By Popular Demand

Growth comes at a price — and often it's a company's human-resources department that has to pay it. Consider Genmar Holdings Inc., a $1 billion maker of recreational boats sold under such brands as Wellcraft, Seaswirl, and Larson. A multiyear acquisition spree made it difficult for the company to obtain consolidated information at the corporate level. Even tallying its current number of employees proved elusive.

Yet David Mahler knew how many IT staffers he had: one.

So when talk turned to buying a new HR system, Mahler, the treasurer at Genmar sister company Jacobs Management Corp., which provides a range of administrative services to Genmar, knew it had to be easy to implement and even easier to run — and it had to cost very little money.

A few years ago, that wish list would have doomed the project. But today, HR departments find themselves in the unaccustomed position of actually driving a technology trend, toward the "software as a service" model. Often referred to as "on-demand" or "hosted" software, the idea is to pay for software on a subscription basis (say, per employee per month) and let the provider worry about actually running it. Clients access the applications via the Internet, but they don't own or support them.

Mahler opted for such a service from Ultimate Software. He says the new system provides an unprecedented level of access to consolidated payroll and benefits information about Genmar's 4,000 employees. And since going live with the system in January 2004, Jacobs Management has achieved an ROI of about 75 percent, Mahler estimates. The software has also paid off in unexpected ways. By providing its 401(k) plan administrator with a single-source feed from payroll — which wasn't possible before — Genmar's cost to administer retirement benefits alone has been reduced by $200,000 annually. "That's real money," the treasurer boasts. He adds that another major advantage is that Genmar's 10 locations can all access the system seamlessly.

"There's a significant economic argument in favor of software as a service," says Frank Scavo, president of Computer Economics Inc., an IT research firm in Irvine, California. "On-demand applications are pay-as-you-go and generally require much less cost up front." With no IT staff to hire, no hardware to buy, and no up-front capital investment, human resource management (HRM) software becomes viable for even the smallest companies. Michael Seckler, co-founder and vice president of business development at Employease Inc., an on-demand HRM vendor based in Norcross, Georgia, says the cost to his company's 1,000 customers averages $4 to $8 per employee per month.

Speed is another advantage: companies can access an on-demand HR system online within 60 to 90 days, rather than the 12 to 18 months it can take to get a packaged system up and running, according to Jim Holincheck, vice president of research at IT research firm Gartner Inc.

Vendors love the software-as-a-service model because the recurring revenue derived from monthly subscriptions provides predictable income, and they can more easily manage product upgrades because all customers run off of the same version of the software.

Leading, Not Lagging
The model, which isn't new, wasn't always such a hit. Known during the dot-com boom as the application-service-provider model, it got a black eye after many providers collapsed with the technology bust. The perception of risk that followed, while perhaps unfair, is just beginning to abate as pioneering vendors, including Salesforce.com, prove that the concept has staying power.

HR, for once, leads rather than lags a technological advancement. "It's not accidental that HR has emerged as a hotbed for this model," says Tod Loofbourrow, CEO of Authoria Inc., a talent-management firm in Waltham, Massachusetts. "HR has always had a hard time getting money for systems or ongoing IT support." Often last in line for IT projects, the on-demand model enables HR departments to pay for new systems out of their own operating budgets, rather than waiting for a capital budget allocation.

While the degree of on-demand adoption by HR departments is hard to quantify, the level of activity in the vendor community suggests a vigorous market. In a 2005 IDC survey of more than 500 IT professionals, three of the top areas for implementing on-demand software were payroll, workforce management, and general HR administration. "The number of on-demand providers is increasing, as is the level of M&A activity in the HR software space," says Erin Traudt, a research analyst in the software-as-a-service practice at IDC, a market research firm in Framingham, Massachusetts. Traditional HR vendors, led by Oracle/PeopleSoft, are moving into the software-as-a-service arena as well. Across the market, vendors, such as Ultimate, are shifting their model away from traditional premise-based software to the on-demand model.

Jason Corsello, program manager of the business and IT services practice at Yankee Group Research Inc., a consulting company based in Boston, says that on-demand appeals particularly to two areas within the HR space. "Basic functions such as payroll and benefits administration can be done more efficiently with on-demand software," he says. "Then there are the talent-management-type applications such as recruiting, performance management, and compensation analysis that can also benefit." The latter may provide an affordable way for HR departments to transcend their traditional administrative status and become more strategic, Corsello says. In an informal survey among Yankee Group clients, 75 percent said they plan to deploy on-demand talent-management software, up from 60 percent last year.

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