Software as a Service gears up for tough times

Would you choose a software as a service (SaaS) solution to run your entire business? Not many would, but Torstar Digital did, and the company has no regrets. Torstar Digital is the online advertising arm of Torstar Corp., publisher of The Toronto Star and owner of other media properties including romance novel publisher Harlequin Enterprises and online job search service Workopolis. Soon after it was spun off three years ago, the new entity began a search for integrated software that could manage core functions. While the parent would handle cost-side financials, Torstar Digital needed a solution for customer relationship management (CRM), sales force automation and revenue-side financials – mission critical stuff. The search team looked at nearly 40 possibilities, narrowing it finally to two. One was traditional licensed software that the company would host – Microsoft Corp’s Dynamics CRM integrated with GreatPlains accounting software. The other was NetSuite from California-based SaaS pioneer NetSuite Inc. It wasn’t quite as radical a decision as it might have been for a more mainstream business. Torstar Digital is after all a new media company and it was already using SaaS solutions – for online ad serving and web analytics. Still. “We weren’t necessarily looking for a software as a service solution,” says Jeff Sherman, the company’s chief financial officer. “We were just looking for the best solution.” SaaS may not always – or ever – be the best solution for your company. And consultants and analysts warn CIOs to carefully analyze pros and cons and total cost of ownership. But SaaS certainly deserves consideration, even by mid-size and large enterprises. “If you look at some of the list pricing from SaaS vendors, I don’t see why you wouldn’t at least invite them to the table,” says IDC research director Nigel Wallis. One reason: SaaS is perceived as new fangled and for that reason, by some, as suspect. In fact, it differs little from earlier models. A SaaS vendor is much the same as an application service provider (ASP). And how different is either from service bureaus of bygone mainframe days? Still, there remains confusion about what SaaS actually is. Some vendors that host applications designed as on-premise licensed software, and require the end customer to buy conventional licences, refer to their solutions as SaaS. They’re not, says Tim Hickernell, lead analyst at Info-Tech Research Group Inc. To be SaaS, Hickernell argues, the vendor must have architected the solution from the ground up to be “multi-tenanted” with multiple users and only virtual separation of tenants on servers. SaaS vendors deliver over the Internet and almost always charge per month per seat. Not every type of software functionality is available from SaaS vendors. CRM, human resources, payroll, billing and data storage solutions tend to predominate. Few credible enterprise-class ERP solutions have emerged, perhaps in part because of market resistance to the idea of outsourcing such vital functionality and storing data off site. Notwithstanding Torstar Digital’s decision. Pricing for a new economy Hickernell believes the economic downturn may push more CIOs into the arms of SaaS vendors. “A lot of our clients have received instructions to cut back on on-premise projects, or they’re under pressure generally to reduce IT costs,” he says. Because the SaaS pricing model moves software costs from capital to operations budgets, it could provide an attractive middle-ground option between doing nothing and undertaking a capital-intensive software implementation or development project. “When orders come to cut budget,” Hickernell points out, “no one looks at long-term amortization, just what you have to put in next year’s budget.” Whether the downturn actually increases activity or – more likely – merely offsets a net decrease in spending, SaaS has already gained considerable traction. According to an October Gartner Inc. report, worldwide SaaS revenue from enterprise applications will top $6.4 billion in 2008, up 27% from 2007. Gartner expects the market to more than double by 2012, reaching $14.8 billion. Canada lags other countries. According to data from research-firm International Data Corporation (IDC), it accounts for just 2.5% of the North American SaaS market. (In most IT product markets, it’s more like 6% to 7%.) Part of the reason is that SaaS vendors tend to be U.S.- or European-based and haven’t yet turned their attention to Canada, Wallis says. There are a few successful Canadian SaaS vendors, including FreshBooks, a billing, time tracking and expense management solution for small businesses, and Taleo, an HR solution. And the Canadian market is growing now as a percentage of the North American total. In some segments, such as CRM, it’s growing “fairly quickly,” Wallis says. But a whopping 70% of Canadian CIOs surveyed by IDC said they still prefer to acquire software under a traditional licence-fee-and-annual-maintenance pricing model rather than open source or SaaS. One concern with SaaS, CIOs told IDC, was the inability to predict exact costs, because when you add seats, costs go up. But for some companies, analysts point out, the ability to turn on additional seats on short notice is in fact a key benefit. “SaaS is a great option if you need to scale up or down very, very fast and instantly turn on seats as the business grows, or to handle seasonal peaks,” Hickernell notes. It means growing businesses no longer have to guess at how big or how fast they will grow to figure out what class of solution to buy. They can simply add, or subtract, seats as needed. While traction among enterprises is now growing, it was small-medium businesses that first saw value in the SaaS model. The appeal of simplification Another benefit that appeals particularly to small businesses: reduced IT management burden. You no longer need to manage application server and network infrastructure. All users need is an Internet-connected PC and browser to access the application and data stored on a Web server. The SaaS model simplifies software maintenance and upgrading in particular. This last was a critical consideration in Torstar Digital’s decision. “NetSuite versus Microsoft was less about functionality,” Sherman says, “than about flexibility and ease of upgrades.” GreatPlains reference customers told him they typically faced a major upgrade every three to five years that was almost like a complete reinstall. NetSuite, on the other hand, like most SaaS providers, publishes small changes continuously. When it does bring out a major upgrade, Sherman says, it’s virtually painless for users. “They come in the next morning and find the new version in place with a bunch of features they didn’t have before.” NetSuite is also a less complex solution, partly because it is SaaS. This is important, Sherman says, because complexity brings hidden, hard-to-predict costs. Just figuring out how to do things in a complex software environment is harder, so it takes longer. As Sherman notes, though, SaaS doesn’t actually eliminate software maintenance or other IT management costs – it only moves them from an IT management line item to an end user computing line item. Indeed, total cost of ownership with SaaS, when calculated over a long enough amortization period, is rarely if ever lower than for licensed, on-premise solutions. “It might be cheaper per year than on-premise,” Hickernell says. “But costs do eventually cross over. We’ve never seen that doesn’t ultimately become more expensive.” Under the first proposal NetSuite made to Torstar Digital, the SaaS solution, over three years, would have been “slightly” more expensive than the Microsoft on-premise solution, and “much” more expensive over five years. NetSuite eventually came back with a revised proposal that brought its TCO closer to Microsoft, and the company made the decision based on the other perceived advantages of the NetSuite model. If you’re considering a SaaS solution, calculating total cost of ownership is crucial, Hickernell says. Info-Tech has developed a methodology it uses to help clients with this. “But we don’t really care whose you use,” he says, “as long as you do it.” The object is not to talk yourself out of SaaS, but to calculate how long it will take to reach the inevitable break-even point at which it starts to become more expensive. If it’s far enough out – and what’s far enough will vary from company to company – SaaS probably makes sense, especially if the only other option is to do nothing, Hickernell says. And in some cases, as for Torstar Digital, it will make sense as a longer-term solution. There are trade-offs, of course. SaaS applications are almost invariably less customizable than on-premise licensed solutions. “SaaS probably works best if you avoid customizing as much as possible,” Wallis says. “The idea is that if you have 80% of the functionality, that’s good enough.” The ability to customize was a consideration at Torstar Digital. With the Microsoft solution, the company could eventually have met 100% of its functional requirements, Sherman says. “But it would take a lot of muscle on our part.” With a much smaller customization effort, it got about 95% to 97% of what it needed with NetSuite. “And up to now we haven’t been constrained at all ,” he says. This is still IT CIOs also need to understand that opting for a SaaS solution does not eliminate the need to perform basic IT functions and ensure good IT governance. “There’s a lot of demand from the mid-market and above,” Hickernell notes. “Oftentimes for divisional use and for wholly owned subsidiaries. And absolutely does make sense there. But you can’t get into thinking that the game changes so much you can stop doing the basic IT stuff.” Somebody still has to test the software and do the due diligence on the vendor, he points out. Somebody still has to think through process re-engineering and change management issues. And somebody still has to integrate the new solution with legacy systems. That said, some SaaS vendors do have professional services departments to which you can outsource. NetSuite implemented Torstar Digital’s system, for example. Some vendors provide help desk services. And the integration issues, while they don’t go away, won’t necessarily be any more onerous than with on-premise solutions. They were not at Torstar Digital, Sherman says. Some SaaS vendors – notably Microsoft with the new multi-tenant version of Dynamics CRM (introduced over a year after Torstar Digital’s decision) – are now selling through value added resellers (VARs) and system integrators that can provide integration services to smaller companies lacking IT resources. For small firms, using SaaS solutions may be their first experience with enterprise-class applications, and the vendor may in fact impose some IT disciplines for the first time – regularly backing up data and physically securing the data centre, for example. It’s one more benefit of SaaS. “Customers get these things whether they would know to include them or not,” Hickernell says. “And many firms may not be as willing to invest in them if they were doing it on their own.” Still, even those companies need to think about basic IT imperatives such as software testing, change management and business process engineering, he stresses. Most CIOs in enterprises, especially those suspicious of the concept to begin with, don’t need to be told this, of course. Or that they need to carefully analyze the downside risks associated with SaaS. Sherman and his team had a long list of concerns that they eventually whittled down to three – security, reliability and response time. In the end they were able to satisfy themselves on all three. Security and reliability concerns may, as Wallis and Hickernell suggest, be more perceived than real, but have to be addressed. Sherman demanded and got SAS 70 certification from NetSuite. SAS 70 (Statement on Auditing Standards No. 70) defines standards for assessing service organizations – including security and privacy of data. NetSuite, like most enterprise-class SaaS vendors, offers a service level agreement (SLA) that defines up-time requirements and specifies financial penalties for failing to meet them. It has never paid out, Sherman notes, and never expects to. He was also impressed that the company is completely transparent about uptime performance, reporting in detail on outages at its Web site. Torstar Digital was somewhat concerned that NetSuite had no hot site provision in its business continuity strategy, only a warm site, but waived concerns on the understanding that a hot site was on the company’s roadmap. “At the end of the day,” Sherman says, “we’ve had more outages from here to six blocks away than to NetSuite’s servers in California. In roughly two years, we’ve had one or two minor outages lasting minutes, not hours.” Response time is another valid concern, especially for organizations moving from client-server applications. Commands and queries now travel thousands of kilometers over the Internet and data must travel back the same route. The Torstar Digital team was reassured by what it heard from NetSuite reference customers. The difference in response time with most functions is probably sub second, Sherman says. “It’s not like you’re waiting 20 seconds for the screen to refresh.” SaaS in the enterprise may – may – be an idea whose time has come. That doesn’t mean it’s a no-brainer. But it raises some interesting questions about IT strategy that it wouldn’t hurt to revisit at this time. “If your system is working fine today, a bad economy is not the time to start changing it,” Wallis says. “But this may be the moment for some CIOs to take a leadership position and say, no, we don’t need to be the host for every application. What really matters is the best functionality.”

Software as a Service gears up for tough times

News | 12/17/2008 12:09 am EST

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