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Software as Service

January 20, 2006
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The story below about software as a service, written in 2006, still holds mostly true. Delivering human resources and other business applications over the Web has continued to grow in popularity for reasons including ease of installation, lower upfront costs and rapid improvements to the code. But there have been changes worth noting. For one, software as a service has taken on another name. SaaS now also is frequently called "the cloud"—referring to the notion that applications and data reside far away from an organization's physical facilities. Second, software titans Oracle Corp. and SAP have taken giants strides into software-as-a-service in the past six years. Oracle developed a new line of applications—dubbed Fusion—that is designed to run as a cloud application. And earlier this year, Oracle acquired Taleo Corp., a talent management application vendor that has focused on the software-as-a-service model. That acquisition followed on the heels of SAP buying cloud talent management software vendor SuccessFactors Inc.

Still, software as a service is not a panacea. As mentioned in the article below, installing software—quickly or not—is not an answer for inefficient or misguided business methods. In fact, the shift to the cloud may be exacerbating the problem. That's because traditional installations of business software on customer computers often prompt extensive conversations about organizational processes and their value. With SaaS, vendors and customers may be so focused on fast implementations that they miss the chance to have important discussions about business process improvement.


The phrase "enterprise software" leaves a sour taste in the mouths of many business leaders. For years, business applications for workforce management and other tasks typically have meant costly upfront licenses, lengthy installations by pricey consultants and ongoing maintenance issues.

But there's a newer flavor of software delivery that promises customers a much sweeter experience. So-called "software as a service" involves companies accessing standard business applications over the Internet.

Advocates tout this method as having lower upfront costs and fewer hassles related to managing computer systems. Another benefit, backers say, is rapid changes in features. Frequent upgrades allow businesses to tackle new challenges--say, a tightening talent market--with greater agility, notes Kathy Barton, senior vice president of marketing and product management at Raleigh, North Carolina-based Peopleclick.

Barton, whose firm offers recruitment software over the Web, says the key is that a single software code base can be used by many customers. Up to now, she says, organizations typically have run their own copy of the software and even customized that code, meaning lengthy testing might be required before installing an upgrade. "We can add changes to the system and make those available to our clients much more quickly than you could with the license model," Barton says.

Software as a service, also referred to as "on-demand" software, is growing in popularity and recently made headlines when tech icon Bill Gates acknowledged its importance. In the world of workforce management, on-demand software poses a threat to dominant traditional vendors Oracle and SAP. But those big guns are developing strategies involving software as a service, and the smaller vendors touting the approach face some hurdles. Among them: the relative lack of flexibility in software that is rented to many clients at once and a recognition that poor customer service can ruin a vendor in short order.

Licensed software over?

For years, organizations have installed most of the business management software they use on their own computers. They typically pay software vendors for a license to use the program, face a one-time cost for installing the software and write another check for yearly fees to maintain it, which can include fixing bugs that crop up.

Altogether, large companies can spend millions of dollars to run HR and other applications in this way. In many cases, however, these massive projects have failed to provide expected results. Stories abound of troubles such as systems that fail to work properly and cost overruns.

With the widespread emergence of the Internet about a decade ago, another way to deliver software became possible: The code and the computers that run it could reside elsewhere, with businesses using the Web to input data such as the health benefit choices an employee makes during open enrollment.


"Multitenancy" is the reason SuccessFactors can upgrade its software each month, similar to the way Google or Yahoo regularly offer users new options.

--Rob Bernshteyn, SuccessFactors


Overall, the adoption of software provided over the Web had been underwhelming until the past few years. Things began to change with the success of companies like Salesforce.com, which offers a product for tracking clients, and Google, which has introduced Web-based services such as e-mail and instant messaging and has emerged as a rival to old-guard software giant Microsoft.

In early November, Microsoft chairman Bill Gates effectively endorsed the shift to software as a service by previewing two Internet-based services, including Office Live, which aims to help small companies do business online.

Roughly a third of the $3 billion annual market in so-called human capital management software is currently delivered over the Web, estimates Paul Ha­mer­man, an analyst at research firm Forrester. That ratio could rise to 50 percent by 2010, he predicts. "It's clearly growing," Hamerman says. "It's become a proven, mainstream model."

On-demand software has evolved over time. In the late 1990s, it was common for a vendor to offer to host a remote copy of an application dedicated to one client--a practice known as the "application service provider" model. Peopleclick, for example, offered this kind of recruiting software from 1997 to 2003. That's when it switched to what's generally called software as a service--meaning a single instance of the code runs for more than one customer.

This feature, dubbed "multitenancy," also is at the heart of software offered by San Mateo, California-based SuccessFactors, which provides a range of workforce management applications over the Web. Multitenancy is the reason SuccessFactors can upgrade its software each month, says Rob Bernshteyn, the company's senior director of product marketing. He likens the frequent enhancements to the way Google or Yahoo regularly offers vast numbers of users new options, such as making phone calls over the Internet. Customers "can take the upgrade or not," he says.


Software as a service allows for a dramatic price cut compared with the licensed model. Licensed enterprise software never paid for itself.

--Michael Mullarkey, Workstream


Client Quintiles Transnational likes the way SuccessFactors upgrades its software so often, using customer input. Quintiles--which is based in Durham, North Carolina, and offers clinical research, sales and other services to pharmaceutical and health care companies--signed a contract with Success Factors in 2004 for performance-management and goal-setting software. To meet European data privacy requirements, Quintiles needed an option to limit the ability of managers to view the personnel data of lower-level employees. SuccessFactors fulfilled the request in about two months, says Tim Toterhi, director of global learning and development at Quintiles.

Quintiles pays a monthly fee to access SuccessFactors software for some 6,000 employees, a number that is expected to grow to more than 15,000. Toterhi says the lack of upfront license fees was one of the reasons Quintiles signed its three-year contract--a typical length for software-as-a-service agreements. Toterhi declines to state the exact cost of the service, but says that "it was the best bang for the buck."

Other vendors pitching HR software as a service include Wayne, Pennsylvania-based Kenexa, San Francisco-based Taleo, Orlando, Florida-based Workstream and Waltham, Massachusetts-based Authoria.

The heavyweights of the field also are paying attention to the software-as-a-service trend. Oracle, for example, offers to provide hosted HR software, but clients still pay for a license to the application. Another way the Redwood City, California-based giant is tapping the trend to take software management off customers' hands is by working with an outsourcer. Oracle says its HR software is used by Gevity to serve more than 8,000 small and medium-size businesses.

Oracle archrival SAP does not directly offer human capital management software over the Web. It also has an outsourcing strategy: SAP has arranged for its HR software to be used by several major outsourcers, including ADP and Convergys.

Smaller vendors argue that SAP and Oracle will have a hard time moving fully to a software subscription model, suggesting that those companies' quarterly revenues would take a big hit without new license sales. Forrester's Hamerman, though, expects both giants to come out with additional software-as-a-service products in the coming year.


Using software over the Internet raises red flags. We said, 'We're going to have performance reviews online.

Can we do that?'"

--Libby Sartain, Yahoo


Price points

On-demand software deals often are priced based on the number of people using the application, and may involve some initial setup fees. Workstream, for example, says companies signing a three-year contract to access its complete line of applications for 10,000 employees can expect to pay $1 per employee per month. Combined with implementation costs and a monthly hosting fee, the total cost is about $3 to $4 per employee per month.

Michael Mullarkey, Workstream's chief executive, says software as a service allows for a dramatic price cut compared with the licensed model. A typical large organization might spend $2 million on a software license, another $4 million to get it up and running, and then another $1.2 million over three years to maintain it. Compared with that price tag of about $7 million, similar software over three years from Workstream would cost a business about $1 million, Mullarkey estimates.

Licensed enterprise software "never paid for itself," Mullarkey says. "The return on investment made wasn't there."

Forrester's Hamerman, however, says software over the Web isn't necessarily a better bargain. Renting an HR application may avoid a license fee and save on computer hardware and software maintenance, but big companies especially may end up saving money with the traditional model, he says.

That's because per-employee pricing can add up when you have tens of thousands of employees using benefits management software or other applications, he argues.

Using software over the Internet raises other potential red flags. Yahoo, for example, questioned whether it could zap employee performance data across the Internet before it signed up with SuccessFactors in late 2005. "The concern was security," recalls Libby Sartain, Yahoo's senior vice president for human resources. "We said, 'We're going to have performance reviews online. Can we do that?' " Yahoo had specialists dubbed "the paranoids" check out SuccessFactors' security safeguards, which include data encryption.

Yahoo has arranged to have 10,000 employees access SuccessFactors' software for performance management and goal setting. Yahoo also is looking into tapping the vendor for its succession-planning software.

Even if companies can feel comfortable with sensitive data sent over the Internet, they may find their service pro­vider doesn't give them exactly the features they'd like. SuccessFactors, for example, offers 15 colors for its Web interface, and companies have to choose one that's closest to the hue of their corporate portal. Nor does SuccessFactors offer to tailor its software for particular customers who may want a highly specific feature.


"It is very difficult to deliver best-in-class functionality and best-in-class service. We decided, 'Hey, look, let's go with the best service providers.'"

--Mark Lange, SAP America


Bernshteyn counters that companies can "overcustomize" their software, and says SuccessFactors' product allows for a large amount of variability on key business matters including job titles.

The more streamlined approach, he says, allows the vendor to keep costs down and frequently churn out upgrades valuable to most customers.

At their service?

Another potential obstacle to a satisfying software-as-a-service experience is embedded in its very name: customer service. Most software companies aren't accustomed to emphasizing customer support services, says Kevin Dobbs, senior vice president for marketing and business development at Workstream, which offers a range of HR applications over the Web.

But shoddy support spells big trouble to providers that offer their clients contracts as short as one year in duration, he says. "If they don't renew, the model blows up," he says.

Mark Lange, vice president of human capital management at SAP America, says the support challenge is precisely why SAP decided to forge partnerships with outsourcing companies steeped in the service field, like Affiliated Computer Services. "It is very difficult to deliver best-in-class functionality and best-in-class service," Lange says. "We decided, 'Hey, look, let's go with the best service providers.' "

In addition to claiming lower prices and faster upgrades, on-demand pro­viders also say they can get started quicker--meshing their service with a company's internal systems in a few months rather than the years that on-premise software implementations can take.

Even if the on-demand approach goes down easier than licensed software, some companies still might not be completely happy with what they're served.

A chief reason given for failures in traditional software installations is customers' unwillingness to change corporate habits to match the "best practices" coded into the application. To make on-demand software succeed, organizations will probably still have to tackle tasks like improving business processes and training employees.

No matter what flavor of enterprise software a company chooses, that part of the recipe hasn't changed.

Ed Frauenheim is Workforce Management's senior editor. Comment below or email editors@workforce.com.

Workforce Management, January 16, 2006, p. 42-45 -- Subscribe Now!

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