, and Adaptive Planning.

But even an evangelist like Kelly admits that SaaS still has kinks to be worked out. "SaaS is growing so fast that you sometimes get salespeople who don't know what the product can and can't do, and what it can and can't be integrated with," he complains. "So they promise something that can't be delivered. That leaves a bad taste in your mouth."

More CFOs are finding themselves in Kelly's shoes. SaaS debuted a decade ago but has only recently become the software industry's shining star, goosed by tight capex budgets, frustrations with high software-maintenance fees, and the hype over "cloud computing," in which Internet services replace (or try to) traditional shrink-wrapped software.

SaaS offerings now account for 9% of the business-software market, and sales are growing at a 20% annual clip. Gartner predicts that by 2013 SaaS will command a 15% to 16% market share. Yet Gartner also says that only a minority of users expressed an interest in expanding their use of SaaS alternatives, and a small percentage (5%) planned to discontinue it, according to a survey conducted in December 2008.

Integration is the top source of dissatisfaction. "There has been a lot of concern around a large number of SaaS offerings coming out that don't have effective application programming interfaces" to facilitate connection to other programs, says Treb Ryan, CEO of OpSource, a provider of integration solutions to SaaS vendors.

Ryan says the good news is that this lack has created a booming market for third-party integration offerings, which have become more robust in the past several years. Vendors such as Boomi and Cast Iron can smooth over holes left by SaaS vendors.

Armed with an awareness of this pitfall, more clients are now pushing for flexible cost arrangements that compensate them for integration delays. Joe Zulich, senior business analyst at White-Rodgers, a division of Emerson Electric, oversaw a move to an accounts-payable SaaS offering from DataServ that took longer than expected. "You will probably spend more than you expect to on programming, so negotiate fees up front to allow for unforeseen changes," advises Zulich. "Work with a company that's very flexible and understands you're going to run into problems and won't nickel-and-dime you to death."

Your Costs May Vary
Although a huge part of the SaaS pitch is its cost-effectiveness, cost turns out to be the second most commonly cited source of dissatisfaction, according to Gartner. "People are realizing that all these promises of dramatically reduced expenses are not necessarily coming to fruition," says Gartner analyst Robert DeSisto. "Clearly it looks good in the first couple of years, because you don't have a big capex outlay, but in subsequent years CFOs find themselves asking, 'Where are the true savings? Where is the reduction in head count, in infrastructure?'"

To be sure, many companies do save money, especially small and midsize businesses with limited IT resources. Doug Menefee is CIO at Schumacher Group, a 750-person firm that provides emergency-department management services to hospitals. He had moved half of his applications to SaaS by the beginning of 2009 and saw a savings equivalent to the salaries of four full-time employees. He plans to migrate another 25% of his software to SaaS by the end of the year.

But Doug Tracy, CIO of auto- parts maker Dana Holdings, which has 22,500 employees, has had different results. "With SaaS you don't necessarily get better ROI, you just tend to get the solution faster," he says. "In some cases it can be a better ROI because the payback is quicker, but it's not necessarily a lower-cost solution."

Tracy is also cautious about data-integration issues and the lack of control over upgrades with SaaS solutions. "I'm less apt to be concerned about support for older applications," he says, "because problems have been patched and my staff can take it from there, so we're looking at canceling the support and maintenance on a lot of the old software. But if you go with a SaaS approach, that option isn't available to you, because the support is bundled in."

Fee Folly
SaaS pricing is another area where companies need to proceed carefully, because the models have changed over time and may not be as flexible as customers expect. In some cases, in fact, the model has swung completely around to mimic the traditional site license. For some customers that's fine. "We said we wanted to give every employee a license and we got a multi-year contract that we paid up front," says Schumacher's Menefee. "That gave us predictability on what our spend rate would be."

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LinkedIn Company Connections:

• Kardia Health Systems |
• NetSuite |
• Google |
• Salesforce.com |
• Adaptive Planning |
• OpSource |
• Boomi |
• Cast Iron |
• Emerson Electric |
• Gartner |
• Schumacher Group |
• Dana Holdings |
• WorkOasis |