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From Dot-Com Bust to SaaS Strength

July 2, 2009
Related Topics: Corporate Culture, Human Resources Management Systems (HRMS/HRIS), Featured Article
The end of the dot-com boom was a crisis for Ultimate Software.

At that point, Ultimate was selling software in the traditional way: Customers would pay upfront for a license to use the software, and they’d typically pay about 20 percent of that license fee annually for maintenance and support. In 2000, new license sales dried up, says the firm’s chief executive, Scott Scherr.

From 2000 to 2004, Ultimate lost more than $45 million.

But for Scherr, sticking together meant not throwing any of his roughly 450 employees overboard to make earnings look better.

Instead, Ultimate raised tens of millions in additional financing. And beginning in 2000, it bit the bullet of switching to software as a service, also known as the on-demand model. Ultimate introduced an on-demand version of UltiPro in 2002.

The software-as-a-service model appeals to many customers because it reduces upfront payments. It also typically takes less time to get an on-demand application up and running for a company. And because the vendor runs the software on its own computers, coding bugs and upgrades are less of a headache for clients.

Still, it’s a difficult transition for vendors used to traditional license sales. Moving to the on-demand approach typically means quarterly revenue takes a dive, because the deals do not come with big upfront payments.

It also involves rebuilding applications so that many customers can access the same code over the Web. And it requires more of a service mentality than software companies historically have had, because clients are relying on the vendor every minute of the day and night.

Ultimate was a pioneer in making the shift to software as a service, says Jim Holincheck, analyst at research firm Gartner. And, Holincheck says, they did it fairly well.

“They really understand how that model works,” he says.

By 2004, more than half of Ultimate’s revenue was recurring, up from 17 percent in 2000. That figure grew to nearly 60 percent last year.

Earlier this year, the company stopped selling new licenses for its software altogether—though customers who want to run Ultimate’s software on their own computers can do so by paying for it on a subscription basis.

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