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Software’s Temperamental Star

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

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Although a huge part of the SaaS pitch is its cost-effectiveness, cost turns out to be the second most commonly cited source of dissatisfaction, according to Gartner. “People are realizing that all these promises of dramatically reduced expenses are not necessarily coming to fruition,” says Gartner analyst Robert DeSisto. “Clearly it looks good in the first couple of years, because you don’t have a big capex outlay, but in subsequent years CFOs find themselves asking, ‘Where are the true savings? Where is the reduction in head count, in infrastructure?’”

To be sure, many companies do save money, especially small and midsize businesses with limited IT resources. Doug Menefee is CIO at Schumacher Group, a 750-person firm that provides emergency-department management services to hospitals. He had moved half of his applications to SaaS by the beginning of 2009 and saw a savings equivalent to the salaries of four full-time employees. He plans to migrate another 25% of his software to SaaS by the end of the year.

But Doug Tracy, CIO of auto- parts maker Dana Holdings, which has 22,500 employees, has had different results. “With SaaS you don’t necessarily get better ROI, you just tend to get the solution faster,” he says. “In some cases it can be a better ROI because the payback is quicker, but it’s not necessarily a lower-cost solution.”

Tracy is also cautious about data-integration issues and the lack of control over upgrades with SaaS solutions. “I’m less apt to be concerned about support for older applications,” he says, “because problems have been patched and my staff can take it from there, so we’re looking at canceling the support and maintenance on a lot of the old software. But if you go with a SaaS approach, that option isn’t available to you, because the support is bundled in.”

Fee Folly

SaaS pricing is another area where companies need to proceed carefully, because the models have changed over time and may not be as flexible as customers expect. In some cases, in fact, the model has swung completely around to mimic the traditional site license. For some customers that’s fine. “We said we wanted to give every employee a license and we got a multi-year contract that we paid up front,” says Schumacher’s Menefee. “That gave us predictability on what our spend rate would be.”

But others have worked to keep terms more flexible. Kardia’s Kelly tries to negotiate payments and an option to change the number of licenses on a quarterly basis. Smaller vendors are more likely to go for the latter, a helpful provision during the recession. When Kelly’s former employer, exercise-equipment dealer Second Wind, was forced to shut 10% of its retail outlets and lay off store managers, its automated work-order and maintenance-tracking software provider, WorkOasis, allowed Second Wind to reduce its number of licenses accordingly. Similarly, DataServ says that some of its customers have been relieved to learn that the software can scale down as well as up.


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