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Renting business applications may be all the rage, but it can also come back to bite companies.
John Edwards, CFO Magazine
September 1, 2007
Gartner analyst Robert Desisto recently predicted that by 2011 fully a quarter of new business software will be delivered as a service. That's a startling percentage given that the current generation of on-demand software has been around for just four to five years. But that's long enough for some to regard Desisto's forecast as a threat rather than a prediction.
You won't find a trendier concept in corporate computing these days than SaaS (Software-as-a-Service) — the enterprise application answer to the iPhone. The early success of Salesforce.com and NetSuite, among others, has inspired a host of recent entrants into the SaaS sector, including business-intelligence specialists LucidEra and OnDemandIQ and corporate performance management mainstay Adaptive Planning.
In fact, it's almost impossible to find a software vendor that isn't offering its product in some subscription-based model or another. That list includes some heavy hitters; antivirus specialist Symantec recently rolled out its own SaaS platform, and Microsoft plans to challenge Salesforce.com with its hosted Microsoft Dynamics CRM Live, scheduled for release later this year. Even longtime SaaS critic SAP is readying an on-demand suite of apps, dubbed A1S.
Yet despite its current caché, subscription-based software may not be right for every company. Many business managers believe they can do better with applications that run on in-house servers. Some of that thinking is born out of less-than-satisfactory experiences with hosted software.
Covalent Technologies, an open-source software developer in Walnut Creek, California, embraced SaaS, going live with a hosted CRM application in December 2000. Ryan Lindsay, chief operating officer at Covalent, says the company's previous CEO and CFO bought into the usual SaaS arguments — the approach lowers upfront capital costs, streamlines maintenance, and scales easily. But things didn't turn out exactly as planned. "There was a lot of expense and cost, and some painful learning curves," says Lindsay. "It failed pretty miserably for us."
Computer Says No
Indeed, hosted software is hardly a panacea for every corporate computing ill. While some SaaS purveyors claim the outsourced approach takes most of the hazards out of running enterprise software, that's a bit of a stretch. "SaaS doesn't eliminate IT risk," a recent Gartner study noted. "Rather, it changes the nature of the risk."
One of the biggest problems: in-house applications don't always play well with outsourced programs. At Covalent, there were serious problems getting existing apps to share data with the hosted CRM program. "There was always a disconnect, there was always a time delay," says Lindsay. Covalent has since switched to an onsite application from SugarCRM. "By bringing everything back in house," says Lindsay, "I was able to put everything under one nice, neat, clean environment."
Even when connectivity and compatibility are not at issue, many managers simply don't like the idea of relinquishing control of key applications. And with reason. In December 2005, Salesforce.com suffered an hours-long service outage, and has reportedly suffered several minor outages since then, as have some other SaaS providers.
Such blackouts tend to infuriate existing customers — and scare away potential ones. Moreover, in a recent filing with the Securities and Exchange Commission, on-demand ERP specialist NetSuite noted that the company does not maintain an offsite backup for either its own apps or customer data. This lack of offsite protection does not appear to be uncommon in the SaaS sector.
Don't SaaS Me
Then again, Desisto believes most hosted software providers do an excellent job of keeping their apps up and running. "What we're seeing now is more and more vendors committed to having a 99.7 or 99.9 percent uptime for reliability," he says. Rebecca Wettemann, vice president of research at Nucleus Research, reckons there's another factor motivating many businesses to take a pass on SaaS: "Their culture is to manage things internally."
The in-house approach does have its pluses. For starters, it means a business doesn't have to unwind connections to a hosted-software provider if that vendor is acquired or goes out of business. Given the track record of the software industry, neither scenario qualifies as a long shot.
Moreover, housing apps on company servers enables managers to customize programs to accommodate specific business needs. Many SaaS vendors offer little or no customization capabilities.
The resistance of on-demand providers to offering easy customization is a point that rankles Ryan Fernandez, CEO of Boon, a designer and manufacturer of children's products for national retail chains. "There will come a time when we want to customize pieces of our application and have a little more control over it," he says. "That would be difficult to do in a hosted environment." Fernandez says the ability to fine-tune applications was one of the main reasons the Tempe, Arizona, company turned to Exact Software, rather than a SaaS vendor, when purchasing its ERP application.
In fact, while SaaS vendors continue to target the SMB (small-to-midsize business) space, some observers wonder if they shouldn't stick to the M's rather than the S's. A recent survey by Nucleus found that 63 percent of companies with more than 1,000 employees have adopted some form of on-demand technology. By comparison, only 46 percent of businesses with fewer than 1,000 employees had signed on with a hosted-software service.
For small fast-growing businesses, the argument for on-demand software becomes less compelling. "As we scaled up our usage, the hosted software became much more expensive," Lindsay says, echoing a concern felt by many managers at smaller businesses. "I had the infrastructure here. There was no reason I just couldn't do it myself."
On-demand software is not without its selling points, or champions. Thousands of companies have signed up for subscription software, drawn by relatively low monthly costs (compared with maintenance fees) and quick deployments. One recent study found that 8 of the 10 fastest-growing software companies use the SaaS model.
Boon's Fernandez concedes that most SaaS clients enjoy unlimited access to software support representatives. That's important for businesses that don't see IT as a core competency. Fernandez credits his background working at Intel as a key factor in his decision to install Boon's ERP software on-site. "If somebody very technologically illiterate were trying to navigate these waters," he notes, "that would be very scary."
Still, managers at many smaller operations may do better purchasing software rather than renting it. When officials at The Salvation Army USA Western Territory headquarters were looking for technology to help manage networked desktop computers, they faced a choice between a SaaS program and an on-premise tool from Bomgar. CIO Clarence White says the financial benefits of the on-site tool and software more than outweighed the advantages of a hosted solution. "For a one-year solution, Bomgar was slightly cheaper," he says. "However, in year two, it's massively cheaper because we own it."
When it comes to software, ownership can be a good thing. "Even though we may amortize [on-site software] over a shorter period of time, it will work for us for many years," says Fernandez. "With a SaaS program, it's gone. You rent it and then you have nothing to show for it."
John Edwards is a frequent contributor to CFO.