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Why buy HR applications when you can rent them?
Megan Santosus, CFO Magazine
February 15, 2006
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.
Getting a handle on administrative tasks can lead to strategic gains as well. Mike Metivier, HR director at athletic apparel maker Puma North America in Westford, Massachusetts, embraced the on-demand model to do more with less. At the start of 2004, with a corporate HR staff of four, the rapidly growing company wanted to provide its then 800 employees with Web-based benefits-administration systems so they could perform a variety of self-service functions such as changing their deductions, checking leave balances, and requesting vacation time. "It sounds minor, but it was really huge for us as a department to automate those things," Metivier says. The company turned to on-demand software from Employease, in part because it could implement the system in only four months.
With Puma employees now handling their own benefits-related changes and updates, Metivier and his HR department have more time to devote to competitive issues, which comes in handy now that Puma has grown to 1,800 employees. The team is now focused on training, succession planning, and bonus programs in an effort to recruit and hire better candidates and reduce turnover. Puma pockets savings of about $90,000 per year now that it relies less on headhunters to find qualified prospects, and Metivier expects to be able to measure other benefits soon.
Similarly, on-demand software helped Pep Boys automate its succession-planning process. "Succession planning wasn't new to us," says Liviu Dedes, director of training and organizational development at the nationwide chain of auto parts and services stores. "But on-demand software gave us a cost-effective way to move from a three-inch binder stuck in a closet to a fully automated system."
Using software from SuccessFactors Inc., the company is able to identify good internal candidates for regional management positions, reducing its external recruiting costs. More broadly, Pep Boys compiled a profile of all 20,000 employees, complete with career histories, performance reviews, certifications, and more. The software also generates "perceived next steps" for many employees, making it easier for the company to groom internal talent. "In just six months we saved enough on recruiting to pay for half the system," Dedes says. Not that it was all that expensive. While he won't say just how much it costs, he acknowledges that the system was able to meet Pep Boy's "significant price restraints." The auto-parts company also secured a fixed implementation price, which no other vendor was willing to provide.
Despite such accolades, the on-demand model still faces plenty of criticism. While the "tier one" data centers that most on-demand companies use to house their software provide ample security, some CIOs aren't comfortable letting sensitive employee data cross their firewalls.
Another issue is customization. While on-demand software is highly configurable (companies can add, delete, or modify fields within an application), writing new code or truly customizing an on-demand application is hard if not impossible. According to David Watkins, CEO of Wayland, Massachusetts-based Softscape Inc., which provides packaged and on-demand HRM software, it's not for everyone. "If you don't fit the box, you don't fit the model," he says.
And while ease of implementation and use are touted as advantages of on-demand software, Ron Hanscome, vice president of human-capital management marketing at Oracle Corp., warns that companies can't give short shrift to training and education. Hanscome says that businesses typically budget only two-thirds of what they need to spend on end-user training, change management, and internal marketing. "Regardless of the pricing model," Hanscome says, "you can't shortcut any of the basics if you want the system to succeed."
Still, Authoria's Loofbourrow says that the model gives HR departments a middle way between traditional software purchases and full-scale outsourcing. "HR can, in essence, outsource facets of its operation on an application-by-application basis," he says, gaining more flexibility and more options as to what vendors it relies on. For a department that has often had to go without, that may be very good news indeed.
Megan Santosus is a writer in Natick, Massachusetts, who specializes in technology and business.
Weighing the Benefits
Purchasing human-resources management software under the on-demand model is fast and easy but has limitations.