To SaaS or not to SaaS

There's no doubt on-demand applications represent a viable option for many businesses, particularly start-ups or smaller organizations that need to get new systems up and running quickly. But considerable debate wages on as to whether the on-demand model—also known as Software-as-a-Service (SaaS)—will ever be the predominant method of delivering enterprise applications.

By William Atkinson, contributing editor September 1, 2008

There’s no doubt on-demand applications represent a viable option for many businesses, particularly start-ups or smaller organizations that need to get new systems up and running quickly. But considerable debate wages on as to whether the on-demand model—also known as Software-as-a-Service (SaaS)—will ever be the predominant method of delivering enterprise applications.

“Realistically, customers want deployment options and deployment choices,” says Jim Shepherd, a senior VP with Boston-based AMR Research , who sees the SaaS model coexisting with the traditional on-premise software approach—often within the same company—for quite some time. In fact, Shepherd says, there aren’t enough SaaS applications on the market to drive on-premise solutions into extinction any time soon.

“People typically think they can go to any vendor and decide whether to deploy the software on a SaaS or an on-premise basis,” Shepherd says. “However, the vast majority of products are available only on-premise.”

As Shepherd notes, the ability to choose between SaaS and on-premise deployment models is becoming more important as companies find the circumstances under which they operate changing faster—and more often—than ever before.

GLI Pool Products is a case in point. The Youngstown, Ohio-based manufacturer of custom swimming pool products was spun off from a larger company that had an eight-person IT staff managing an aging mainframe-based ERP system.

A clear choice

“We kept the system because our employees were used to it,” says Jerome Foskey, IT project manager for GLI Pool Products. But when GLI’s much smaller IT staff was charged with maintaining the system, it became clear that a change was needed.

“We no longer had the support that we needed to do customization on the old system,” Foskey recalls. “We also needed to rebuild our Web site, and we needed a better accounting system.”

After considering another on-premise solution that would have required nearly as much day-to-day IT support as the old one, GLI turned to NetSuite , which offers an on-demand ERP solution primarily for medium-size enterprises.

“NetSuite provided about 85 percent of what we needed,” Foskey says, adding that the implementation was completed in less than 100 days, without any interruptions to GLI’s business.

Malin Huffman, a NetSuite senior product manager, argues that the SaaS solution will accommodate GLI’s business growth better than an on-premise package.

“One benefit of SaaS is that it allows small manufacturers to grow easily without a lot of additional on-premise IT infrastructure and cost,” Huffman says. “With our SaaS model, as you grow, you can add more licenses. You don’t need to add more hardware or hire more IT personnel.”

Huffman says NetSuite also designed its system to make customizations that allow companies like GLI to create unique business processes easier to accomplish.

“In addition, as we do upgrades, customers don’t have to do customizations over again. They seamlessly transition as we do the upgrades,” says Huffman.

SaaS-based PLM

Eric Larkin, cofounder and CTO of Arena Solutions , a SaaS-based product life-cycle management (PLM) software supplier, says companies that rely on SaaS solutions are assured of always being on the most recent version of a system, which allows them to continuously improve their business processes.

Infinera Corp. , a Sunnyvale, Calif.-based provider of digital optical networking systems to telecom carriers, began using the Arena package to manage its product data in 2003.

“We wanted a SaaS solution because we didn’t have to buy a site license for thousands of users,” states Dave Winn, IT manager. “We purchased the application for a small fee and then a per-user license. We wanted to do this as a way to keep variable costs low.”

Though Infinera has expanded from less than 200 employees to more than 1,000 since 2003, the SaaS-based PLM application still meets its needs.

“We had about 30 users when we started,” Winn says. “Now we have about 175.”

Pumping systems manufacturer Colfax Americas switched from a hosted enterprise solution to an on-premise model since each Colfax division executes unique business processes—a complex situation whereby the hosted model lacked the flexibility to accommodate multiple processes.

Winn says Arena has offered support in critical areas—such as integration with other business applications—to ensure the system could accommodate Infinera’s growth.

“SaaS made more sense for us [in 2003], and it still does,” Winn adds. “For us, the problems with an on-premise solution would be cost and maintenance.”

Winn does have one lingering concern about the SaaS model: security.

“The ‘secret sauce’ of how we make our product is on this system,” he says. “If it was ever infiltrated, we would be in trouble. In this era of hackers, we are interested in the ability to control the software to do what we need it to do within our firewall and security processes, rather than rely on a hosted system.”

A similar sentiment prompted Colfax Americas , a Richmond, Va.-based manufacturer of pumps and pumping systems, to move off a hosted system in favor of an on-premise solution. Both systems came from IFS , an ERP vendor that offers a hosted model for customers that request it, though it primarily sells its IFS Applications suite in on-premise model.

Multi-tenant terms

Some industry observers would not classify the IFS hosted option as a true on-demand SaaS solution because it is set up to serve only a single company. In industry vernacular, this is known as a single-tenant delivery model.

True SaaS solutions, according to the experts, operate in multi-tenant fashion, which means numerous companies are accessing a single system located in the vendor’s data center.

Colfax is rolling out the on-premise version of IFS Applications across its various divisions, with five divisions on the system now and two more in process. One reason for the shift to an on-premise solution is that each division operates some unique, and complex, business process, and Colfax management wasn’t confident that the hosted model would be flexible enough to accommodate all of those processes.

“We started out with ERP in a hosted environment because it was the right thing to do at the time,” says Jay Michael, a Colfax senior business analyst. “We were in a growth state and a transition state in terms of technology platforms. We completely revamped the entire IT department, and we didn’t have the internal database skills for an on-premise system.”

As Colfax’s growth-through-acquisition strategy transformed the company into an $800-million-a-year enterprise, an in-house ERP system made more sense.

“We are now at a size where we can justify having internal people to support it,” explains Michael. “There is no substitute for being able to poke around the servers and watch everything that is going on and have it all under your own control.”

A hybrid approach

The desire for deployment choices has some vendors offering both on-premise and SaaS solutions. One such vendor is QAD , which is known for supplying ERP solutions specifically to midsize manufacturers.

Doug Gilkey, QAD’s program manager for on-demand solutions, says few of the pure-play SaaS vendors offer any solutions for manufacturers. “More commonly,” Gilkey says, “we are seeing traditional on-premise software vendors broadening their application delivery model to deliver SaaS when it makes sense for their customers.”

That’s QAD’s approach when it comes to SaaS.

“We will not be a pure-play SaaS vendor,” Gilkey declares. “We sell our application as a service in a multi-tenant and single-tenant delivery model. We also sell our application as a service delivered in an on-premise model, where it makes sense.”

Enterprise software market leader SAP also offers SaaS solutions, partly as a way of dispelling the widespread belief that its applications only work well for very large companies.

“Most of our customers are deploying in-house applications, but the smaller end of the market is eager to have on-demand solutions,” says Vinay Iyer, VP of marketing for SAP CRM. “As such, we offer a hybrid solution—a middle-of-the-road approach.”

According to Iyer, smaller companies are shying away from on-premise solutions because they don’t want to create the IT departments—and the accompanying budgets—needed to support them. Conversely, he says, large companies have a lot of issues related to system performance and the complexity and security of data, which causes them to question the viability of the SaaS model.

“Smaller companies are more easily able to live with standardized software hosted by someone else,” Iyer continues. “These days, on-demand software is becoming easier to use and easier to customize. This is one reason for the uptick in the use of this software in small to medium-size companies.”

SaaS by company size

Some large companies do use SaaS solutions, but Iyer says that typically happens when one department needs a specific application that the IT department can’t support, or it’s a stand-alone application that doesn’t require integration with other systems in the company.

From a cost perspective, Iyer says SaaS solutions look attractive because customers pay only a monthly fee.

“Over time, though, the total cost pay becomes greater, because you pay perpetually,” says Iyer, adding tat with an on-premise solution, once you pay the higher up-front cost for installation, it becomes cheaper after four or five years. “It’s a minimal cost in maintenance to keep it running,” he says.

Iyer sees two hurdles before SaaS can gain acceptance among large companies.

“For on-demand systems to be more attractive to large companies, there needs to be common standards for data exchange between different applications,” he states. “If a company is using SAP for manufacturing and financial operations and a different on-demand solution for sales management, they can’t ‘talk to each other’ to exchange customer information, product information, pricing information, etc.”

The second hurdle is that SaaS solutions make up a small fraction of applications in the U.S., are even less common in Europe, and almost negligible in the rest of the world.

“For on-demand solutions to be readily acceptable, they must become ubiquitous around the globe,” Iyer contends.

In terms of who uses SaaS and who uses on-premise, QAD’s Gilkey believes it’s not so much a matter of industry or size, but rather a function of what is going on in a particular business or business unit.

“For example, we have customers above $1 billion using SaaS,” says Gilkey. “These companies want SaaS because they don’t want to build large IT organizations to support their businesses.”

For others still, it’s a combination of cost and a mitigation of risk factors.

“We are seeing more manufacturing companies starting to feel comfortable with an ERP application delivered in an on-demand model,” Gilkey concludes.

SaaS: Think before you subscribe

Companies often want a quick fix when it comes to automating business processes, making Software-as-a-Service (SaaS) an attractive option. Deployment direction is one of the most important decisions a company can make, so it’s essential to look beyond the marketing hype when planning a long-term technology strategy.

Before putting more advanced solutions aside—such as true Web-based applications—companies should know the hard facts about SaaS.

First and foremost, many SaaS business models involve acquiring applications and placing them behind a Web portal. This approach lets vendors offer numerous applications while avoiding the time and investment that Web-based software development demands. What SaaS vendors are really offering subscribers is Web-enabled software. Thus, SaaS subscribers must recognize that by opting for Web-enabled solutions, they are losing the robustness and functionality of Web-based software.

Fear of maintenance and back-up tasks is one reason some companies are willing to make this trade-off. However, smoother system administration has advanced along with technology progression. It’s now simpler than ever to maintain systems in-house. In addition, independent software consulting firms are available to perform these tasks at a reasonable cost.

One word of caution: Even in a SaaS environment, system maintenance is required, and SaaS vendors will pass these costs on to subscribers.

Adding up integration

Whether opting for Web-based software or a SaaS solution, implementation takes about a day, and there is no difference in training time. But there can be a big difference when it comes to integration.

Integrating Web-based software is generally more efficient and less costly than SaaS. Most Web-based software applications already are integrated; only integration with ERP and other systems is needed. Many SaaS vendors must integrate the selected applications behind their portals to meet each customer’s desired business process. Then the SaaS vendor must integrate with the subscriber’s in-house systems. Subscribers pay for both integration efforts.

Total cost of ownership is a key selling point used by SaaS vendors. What is left out of this equation is that ROI typically is achieved within 18 to 24 months of purchase. At month 19/25, the company pays annual maintenance fees, which add value to the acquisition in the form of upgrades, new functionality, software support, and more.

SaaS subscribers, via transaction, integration, or subscription fees—which, whether acknowledged or not, do include annual maintenance fees—will expend the equivalent of the system purchase price in 18 to 24 month. From month 19/25, they will continue to pay subscription fees that, as they mount, will equate to double and then triple the purchase price of a Web-based software system.

Companies will make a software investment either way—up front or over time. The real question is: What will the company possess after making this investment?

Talk the talk

SaaS vendors promote pay-as-you go business models as more economical because with transaction fees companies only pay for the services used. Manufacturers need to understand how the vendor defines transaction , as well as licensing provisions . Do transaction recipients and initiators each require a license? Companies must negotiate definitions carefully and be vigilant in identifying the terms that require definition in the SaaS agreement.

But perhaps the biggest issue of all is security. Hundreds, even thousands, of customers subscribe to the same SaaS vendor applications, including competitors in the same vertical. Is everyone on the same server? A company must be comfortable with the thought of its data residing on the same server as its competitors if it opts for the SaaS approach.

The other side of security issue involves access. What if a company can’t pay the SaaS subscription fee? Is it cut off immediately? What if the SaaS vendor raises fees substantially? Switching vendors leads to data-retrieval issues and new integration requirements. Even if the SaaS provider does regular backups on tapes or disks, subscribers do not possess an application to drive the data, and cannot mine the data without the application or knowledge of database structure. Companies often pay a hefty fee to the SaaS vendor to obtain their data in a usable format.

Companies also must consider Internet access. SaaS subscribers cannot use the applications without Internet service, so business comes to a screeching halt if service is interrupted. Conversely, companies that install Web-based software on a server are unaffected by Internet outages.

It’s important to determine whether a SaaS solution affords growth and enables a company to take ownership of its business processes. In the final analysis, these factors should drive technology acquisition regardless of the path taken.

Wayne Slossberg is VP of QuestaWeb, a Westfield, N.J.-based provider of Web-based global trade management and logistics solutions. QuestaWeb offers software for purchase, or a Software-as-a-Service model.