Software as a Service

How far can the pay-as-you-go approach take you? Proponents say the road less traveled is about to become jammed.

Estimates of savings from SaaS vary widely. Salesforce.com’s Robinson claims a hosted solution can be 80 or even 90 percent cheaper than a traditionally licensed software package. But analysts warn that initial cost advantages can diminish over time as monthly subscription fees pile up. That’s one reason Rebecca Wettemann, vice president of research at Nucleus Research, emphasizes that subscribers must continue to monitor hosted applications to ensure that they are optimized for changing corporate needs. “Don’t just assume that it’s better because it’s cheaper up front, and that it doesn’t have to be evaluated and managed on an ongoing basis.”

But even with those caveats it’s hard to deny that up-front savings can be substantial. The cost of implementing conventional enterprise software is typically four to five times the cost of the original license, says analyst Phil Wainewright of Summit Strategies. So even when the cost of a license and a two-year on-demand contract are equal, the SaaS approach does appear to be the large bargain that Robinson and others claim it to be. Little wonder then that SaaS vendors are extremely aggressive in touting the superior ROI of their services. Indeed, Wettemann reported that a Nucleus Research study found that just 40 to 50 percent of customers with licensed CRM applications achieved positive ROI. By contrast, 82 percent of companies using hosted CRM saw positive returns.

But the SaaS model does face some major hurdles — technology, for one. As Andy Stern, CEO of USi, explains, software written expressly for the Web has thus far appealed chiefly to small and midsize businesses. “Today, most of the Net-native products aren’t fully capable enough for a billion-dollar company,” he says, adding that they tend to lack the rich feature sets and customization capabilities that large enterprise customers often require. They can also be difficult or impossible to integrate with other applications and to modify as internal business processes change. And the programs aren’t dubbed “Net-native” for nothing: while the Internet is a very low-cost way to provide access and essentially share one program among many customers, it also creates a host of security concerns. “This is an issue for us,” says Kim Perdikou, CIO at Juniper Networks, which does subscribe to some SaaS services. “I’m concerned about the security of customer and company data, that it not be copied or interfered with or compromised in any way” (see “A Prescription for Subscription,” at the end of this story).

Right for Everyone?

David Brooks, director of CRM at Magma Design, an electronics design automation firm and Salesforce.com customer, says that “there was some concern initially that security would be an issue.” But confidence in its own IT staff combined with the belief that Salesforce.com has plenty of incentive to address security issues (“If they had a breach, they’d probably go out of business,” Brooks says) assuaged the company. As for the ability to customize the program, Brooks adds, “Salesforce.com gives us up to 95 percent of what we want to do, and I’ll trade off the last 5 percent of customization capability to be able to sit back and relax on weekends when they do the upgrades.”

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