Dr. Dobb's | Businesses Get Serious About Software As A Service

Businesses Get Serious About Software As A Service

InformationWeek Research finds companies using the delivery model for a wider variety of applications.

April 14, 2007
URL:http://drdobbs.com/web-development/businesses-get-serious-about-software-as/199001079


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If you still consider software as a service a delivery model that makes sense only for sales force automation or small businesses, you're behind the times. Two out of three businesses are either buying or considering buying software via a subscription model, according to a recent InformationWeek Research survey.

That's put pressure on the big software vendors, prompting them to offer SaaS models or at least give lip service to the idea. Microsoft and SAP are among the companies developing more subscription offerings for customers, and Oracle president Charles Phillips is giving a presentation in New York this week on how its subscription software can lower customers' costs.

Phillips is preaching to the choir. InformationWeek found that 29% of the 250 business technology pros surveyed are using at least one licensed application that's hosted by a vendor and accessed over the Internet, typically for a monthly subscription fee. Thirty-five percent are planning to buy software that way or are considering it. And interest isn't just among small companies with minuscule IT budgets: 55% of respondents have annual revenue of more than $100 million, and a third have more than $1 billion in revenue.

Still, smaller businesses are big drivers of this approach. "SaaS is one of those technology delivery trends that will come from the bottom up; small and midsize companies will adopt it faster," says Ken Harris, CIO at Shaklee, a $500 million-a-year supplier of nutritional supplements, makeup, and other products. "Large companies will use integration and security as valid explanations not to do it," but those are solvable problems, he adds. The bigger issues are choosing the right vendors and having good service-level agreements in place, Harris says.

He should know. Before coming to Shaklee two years ago, Harris held CIO positions at Gap, Nike, and PepsiCo. "I have a much smaller budget and fewer people, but interestingly enough, I have the same breadth of application needs as I did at Gap or Pepsi," he says. "I still have to support financials and CRM, but as a midmarket CIO I have to find a lot of ways to cover the ground more cheaply, more efficiently, and quicker."

Shaklee began moving its IT infrastructure to a service-oriented architecture two years ago, and subscription software fits perfectly into that plan, Harris says. Shaklee had RightNow Technologies marketing and CRM software running within 120 days, spending in the six-figure range, he says. Similar projects at other companies where Harris was CIO cost millions of dollars and took 12 to 18 months using traditional CRM vendors. Shaklee has about 200 employees using the RightNow apps and plans to replace aging financial applications with those delivered in an SaaS model, he says.

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No Big Rush
Customer service and sales force automation are the leading application areas for subscription software, but more are coming into play. Among those surveyed who are subscribing or planning to subscribe to online software, more than one-third are using it for human resources or desktop applications. Nearly 30% are using it for e-mail, and more than 20% are using it for payroll and application development.

Yet some businesses are moving slowly and keeping SaaS limited to noncritical applications. MiPro Enterprises spent two years using Salesforce.com's sales force automation service before going further with SaaS. Two months ago, the 260-employee IT consulting, medical staffing, real estate management, and business brokering company subscribed to an HR software service from Workday, a startup founded by PeopleSoft co-founder David Duffield.


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By limiting its first try to Salesforce, there was little risk, says Jeff Micallef, a managing partner at the company's IT arm. "It wasn't going to shoot the company down if that model didn't work," he says. Similarly, should Workday's HR app go down, it wouldn't stop the business from running, Micallef says. MiPro plans to implement Workday's billing and general ledger applications when they become available later this year. The company estimates it saved $50,000 on hardware it didn't have to buy by using SaaS for HR and $100,000 on IT personnel who would have been needed to deploy and support software on-site. SaaS savings are letting the company invest elsewhere in the business, Micallef says. "Flexibility is important, too, as the business needs will change over time as well," he says.

Ease of deployment continues to be the leading reason businesses subscribe to online software, cited by 69% of respondents using SaaS. Just over half of respondents think on-demand software is more flexible and lets them keep up with changing business needs.

The Scary Side
Nearly a third of respondents say they're skeptical about SaaS. Security is cited most often as a concern--by 48% of respondents who don't have plans to use SaaS--while 40% question the reliability and uptime of hosted software. About a third are concerned about functionality, interoperability with legacy and other software, and even the cost of what's frequently described as a less expensive approach to software deployment.

SaaS users have some of the same doubts. Among those using or planning to use subscription apps, 87% cite security as a major concern. Just over 60% cite integrating their SaaS software with existing applications as a top problem, while 56% cite data security and 36% cite data control as challenges. A quarter say they're concerned about proving a return on investment for these apps.

Phase II: Integration


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Integration problems are why MiPro will wait until later this year to integrate its Workday HR apps with payroll and benefits services that it has outsourced to other companies, Micallef says. MiPro's HR employees currently have to enter payroll and benefits data in a few different places. Once the apps are integrated, they'll enter that data only once. To integrate the apps, MiPro programmers will have to write code to its SaaS vendors' open APIs or use SaaS vendors' code plug-ins. "We knew integration would be an effort, and because of that we phased our implementations in such a way that we'll deal with integration in phase two," he says. MiPro also is considering integrating Workday financial apps, when they become available, with its Salesforce apps. That would let Mipro enter new customer information once in Salesforce and have it flow into the Workday accounting system.

Integration challenges are likely the reason that among those using or planning to use SaaS, 29% consider themselves still in a test phase and 58% are limiting the number of apps they deploy--only 13% cite wide deployment across many applications.

But Shaklee's Harris doesn't think integration and security are the biggest problems. Integration is becoming a nonissue as more vendors support a service-oriented approach, he says, and security is more of a perceived than a tangible issue: Nontechnical executives worry that sensitive data is more at risk if it resides on another company's system, even though the good SaaS vendors typically have solid approaches to data protection.

Get Granular
The bigger issue, Harris says, is making sure a company has the service-level agreements in place with their SaaS vendors to ensure transaction response times, system availability, failover for disaster recovery, and response time to problems. Forty percent of respondents not planning to use SaaS have concerns about uptime and reliability. Businesses planning to use SaaS should negotiate such contracts to a granular level. If they agree to 99.8% system availability, the vendor gets a bonus if it goes above that level, but the business pays less if the vendor falls even a tenth of a percentage point below it.

That's the biggest responsibility of the SaaS vendor, Harris says. "Not everyone who hangs their shingle out as an SaaS vendor gets it," he says.

As early adopters are showing, SaaS is no longer a niche approach to software delivery. Security, reliability, and integration remain concerns, but not enough to outweigh the implementation and cost benefits for many. The true test will be whether companies can use SaaS effectively for business-critical applications.

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