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Software’s Temperamental Star

The outlook for on-demand business applications remains promising, but there is room for improvement.

Tom Kelly is a believer. The CFO and chief information officer of Kardia Health Systems has seen big savings from the technology known as “software as a service,” or SaaS. Kelly has migrated nearly all of his company’s traditional business applications to these Web-enabled solutions that are usually priced in a subscription model and typically cost $10 to $50 per user per month.

Kelly says the SaaS model helps him do more with less. As one example: “What we used to pay for five people’s use of a traditional accounting software package now buys us not only financials but also dashboards, CRM, and e-commerce. There’s just no comparison.”

He loves being able to log on to the SaaS offering (from NetSuite) from anywhere, and welcomes the fact that the monthly price includes maintenance, support, and even hardware (on NetSuite’s end). In fact, Kelly has now embraced SaaS offerings from other vendors, including Google, Salesforce.com, and Adaptive Planning.

But even an evangelist like Kelly admits that SaaS still has kinks to be worked out. “SaaS is growing so fast that you sometimes get salespeople who don’t know what the product can and can’t do, and what it can and can’t be integrated with,” he complains. “So they promise something that can’t be delivered. That leaves a bad taste in your mouth.”

More CFOs are finding themselves in Kelly’s shoes. SaaS debuted a decade ago but has only recently become the software industry’s shining star, goosed by tight capex budgets, frustrations with high software-maintenance fees, and the hype over “cloud computing,” in which Internet services replace (or try to) traditional shrink-wrapped software.

SaaS offerings now account for 9% of the business-software market, and sales are growing at a 20% annual clip. Gartner predicts that by 2013 SaaS will command a 15% to 16% market share. Yet Gartner also says that only a minority of users expressed an interest in expanding their use of SaaS alternatives, and a small percentage (5%) planned to discontinue it, according to a survey conducted in December 2008.

Integration is the top source of dissatisfaction. “There has been a lot of concern around a large number of SaaS offerings coming out that don’t have effective application programming interfaces” to facilitate connection to other programs, says Treb Ryan, CEO of OpSource, a provider of integration solutions to SaaS vendors.

Ryan says the good news is that this lack has created a booming market for third-party integration offerings, which have become more robust in the past several years. Vendors such as Boomi and Cast Iron can smooth over holes left by SaaS vendors.

Armed with an awareness of this pitfall, more clients are now pushing for flexible cost arrangements that compensate them for integration delays. Joe Zulich, senior business analyst at White-Rodgers, a division of Emerson Electric, oversaw a move to an accounts-payable SaaS offering from DataServ that took longer than expected. “You will probably spend more than you expect to on programming, so negotiate fees up front to allow for unforeseen changes,” advises Zulich. “Work with a company that’s very flexible and understands you’re going to run into problems and won’t nickel-and-dime you to death.”

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