In-Depth

Apps on Tap

• By Steve Ulfelder
• February 1, 2005

Like any CIO, Unishippers’ Kevin Lathrop jealously guards the personal information belonging to his customers. Although Lathrop is generally pleased with the way IBM provides Siebel CRM on a hosted basis for the Salt Lake City shipping company, there’s one optional service for which he won’t hire Big Blue: penetration testing to verify IBM is meeting its security service level agreements. 'We’ll be using another vendor,' Lathrop says. 'Otherwise, the wolf is guarding the henhouse.' Welcome to the odd new world of purchasing software as a service, in which your vendor offers to hack its own servers—for a price—to make sure your data is safe.

Even before Nicholas Carr asked whether IT matters anymore in his influential and controversial Harvard Business Review article, industry experts described a future in which businesses met their technology needs simply by writing a check and flicking a switch.

With IBM leading the charge, the IT-as-service phenomenon has rapidly taken hold, with the usual cacophony of terms, both generic and vendor-specific. IBM’s moniker, On Demand Computing, has found a lot of traction. So have utility computing and Hewlett-Packard’s Adaptive Enterprise, provisioning, and metered services. Although they differ subtly, all describe the basic pay-as-you-go vision.

Writ large, utility computing encompasses every component in enterprise IT, from servers to the network to operating systems to applications to end-user devices. However, the subset that has taken off fastest and found the most acceptance in IT is application software. If nothing else, this proves technology ideas, like neckties, never really go out of fashion—hang around long enough and they’ll be back in style.

Today’s catchphrases include hosted software, subscription-based software and software as a service, or SaaS. A few years back, before the Internet bubble burst, application service providers—which are making a comeback—made the same offer. If you were around when IT was called MIS, you probably recall time-sharing.

By any name, SaaS is hot. According to research firm IDC, worldwide sales of hosted software will grow at a 26 percent annual rate to $8.1 billion, through 2007, up from $2.1 billion in 2002. During the same period, IDC forecasts low-single-digit growth for unhosted software. These predicted growth rates have grabbed software vendors’ attention, with the result they’re tripping over themselves to offer their wares in hosted form.

Someday, maybe, all this technology-from-the-tap will make your job easy. For now, SaaS brings new choices, new factors in your purchasing decisions. What are the benefits and drawbacks of hosted software? What types of applications are good candidates for hosting, and what apps should remain in-house? How do you negotiate the best deal?

Ball of confusion
Although it’s appropriate for IT managers and other software decision makers to be skeptical about vendors’ claims, experts say the emergence of SaaS truly has the potential to be a winner. 'We believe the old software industry is going away, and a new one is being born,' says Fred Hoch, vice president of software programs at the Software & Information Industry Association, a Washington, D.C., industry group. And a confusing industry it is. Here’s the cast of characters: • Traditional enterprise software titans such as Siebel Systems, IBM, Computer Associates and Oracle. • Emerging SaaS-only powers, with Salesforce.com probably the best known. • Open-source vendors such as Red Hat. • A group Hoch calls “hardware companies that are becoming software companies,” such as Sun Microsystems and Hewlett-Packard. • Business-process outsourcing specialists such as payroll giant Automated Data Processing. • ASPs that host, manage and provide remote access to another vendor’s packaged applications. ASP pricing usually includes a one-time license-and-setup fee that’s significantly lower than a standard software licensing fee and a recurring subscription fee that covers hosting and maintenance. USinternetworking and Corio are among the best known.

An odd mix, but the bottom line for software users is that with so many players competing for your business, there’s value to be had.

Value proposition in the works
The SaaS value proposition, while very much a work in progress, is compelling—and worthy of investigation for most companies. Leading off the list of benefits is the lower up-front cost. The large fixed cost of the traditional enterprise software implementation, heavily laden with infrastructure and consulting fees, is replaced by a more budget-friendly variable cost.

ASPs charge $50 to $100 per user per month for a CRM application, while a typical, installed perpetual license for a large organization costs hundreds of thousands of dollars. That may help explain why customer relationship management has had such rapid uptake of the hosted-software model.

'From a payback perspective, [SaaS] is very attractive compared with the up-front costs of a Siebel or Onyx implementation,' says Rebecca Wettemann, vice president of research at Wellesley, Mass.-based Nucleus Research. Many experts believe the multimillion-dollar CRM and enterprise resource planning implementations that require three years and heavy consulting are on their way out.

Rapid ROI was a major reason Orange Glo International opted for the SaaS model in logistics software. The Concord, Ont., Canada, maker of cleaning supplies is a J.D. Edwards shop, but last April, it opted to purchase On Demand TMS, the hosted version of LeanLogistics’ transportation management application. Greg Lutkaskus, Orange Glo’s director of logistics, says it was the right call because of the potential payback. 'We were right-side up in 120 days,' Lutkaskus says.

Reductions in total cost of ownership can be dramatic with hosted products. A recent SIIA report says 'first-year TCO can be five to 10 times less expensive than [traditionally purchased] enterprise software, with the majority of savings resulting from the elimination of up-front integration and customization.' Dramatic savings like these will be rare for most businesses, according to analysts, but all the SaaS users interviewed for this story say their cost analyses showed hosting to be significantly cheaper than purchase.

Another benefit of the SaaS model is that it offers an easier upgrade path. With traditional software, upgrading tends to be a painful process, demanding many hours of expensive IT staffers’ time. With hosted applications, that burden shifts to the vendor. At Orange Glo, LeanLogistics upgrades 'continuously happen,' Lutkaskus says. Many of the application’s improved features begin life as suggestions from Orange Glo, he adds. 'We come up with ideas, tell [the vendor about them] and next thing you know, they come up in the product.'

To some, this kind of rapid-fire upgrade will be unwelcome; even relatively minor changes in an application can throw end users for a loop. So, before committing, you should discuss with potential vendors their upgrade and revision schedules—how often they’ll come and what notice they will give you.

Applera, a Norwalk, Conn., life sciences company, has used hosted expense-management software from Concur Technologies for more than a year and already has been through two upgrades. According to Bob Mendence, Applera’s project manager, finance, one month before Concur releases a new version of the app, the company sends end users a notification on their splash screens informing them when the update will occur. A week before the update, “I send out a global reminder to all employees,” Mendence says. He adds the process is painless and is done over a weekend.

Where it works best
Although the market is immature, consensus is beginning to build around what conditions make SaaS a strong choice. The size of your company is a good place to start. The ASPs are very strong in the small to medium-sized business segments, says Herb Van Hook, an independent industry analyst. 'That’s their sweet spot,' he adds. SaaS is a good fit for SMBs because it brings them the benefits of big-time enterprise software without the cost.

SaaS also is a good option for businesses that lack expertise in a given domain. For example, a small manufacturer might opt for a hosted supply-chain management application and gain not only a software tool, but also the supply-chain knowledge it needs to grow.

These factors help explain the rapid growth of Salesforce.com; with most of the fiscal, staffing and infrastructure barriers to CRM removed, plenty of SMBs and large enterprises are eager to use the software.

Large enterprises have the infrastructure to purchase, provision and manage weighty applications. Virtually all large businesses already have heavily invested in either enterprise software or in a major IT outsourcing contract. Simply firing up a hosted app probably won’t be enough for sophisticated global enterprises; they require customization and large-scale integration with other applications and data sources. At this early stage of the SaaS phenomenon, customization and integration are wildcards.

Van Hook cites large demand fluctuation as another criterion to consider. 'If you’re a seasonal business and you host [enterprise apps], you’ve got to deal with peak demand issues,' he says. You must provision servers, bandwidth, staff, disaster recovery and myriad other components with peak loads in mind. With SaaS, on the other hand, 'Your provider has that responsibility if your SLAs are negotiated well,' Van Hook says.

Tiptoeing around integration
Perhaps the greatest area of uncertainty around SaaS is integration. Integration is perceived as a big problem in large enterprises especially, Hoch says. Many businesses that buy hosted software are tiptoeing around the issue by limiting SaaS to what he calls “edge technologies” that require little interaction with other applications.

Not everybody is scared off by the integration question. In early 2004, Unishippers purchased Siebel CRM from IBM as a SaaS. The company wanted to integrate the Siebel app with its in-house billing system. According to CIO Lathrop, the project differed little from any large-scale integration. 'We didn’t want two databases, so we made the decision early that all customer attributes would live in Siebel, and that billing would share data,' he says. The integration work was handled by Unishippers’ IT staff, because 'you really can’t hand that to someone else,' Lathrop adds.

Many SaaS providers either open their application programming interfaces or offer hooks into multiple vendors’ enterprise applications. When PepsiAmericas, the world’s second-largest bottler of PepsiCo drinks, shopped for hosted human resources software, one requirement was it must easily integrate with PepsiAmericas’ PeopleSoft ERP app. “We needed to leverage our existing ERP investment as fully as possible,” says Dana Sacks, the bottler’s vice president of human resources. PepsiAmericas opted for HR applications from Authoria, because the vendor’s hosted applications provide predefined extracts for easy data interchange with PeopleSoft.

Other solutions are emerging. Salesforce.com’s Sforce platform enables companies to integrate Salesforce.com’s CRM app with other vendors’ ERP and accounting products. An intriguing new group of startup companies, led by Grand Central Communications, offers “integration on demand” services. However, there’s no denying at this early stage integration is a little-understood, and thus risky, part of the SaaS phenomenon.

Gaining traction
The acceptance of SaaS means business is rapidly shifting the way it looks at this phenomenon, according to Nucleus Research’s Wettemann. “In the CRM space especially, the honeymoon period is ending,” she says. “Initially, people were excited just to get rid of expensive CRM.” Once the novelty of the delivery method wears off, IT managers will focus on justifying the ongoing expense of SaaS by demanding new functionality and otherwise adding value.

Discussion Points
Discussion board below

• Software as a Service, or SaaS, is a hot market, according to IDC, which says worldwide sales of hosted software will grow to $8.1 billion through 2007.

• The key to the SaaS value proposition is the lower upfront cost compared to buying and deploying software the usual way. Another benefit: Upgrading packaged software requires hours of expensive IT staff time. With hosted apps, that burden shifts to the vendor.

• One problem: Integrating hosted software is often tricky, so many enterprises limit software services to applications that require little interaction.