Thursday, September 23, 2021

What’s Right for You? An ASP Reality Check

For Swagelok Co., the decision to purchase human-resources software as a

service demanded a great deal of discussion and investigation.

”Our company is privately held and very conservative about keeping

company data close to the vest,” says Bruce Battista, HR information

systems manager at the Cleveland-based manufacturer of fluid system

components. ”We had always done payroll in-house… In a company with

3,000, only two people knew everybody’s salaries.”

Nevertheless, after performing its due diligence, Swagelok opted for one

of the fast-growing trends in IT: purchasing software as a service

(SaaS), also known as the application service provider (ASP) model. The

company traded in its VAX-powered legacy HR application for a hosted

version of Ultimate Software Group Inc.’s Ultipro.

More and more companies are dumping traditional perpetual software

licenses for hosted applications purchased on a subscription or

pay-per-use basis. The benefits of SaaS can be persuasive, starting with

its lower up-front cost. The hosted model also makes powerful

applications available to smaller businesses that couldn’t otherwise

afford them. Upgrades also are less of a headache.

However, using an ASP brings new challenges, as well.

It means ceding control of critical company data to a third party. That

kind of move demands stringent service-level agreements to ensure the

privacy and security of that data, and in many industries there are tough

regulatory hurdles. Moreover, companies struggle with the challenge of

integrating SaaS applications with existing legacy software.

Rent vs. Buy

While a traditional license for serious applications, such as customer

relationship management (CRM) and enterprise resource planning (ERP), can

easily cost hundreds of thousands of dollars, hosted versions of the same

apps typically cost $50 to $100 per user per month.

For many small- to mid-sized companies, the mere fact that these

applications are within reach is a major victory. SaaS brings big-time

CRM capabilities into the price range of a vast new group of potential

buyers.

And don’t think the vendors are unaware of the new markets.

”The service model provides a constant annuity revenue stream, moving

away from the spiked quarterly model” that prevails with traditional

software sales, says Fred Hoch, vice-president of software programs at

the Software & Information Industry Association (SIIA). ”Also, [SaaS]

changes vendors’ relationship with the customer — and vendors are in

need of better customer relationships.”

”All the big vendors have seen this confluence of trends,” agrees IDC

analyst Dan Kusnetzky — especially, he notes, the prediction that SaaS

will soon account for a much larger percentage of overall

business-software sales. They are responding by offering attractive

hosted rates.

Swagelok’s experience confirms this. Battista says when the company

compared traditional licensing fees with SaaS costs for the same

applications, ”it was clear from the pricing structure that they were

steering you in that [hosted] direction.”

Upgrades

Swagelok has yet to go through an upgrade cycle with Ultimate Software,

but for many businesses, shifting the upgrade burden to the vendor is one

of the primary appeals of SaaS. With this model, the vendor typically

offers a heads-up when it is adding new functionality (which may be

monthly, quarterly, yearly or at irregular intervals — check with

prospective vendors).

A month or so before an upgrade is released, the application’s splash

screen notifies end users of the coming change. Most IT managers

reinforce this message in a global e-mail to make sure users aren’t

caught by surprise. The upgrade itself is usually performed over a

weekend, and when users hit the office Monday morning, voila — new

functionality.

Many IT groups find this method of upgrading a welcome relief, but Summit

Strategies analyst Tom Kucharvy points out that it does reduce your

control over the process. Many end users are easily upset ”by even a

small change in the user interface or functionality” of their favorite

applications, Kucharvy says. IT managers should insist that their SaaS

vendor keep them in the loop on what changes are planned.

Greater Input

Many SaaS customers believe the new software provisioning model increases

the amount of control they exert. This is especially true of relatively

small software companies. According to Todd Whitley, vice-president of

online services at the American Lung Association, the non-profit ”has

given many suggestions on applications” to Kintera Inc., which offers a

suite of fund-raising and other applications on a hosted basis.

”Their willingness to listen is impressive,” Whitley adds. It’s not

unusual for the ALA to informally suggest improvements in functionality,

then see them reflected in the product after the next upgrade.

Open Questions

The SaaS phenomenon, while growing rapidly, remains immature — which

raises questions.

For example, there’s not yet a set of best practices regarding the

integration of a hosted application with legacy software. Some

enterprises handle this integration work in-house. Salesforce.com, one of

the biggest names in hosted CRM software, offers hooks aimed at making

its products easy to integrate with other vendors’ enterprise

applications. And there’s even a nascent industry of third-party

middleware services that integrate various SaaS offerings.

But for now, analysts say, most companies are tiptoeing around the

integration issue by focusing on applications that can stand alone.

The other characteristic of SaaS that requires close scrutiny is the fact

that it involves handing off critical proprietary and customer-related

data to a third party — a fact that sends shivers up the spines of both

CIOs and legal departments. It’s vital to ”ask a thousand questions”,

as Swagelok’s Battista puts it, about the ASP’s fiscal stability,

physical and data security, ability to meet any of your industry’s

privacy regulations, and so forth.

If you receive satisfactory answers to your own thousand questions, the

emerging SaaS trend may be an option for your company.

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