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