Software With a Dose of Skepticism

Talking Points

  • The cost savings ASPs promise should be viewed with skepticism.
  • One enterprise claims to have saved 20 to 25 percent on some apps by moving to a subscription model.
  • The break-even point is somewhere in the 30- to-36 month range.

Are there really big savings to be had by procuring software via subscription, rather than through traditional licenses? Which way should an IT organization go to get the best deal possible for the enterprise? It's a major issue for IT managers constantly pressured to keep an eye on the budget without compromising features or data security. Interviews with both procurers of business software and analysts paint an uncertain picture.

The application service provider model may offer several benefits, including easier upgrades and built-in disaster recovery. On the other hand, many IT managers worry about allowing their critical data to live on servers that belong to somebody else, and integration of leased applications is at this point a wildcard (For more, see part one of this story "Apps on Tap," in last month's issue or on the Web at

But the bottom line is the bottom line, and what many businesses want to know about ASPs is: Will this save me some dough?

Software with a dose of skepticism
According to Gartner analyst Ben Pring, ASPs' cost-savings claims should be viewed skeptically. "Many vendors have come to the marketplace and promised 30 to 40 percent savings [compared with licensing] over a typical three- or four-year contract, but we cannot validate that through research," Pring says.

He says Gartner has told vendors that until and unless they substantiate their savings claims with public, repeatable, apples-to-apples comparisons, skepticism will remain the order of the day. "But as soon as you try to validate their figures, and especially [when you seek to make comparisons] public, they clam up," Pring says. As a result, Gartner views ASPs' claims of dramatic cost savings as "very murky," he says. "We cannot authoritatively refute or support those statements."

However, Pring says, "We do hear anecdotally from clients who say they've saved significantly." Many Gartner enterprise clients, he says, essentially support ASPs' savings claims. Pring says one very large Gartner client (which he declines to name) says it has cut costs 20 to 25 percent on some applications by moving to a subscription model.

It's been a rollercoaster ride
When Winter, Wyman & Co., a staffing and recruitment firm with about 130 employees, needed to replace its client/server applicant-tracking system, the Waltham, Mass.-based company was initially intrigued by the flexibility of the subscription model. "We had to think long and hard about it," says Jerry Fain, director of IT and operations at Winter, Wyman. "The biggest hump to get over is the sense, the perception, that you're losing control over your data."

In the past five years, Fain points out, the professional services industry has been a rollercoaster of rapid growth and contraction. Thus, he says, "It's attractive to have a pricing model that can expand and contract with your needs. With client-server, once you buy licenses, you own them--whether you need them or not." To the basic licenses, Winter, Wyman would have been faced with maintenance fees that tend to add 5 to 20 percent per year to the total.

By contrast, Fain says, "The beauty of the ASP is its ability to grow or shrink without a huge infrastructure layout. It becomes a variable cost that grows or shrinks with revenues, so you don't have to capitalize it like you do with traditional licenses."

As far as bottom-line cost is concerned, Fain says the subscription-based application he selected, from Boston-based recruitment-software specialist Bullhorn Inc., handily beat other vendors' client-server answers (Fain declines to be more specific about the savings. Bullhorn executives claim that in a five-year contract for 60 users, their TCO beats client-server competitors by approximately 30 percent).

According to Fain, much of that savings can be ascribed to infrastructure needs. "Most companies our size [in the recruitment industry], to implement a new client-server app, would be looking at a 'forklift upgrade,'" he says, referring to server and desktop replacements. "With the downturn our industry is just now emerging from, we haven't seen a lot of infrastructure investment recently. By going with Bullhorn, we didn't have to pay to upgrade back-office servers and other hardware."

Sometimes, the CEO laughs Of course, there's more to software acquisition than an average monthly price. One of the ASP model's major draws is the absence of major up-front infrastructure investment. Bill Doucette of National Equipment Services Rentals cuts to the chase: "I can't ask for $1 million or $2 million to spend implementing Oracle," says Doucette, vice president of human resources at the equipment-rental business, which has about 3,000 employees and $500 million a year in sales. "My CEO would laugh at me."

Doucette's challenge was notable because the Chicago-headquartered company recently emerged from bankruptcy and had "never built an infrastructure," he says. NES Rentals wanted to upgrade its payroll systems--the company was using what Doucette describes as a "basic, in-house ADP PC system." He says the company "wanted a system that's very current, comparable to what the Peoplesofts and Oracles would offer, but we couldn't afford that."

Since January 2003, NES Rentals has been using Ultimate Software's payroll software on a subscription basis. Doucette estimates payback time of 1.3 years.

Veritas, a vendor of security software, reports even more dramatic results. The Mountain View, Calif., company's salespeople use hosted software from Surgient to perform customer demos. According to Erik Bower, senior manager of e-marketing at Veritas. "We save about $900 each time we use Surgient instead of installing [licensed] software on laptops."

Time factor critical
When deciding whether to buy or lease enterprise software, the length of the contract plays an important role. Indeed, according to Joel Scott, president of Rocky Hill, Conn., CRM consultancy Computer Control, it plays the starring role. "There is a break-even point somewhere in the 30-to-36 month range," Scott says. "That's when the ASP cost advantage goes away. If you plan to use an application for five years, our research shows there's rarely a [cost] advantage for ASPs. For shorter terms, the opposite is true--there's rarely a cost edge in buying the software.

Scott has created a spreadsheet guideline for comparing licenses and subscriptions, available at Computer Control's Web site ( This guide attempts to level the playing field by accounting for hardware and network infrastructure, IT salaries, and other factors.

For buyers of business software, the major message is that despite the siren songs of ASP vendors, a variety of factors go into getting the best deal possible.

Sidebar: Applications on demand: One element of overall IT utility market growth
Sidebar: Only time tells which route offers the best deal