What's Right for You? An ASP Reality Check

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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.''


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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