SaaS: Red Light, Green Light

The benefits of software as a service make it a relatively easy sell--lower up-front investment, accessible from anywhere via the Internet, no more expending scarce in-house resources on glitchy enterprise software updates and patches. And it's no longer a binary choice between in-house or service, as there are hybrids within almost every category. Even big enterprise software vendors such as Microsoft and Oracle offer SaaS versions of the bloated applications you've been fighting with for years.

The challenge for IT now is threefold: Make line-of-business managers aware of the gotchas inherent in SaaS; update the review process to include SaaS-related functionality for every technology purchase; and expand the decision checklist to cover key requirements for SaaS initiatives that might not be readily apparent, such as expanded bandwidth needs and integration costs. In this article and our InformationWeek Special Report, at informationweek .com/1182/report_saas.htm, we'll help with all of these, share results of our March survey of 374 business technology professionals, and rate five popular SaaS categories on their current risk/reward ratios.

Let's start with your standard enterprise application review process. These vary by organization, but in our experience most combine feature, benefit, and cost decision points into a good old-fashioned checklist from hell. Take the time for a high-level definition and goal-setting exercise. The result will be a clear set of business pain points--until you define a problem, you can't solve it. Once you get your business-needs definition, move on to application implementation goals, general vendor requirements, must-have and nice-to-have features, and the big budget picture. We cover this in more detail in our Special Report.

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If acquiring the application on a service basis is on the table, there are a few SaaS-centric evaluation points that you neglect at your peril. First, integration tools and support. It's wrong to consider any SaaS app as a standalone item. At the top of your evaluation checklist should be the tools and kits the vendor provides for back-end system integration. One survey respondent recently abandoned a long-delayed CRM-to-Exchange calendar link after repeated attempts to get a reliable connection failed.Next, know what data analysis options the SaaS app provides. Canned reports and exports are nice, but most vendors charge extra for direct database access or customized reports. Another item to check is the vendor's ability to merge or consolidate data in the case of acquisition. One respondent to our reader survey cited data access as one of the biggest downfalls he's found regarding SaaS: "When hosted externally, databases are usually considered proprietary. If we want to analyze our own data it becomes a three-month project with huge costs."GET YOUR QUESTIONS READYMore than two-thirds of survey participants cite data security as a factor weighing against SaaS vendors. It's a slippery slope for IT: You're responsible for your internal data security, but how do you extend your requirements and mandates to your SaaS partner? A few simple lines of questioning will help clarify its capabilities. Consider:

Here's the bad news: Don't expect traditional vendors to be great at SaaS. Microsoft's recent announcement around its updated CRM SaaS offering, along with renewed efforts from Oracle and SAP, have put these industry giants back in the fray, but if history is any indication, size isn't a predictor of success. Remember Microsoft Business Web, Lotus Notes on demand, and Intel's ill-fated network monitoring service?

The big question is, will history repeat? Enterprise software companies must shift their revenue models from a larger license stream to a smaller, albeit more regular, influx of monthly revenue. What's certain, if a bit surprising, is that the question of whether pure-play SaaS vendors can survive is fading as an issue. Salesforce.com reported record revenue and profits for the second quarter in a row, while in February, Workday announced it would acquire Cape Clear, a move that should help it capture more European business.

No matter which route you take, don't skimp on due diligence, because the risk posed by a SaaS provider closing its doors is is bigger than that of the maker of a shrink-wrapped app failing. Look around your network--in all likelihood you'll find an in-house application that was created by a now-defunct vendor. It's painful whenever that happens, but when you own the software you can at least migrate gracefully.

Finally, when calculating cost, look ahead a few years; this will yield a more complete picture. Your baseline cost for any option should be a three-year total that accounts for licenses; monthly recurring charges; integration and setup costs; increased bandwidth; and ongoing support, both internal and consulting.Building a budget picture based on a three-year total will deliver a more accurate ROI calculation that's better aligned with your productivity and business goals. Consider expanding your initial integration costs to assume some additional development of back-end links in years two and three. As the system grows, often organizations find new ways to connect information that isn't reflected in the initial estimate.STOP OR GO?In light of the expanded decision points we've discussed, how enterprise-ready are today's most popular SaaS options? Here we'll discuss two fairly well established enterprise apps. For coverage of online data backup, spam and e-mail virus control, and network monitoring, click over to our Special Report.

Sales Force Automation, CRMMajor Players: Microsoft, NetSuite, Oracle, RightNow Technologies, Salesforce.com

Yes, that's a yellow light. One of the most popular SaaS applications, all things related to automating the sales process, seems like a perfect place to test the concept. Sales forces tend to be far flung and not very disciplined at following a standardized method of sales information management. Sage, Salesforce, SAP, and a host of other well-funded operations have been preaching the benefits of outsourced sales processes. However, implementing CRM is never easy, despite the maturity of this category. Gartner reports that 65% of enterprises will fail to effectively align their organizations with targeted customer and financial outcomes. Why? Because CRM requires changing and standardizing the most nebulous part of most companies--the sales team.

When you're talking budget, this challenge plays in favor of SaaS vendors. The lower up-front investment in a hosted system lessens the cost of failure. Plus, the template-driven style of most hosted apps can help you work through the development process more quickly. This doesn't mean the project will fly, of course, but it may make a failed SaaS project less painful.

There are multiple profitable CRM vendors with ample cash and long track records. There has been some consolidation--for example, RightNow's acquisition of SalesNet--but these services have been in production for several years. Tools, data security, and customization options vary, but most have a well-developed base set of functionality.

You'll need to dig in with the vendor on the bandwidth impact at the home office. Linking back-end customer data with your sales force is a critical task that will impact traffic to your internal data center.

Payroll And ExpensesMajor Players: ADP, MasterCard, Paychex, Workday

Nearly one in three respondents to our InformationWeek reader survey uses a SaaS vendor for payroll processing, and most payroll processing vendors are steadily migrating away from internal applications to a hosted model. The major vendors are well-known and have solid track records. All have extended their offerings from simple payroll to time tracking, screening services, and HR services.

While most companies can easily move their basic payroll and time-reporting functions to SaaS, here's a cautionary note: This segment lags in support and development of back-end integration tools and kits for exchanging data. A large education client we spoke with had success with basic payroll and time tracking but scrapped plans for SaaS-controlled performance reviews, candidate screening, and additional HR tools because of the high cost of back-end data integration.

Michael Healey is CTO of GreenPages Technology Solutions, a national IT solutions provider. Write to him at [email protected].

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