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.

Fabrice Cancre, CEO of U.S. operations at R/D Tech, a producer of test equipment used by many industries for defect analysis, says that one way around the integration problem is to subscribe to SaaS software that is already integrated. His company is a client of NetSuite, whose product suite combines finance, CRM, inventory management, and other components. Cancre noted that he has 125 users on the software system but “zero IT staff supporting it. This gives a small but fast-growing company like ours a chance to use software that we otherwise couldn’t afford. Even a second-tier ERP package would cost half a million dollars just to get started.”

One key question is whether large customers will ultimately side with Cancre’s view and decide that a monthly subscription model makes more sense. Siebel’s Cleveland says he’s fielding more and more requests for OnDemand from larger clients. “Customers are telling us that they’re intrigued,” he says. While Siebel CRM OnDemand has reported strong revenue growth in recent quarters, on-demand users at large companies represent only about one half of 1 percent of the company’s total user base. Some analysts suggest that large software companies face a major hurdle in moving to an on-demand model: how will Wall Street react when massive one-time licensing fees suddenly give way to monthly subscriptions? That would have a profound impact on financial statements, at least in the short term, and for public companies, the short term is the only reality that counts.

One major advantage to the SaaS model, according to IDC’s Konary, is that it aligns the interest of vendor and customer. With traditional licenses, she says, “there’s no strong vested interest from the vendor perspective to make sure the customer is successful.” Once a package is sold, she says, “the vendor is not coming back until it has something else to sell.” SaaS vendors, by contrast, must continue to justify their ongoing monthly fees. “They aren’t just throwing software over the fence,” she says. “They have to make sure the customer is happy with it month after month.” In the long run, that alignment of interests could prove to be hosted software’s strongest advantage.

A Prescription for Subscription

The remote hosting of software applications offers users many benefits. These include lower up-front costs, speedy deployment, free maintenance and upgrades, and perhaps best of all, no need for pricey know-it-all consultants. But there are risks in embracing software as a service (SaaS). Here are three key considerations that can’t be overlooked:

Service-level agreements. What level of uptime will a remote host guarantee, and how quickly will it respond to a problem? Many customers insist on negotiating guaranteed uptime. If a provider, for example, falls short of 99.9 percent (or some other agreed-on level of) uptime, there should be some negotiated penalty to compensate the customer.

Data security. Although SaaS vendors invariably emphasize the resources they devote to security, many customers remain uncomfortable with their employee and customer data flying over the Internet, not to mention potentially residing on the same data-center server as their rivals’. “Look at security. Do the due diligence. Make sure the vendor has the right premises and that protecting your data is its top concern,” counsels David Brooks, director of CRM at Magma Design. Juniper Networks CIO Kim Perdikou insists on modifying SaaS contracts so that she has the right to do periodic security audits.

Customization capabilities. Does your changing business process require more tweaking of the software than a remote host can — or is willing to — provide? Or do you need (or plan) to integrate the capabilities of the software with in-house applications or other software that you may subscribe to? Either one of those can be a deal-breaker. —N.A.

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