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As SaaS model matures, complexity grows, but SaaS benefits hang tough  [ Search CIO ]
January 22, 2009 11:10 PM
By Christina Torode, Senior News Writer
21 Jan 2009 |

Now that the Software as a Service (SaaS) delivery model has proved itself at the departmental level, some CIOs are ready to go with SaaS for some more complex enterprise applications. And vendors are there to meet them, with services such as integration with legacy systems, custom development and even business process improvement.

As applications like enterprise resource planning (ERP) become available via SaaS, customers' complex business rules often require customization from the standard SaaS offering, said Liz Herbert, an analyst at Forrester Research Inc. in Cambridge, Mass.

Such projects may also require modifying business processes, and, as with any project that touches more users, more user training.

"More complex projects take more time and expenses and inherently possess more risk," said Jeff Kaplan, founder and managing director of ThinkStrategies Inc., a consulting firm in Wellesley, Mass. "That is not scaring anyone away from [SaaS], though, because the value proposition still holds true."

Indeed, even as some SaaS projects may start to resemble the complicated on-premise software projects they replace, the benefits of SaaS have not diminished, Kaplan said. These include little to no up-front costs for hardware, faster upgrade cycles, the chance to get applications into the hands of users faster and the ability to scale the service up or down easily.

And though more complex installations of any kind carry an inherent risk, SaaS deployments still pose far less risk than on-premise ones, said Kaplan, citing the recent claim by Colorado retail jewelry chain Shane Co. that an SAP on-site installation helped cause its decline, which resulted in a bankruptcy filing this month. Shane said the SAP installation took three years instead of one and cost nearly $36 million instead of the $10 million it had projected.

"[Shane Co.] blamed a failed SAP deployment for millions of dollars in losses," Kaplan said. "You will not see that kind of thing happen in the SaaS marketplace."

If anything, SaaS deployments are increasing given such factors as the ability to scale down the number of users as economic conditions change or to cater to a dispersed workforce. According to Kaplan, SaaS adoption rates have doubled in the past year.

"The SaaS market is going through a maturation process. It has been proven out through individuals or departments, and now companies are looking at ways to adopt it at an enterprise level in a planned fashion that meets broader requirements," Kaplan said.

New SaaS contract terms, conditions and technology

At the same time, SaaS vendors are serving up a variety of new pricing and contract options, and new players and technologies are coming on the scene to address nagging integration problems with the SaaS model.

Software company Boomi Inc. makes integration tools that let Web-based applications talk to applications that run behind the corporate firewall. Vendors such as Pervasive Software Inc. and Informatica Corp. have tools that simplify integration between SaaS applications and handle SaaS-to-legacy application integration as well.
A host of systems integrators such as Accenture Ltd. and Deloitte LLP are building SaaS consulting practices to help enterprises with business process design, custom application development and integration between SaaS and legacy applications, Herbert said.

New utility pricing models are taking shape with such SaaS vendors as Inc. testing pricing strategies based on how many times a user logs in to its service, vs. per-seat licensing, for example. And SaaS vendors are trying to tempt customers into longer-term contracts, vs. traditional month-to-month terms.

"Vendors are offering heavy discounts on volume buys and longer contracts -- in some cases discounts of up to 50% -- to get customers to sign two- to three- and in some cases five-year contracts," said Herbert, who authored a Forrester study on SaaS contract negotiations. 

Yet no matter how lucrative those incentives, CIOs won't automatically seek out SaaS without a strong business case to do so.

Nick Garbidakis, CIO at the nonprofit American Bible Society in New York, said he would like to start looking at SaaS options for Microsoft Exchange and customer relationship management applications. The pay-as-you-go model is appealing in that the license costs can be cheaper, it reduces hardware costs, and the provider handles upgrades and maintenance issues, he said.

Right now, though, he can't justify the investment. "Many projects are on hold, and we would not save money today if we moved to SaaS [for Exchange Server]. We already did an Exchange upgrade," he said. "So we are keeping things status quo to save money."

When the time comes to upgrade its core applications in two to three years, Garbidakis said he believes his organization will look at SaaS closely as a deployment option.