(July 1, 2007)
By Alexandra DeFelice 

Scotland, a CPA and president of Madison, Conn.-based Binnacle Technology Solutions, started selling AccuFund software in addition to QuickBooks about four years ago because he liked the fact that the vendor designed its tools with the nonprofit industry in mind.

It contains language that community service-type organizations use and can maintain sometimes "crazy" charts of accounts and costs allocations. A lot of these organizations are Mac users, who don't want to switch to PCs to accommodate their software and many others simply cannot afford the internal IT staff or the initial upfront costs to bring AccuFund in house.

When AccuFund president Peter Stam revealed plans to offer a hosted version of his company's nonprofit accounting software this spring, AccuFund Hosted, Scotland saw potential, although not in the immediate future.

"We'd be delighted to get three to four [hosted] customers in the next year," he says. "Long term, I can see it being half of our annual sales."

AccuFund represents a growing number of traditional software vendors making the plunge into the SaaS world in hopes of taking on small and midsize companies looking for cheaper upfront costs and faster deployment with no need for an IT department. On the other end of the target market are larger companies with multiple offices that want to work out of a common database so their corporations can get a real-time consolidated view of business operations.

Vendors like Microsoft, SAP and Sage have watched their younger competitors like Intacct, NetSuite and Salesforce.com, grow increasingly successful in this SaaS environment and have begun developing hosted versions of their own applications in hopes of tapping into the huge, hungry SMB marketplace by offering lower initial price points through monthly per-user subscriptions and providing online access.

They have been working for three to four years to build their systems so that the user experience can be the same in both environments. Security concerns remain the biggest hurdle, but most vendors are putting multiple layers of security into place to ensure the safety of client data and to meet increasingly stringent compliance requirements.

Microsoft, LexisNexis, Sage and SAP are providing hosted CRM, with SAP planning for volume readiness of a hosted version of its ERP product early next year. Sage currently offers Sage Payroll Services online and a hosted version of Accpac, Accpac Online, but the vendor is in the process of improving the Accpac product for better scalability. It also plans to provide hosted options of its MAS and HR products down the road. Universal Business Computing Co. is providing hosted versions of its accounting applications and payroll services, and this year AccuFund hopes to have 25 to 35 percent of annual sales generated from AccuFund Hosted, which it launched in June.

Does this signal the "end of software," as Salesforce.com CEO Marc Benioff is so fond of proclaiming?

Maybe not.

Many vendors are planning to give customers credit for some of those fees should they eventually choose to buy the software, and most claim that the user experience will be nearly identical in both versions with the switch over taking less than a day.

Winds Of Change

Traditional software vendors are lining up acknowledging that SaaS "makes sense," says Ben Pring, research vice president at Gartner.

"They're trying to transition this into part of their portfolio," Pring says. "We're not talking about an overnight shift. It's a managerial decision to decide at what pace do we invest in this?"

About three years ago, prospects started inquiring about a hosted version of AccuFund's application, but the technology available back then was not robust enough to allow the vendor to provide the same quality of functionality as it could on premise, according to Stam. Now users will experience nearly the exact same thing, lacking only image storage capabilities in the Web-based version.

To help make a smooth transition to the SaaS world, UBCC utilized one of the oldest programming languages: COBOL, originally designed to work on different hardware platforms.

Since announcing its hosted payroll and accounting software in November 2005, UBCC has only turned on about a half-dozen clients, but several are sharing seats so the total number of users is around 12 to 15. The company has taken its time to debug the process before actively marketing the hosted version, according to COO Bill Botzler.

Moving forward, UBCC's goal is to make sure future releases support online access, Botzler says. For example, in April, the company unveiled a Payroll Entry Grid, featuring one-screen access to all current period payroll entry fields, which is more appealing in an online environment.

UBCC plans to expand online access by the fourth quarter of this year and will push that model hard in hopes of having one-third of its client base Web-based in the short term, and 50 percent within three to five years.

The company will support on-premise and hosted customers for as long as they want, but believes that at some point on-site offerings will no longer be appealing.

"We feel the Internet will eventually kill traditional payroll and write-up, and companies who only offer one side will be out of business," says Botzler. "As dad and grandpa hand the keys over to the next generation, there's no question it will happen; it's just a question of how soon."

Long Road Ahead

Gartner research estimates that by 2011, roughly 25 percent of new software from ISVs will be delivered through the SaaS model. But to imagine the traditional companies would die if they didn't adjust and start offering hosted versions of their software is unrealistic, given their large installed bases, according to Pring.

Still, the major vendors are moving ahead.

Microsoft has announced its road map for the on-demand version of Microsoft Dynamics CRM, CRM Live, which can currently be hosted by partners and will be hosted by the vendor in the fourth quarter of this year (See related story, Resellers: To Host or Not to Host.)

SAP began investing up to $400 million over eight quarters starting in January 2007, and hired a fully dedicated CRM on-demand sales team in the United States.

In February 2006, the vendor announced a controlled rollout of the mySAP CRM on-demand suite designed for helping large and upper midsize organizations manage sales, marketing and services online through a subscription-based licensing model.

The rollout consisted of four module release "waves," the last in April, which consisted of flexible online reporting capabilities, lead distribution and power user tools for uploading information. One module costs $75 per user per month; the suite costs $125.

As of May, it was closing four to six large enterprise SaaS deals per quarter, according to Steve Ernst, principal of the North American influencer program for SAP.

In January, SAP announced plans for a hosted ERP offering currently referred to as A1S (after mySAP All in One systems). Pricing has not been determined and the product is still in the testing phase.

As SAP attempts to reach a customer segment of 50 to 100 employees through the hosted format, it also is leveraging the Web to introduce new ways of adoption, letting them try before they buy. Customers can enter their own information as part of a trial mode and be up and running in a few hours or a couple of days, depending on how much data they are willing to share.

In May, Sage created the North American Technology Office, a team focused on technology research, best practices, product strategy and project management, including three positions dedicated to solving SaaS problems like integration and server response time, according to newly named CTO Jim Foster.

Sage began offering the hosted version of Accpac ERP in 2001 for $195 per user per month, plus $35 per module for modules such as general ledger, accounts receivable and accounts payable, but version 6.0-scheduled for release in the fourth quarter of 2009-will be much more scalable for companies to use as they grow and will provide for better integration with the Sage's hosted CRM offering, SageCRM.com. Human resources is the next target, with hosted versions of Sage's Abra HR products planned for the next 12 to 24 months, followed by the MAS product line, according to Foster.

The company has not seen a critical mass of customers flocking to Accpac hosted. Foster believes many are still concerned about handing over all of their accounting information to another company, which essentially owns their data. For now, they are more comfortable doing so with things like time and attendance and CRM rather than with their "system of record," Foster says.

Ensuring Security

That brings up another challenge vendors moving into the hosted world need to think about: data storage. Where is it going to be stored? How secure is that location? What happens to the data if the servers go down, as Salesforce experienced on multiple occasions in early 2006?

"There are fundamental challenges which on-premise vendors face moving to our on-demand world. The first is the realization that you are now operating a utility that must be always available and continually updated," says Aaron Harris, vice president of engineering for Intacct. "This is no small task, as the traditional software model is pretty sloppy in this regard. Major process and cultural changes need to be made to adapt to always-on high customer service to thousands of customers."

Sage's Foster agrees.

"Being up 98 percent of the time isn't good enough. From an accounting perspective, it's not going to be accepted," he says. "You get into service-level agreements challenges. You need to be up 99.998 percent of the time."

UBCC has experienced a handful of 10-to-15-minute outages, but nothing significant, according to Botzler. Still, the company provides its customers with an archived copy of the software as a "warm fuzzy security blanket, just in case."

When Emerging Information Systems introduced a hosted version of its financial planning application, NaviPlan Central, in the beginning of 2005, security was one of the top concerns, according to Kelly Brown, the company's senior vice president of strategic business development.

As of May, 362 firms and 2,600 advisors were utilizing NaviPlan Central, but attracting interest was not easy.

"There were some hard knocks at first getting people to come over," Brown admits. "We're very good at writing software, but the diligence of hosting services is tremendous. When it comes to clients' confidential information it's too sensitive an area."

"Once we got SAS 70 validation, they were happy. Then they wanted to know their business continuity plan, if the site goes down today what happens to my data," Brown says. "Today, the most you lose is an hour. With the new system, there will be instant backup so if it goes down the system automatically switches to another set of servers in another city."

SAP is avoiding those concerns with IBM doing the hosting. LexisNexis also chose to go through a third party, Swimfish, to provide hosting of its InterAction product to smaller accounting and financial services firms.

"It's a steep learning curve going from solely an implementing shop to offering a SaaS model at a financial level they're comfortable with," says Stuart Katz, product marketing manager, noting that prices range from $79 to $149 per user per month and include around-the-clock enduser support and online training.

Swimfish, a Cambridge, Mass.-based management consulting and technology services firm primarily focusing on financial services companies, began hearing requests by smaller investment banks with about 20 to 50 employees around five years ago.

It had been implementing InterAction's on-premise CRM software and wanted to test it to ensure it could really work in the hosted world. Since LexisNexis began offering the SaaS version in 2005, about 20 clients have signed on, but the vendor's marketing efforts have not been aggressive because it wants to make sure the product fits the needs of each customer and that the customer is willing to make a commitment in order to get good value out of the system, so it doesn't fail and that company continues to renew, Katz says.

Reseller Revenue

Vendors are also grappling with the issue of how resellers, who are used to generating revenue from upfront licensing, can make money with hosted applications, primarily through the sale of creative consulting services.

Sage is considering paying resellers for a portion of customers' annual fees upfront, confident the customers will keep coming back. Sage and Microsoft both are giving resellers the option of hosting the products themselves; some are developing microvertical products, add-on modules and other ways of keeping end users on board and thereby enjoying a recurring revenue stream for a longer period of time instead of having to keep chasing after new leads.

Scotland, for one, is not concerned about making money from reselling AccuFund Hosted.

"You still make the same money on implementation, which is close to 100 percent of the cost of software. I just can't expect to get that license commission on software, but that's OK because I know every month or every quarter I get a check from the hosted solution," Scotland says. "It also helps with little things I don't have to get involved in, like upgrades or whatever crazy IT situations exist on the part of the client" because everything is done online.

AccuFund compensates resellers over the full life of the contract, and most of them are relying on the customers not to abandon their core applications after only a few years.

"The key is to build business on both recurring and non-recurring revenue streams to see you through the skinny periods," Scotland says. "You have to have different expectations."