The Different Shades of SaaS


Companies Mentioned
Posted on Jul 26, 2006

Deployments take only a week and require no sizable start-up fees, no costly server or networking hardware. You are billed only for the software modules in use and the number of employees accessing the system, and are automatically upgraded to any new releases. Sound too good to be true? Not according to proponents of a new way of delivering enterprise software, dubbed software as a service (SaaS), or "on demand." This method, popularized by upstarts like CRM provider Salesforce.com, forgoes traditional software licenses and on-premise deployment in favor of applications specifically built to be delivered on a subscription basis over the Internet. While the concept has been around for a while, the latest generation of hosted software leverages Web services and other emerging Internet technologies to offer economies of scale and productivity advantages not possible with earlier iterations from ASPs (application service providers) in the late 1990s, proponents say. Manufacturers considering SaaS should step carefully, however. SaaS vendors offer several different online delivery models, and not all approaches make sense for all application types, or all companies. Potential SaaS customers should also carefully consider start-up costs -- not just per-seat rental charges -- before signing up, experts say. Most pure-play SaaS providers support what is called a multi-tenancy model, where one instance of the software and data model is provisioned to multiple customers. This, advocates say, is the key to delivering SaaS benefits such as low cost and scalability. Traditional vendors, on the other hand, argue that a single-tenancy set up (one server and license per customer company) is essential to delivering the high levels of security, integration, and customization that manufacturers require for mission-critical, enterprise applications. As it turns out, both options have merits, depending upon the application and the manufacturer's needs. Applications that manage extended processes like supplier collaboration, transportation management, or, to some degree, product development, can be good candidates for multi-tenancy SaaS, experts say. But transaction-oriented, internally focused systems like ERP are less compatible with this delivery method, particularly in large enterprises. That's because transaction-oriented applications like ERP often require high levels of security and integration that typically can be better supported in an on-premise or single-tenancy SaaS model, where each application is given its own hardware and database. Moreover, if the long-term plan is to bring the application in-house when IT resources free up, experts say a single-tenant solution is probably a better interim choice. To ensure that a specific style of hosting arrangement works to their advantage, manufacturers can take numerous steps, including conducting security audits and requiring service level agreements (SLA) as part of the contract. A Louder Buzz Whether deployed in multi- or single-tenancy fashion, SaaS is catching on. And the buzz surrounding it has not been lost on traditional enterprise software vendors such as SAP AG, Oracle Corp., PTC, and Agile Software Corp., which have announced Web-based flavors of some of their applications. However, unlike the pure-play SaaS providers, many of these companies have opted for traditional hosting arrangements, in which each customer is outfitted with its own license and server infrastructure that a third-party oversees, either on or off site. Others, like SAP, are embracing a hybrid approach that combines the benefits of both single- and multi-tenancy models. Despite the increasing popularity of these delivery models, manufacturers shouldn't pull the plug on traditional licensed software any time soon -- and many aren't. "Software as a service is an important part of the corporate IT portfolio, but it's not a wall-to-wall strategy, at least for the next decade or so," says Beth Enslow, senior vice president of enterprise research at Aberdeen Group (Boston). "Companies can get a different value from having in-house systems that they build or customize internally. Also, a fraction of companies are still not comfortable having critical, high-volume activities be the responsibility of someone else." That keep-control mentality is rapidly abating, however, as manufacturers struggle to stretch limited IT budgets and resources to cover new areas. With much of the IT budget already earmarked for ERP and compliance, vendors like Kinaxis (formerly Webplan) (Ottawa, ON) see the Web delivery model as the best way to get in the door because it can promise faster deployment with minimal up-front expenses, says Randy Littleson, vice president of marketing. Kinaxis, which previously had sold its response management SCM system as a traditional licensed application, is now only offering an on-demand version to new customers thanks to a partnership with IBM, Littleson says. Even SAP (Walldorf, Germany), whose bread and butter is delivering software as a traditional licensed product, acknowledges that customers want options when it comes to software delivery models, according to John Garrish, SAP's director of solution marketing. SAP in February launched an on-demand CRM offering aimed at enterprise and mid-sized customers, and the company recently said it plans an on-demand version of its All-in-One ERP suite for mid-market customers by year's end. Unlike its SaaS competitors, however, SAP is promoting what it calls a hybrid model, offering customers the option of easily migrating from an SaaS implementation to an on-premise deployment when business priorities dictate. "We see the world through a hybrid lens," Garrish explains. "Not every customer situation is created equal. For a big company, there is typically a divergent set of requirements across the same company -- some business units literally need to get going right away, others need something more tightly integrated with a guarantee of performance and reliability." The on-demand CRM offering has been built with the same user interface as SAP's licensed CRM offering, giving companies the option of migrating to the traditional software license when and where it makes business sense, he adds. SAP also applies its hybrid approach to how it implements software as a service. As opposed to the multi-tenancy approach favored by pure-play SaaS providers, SAP, through a partnership with IBM, is leveraging state-of-the-art virtualization capabilities for a model it bills as "isolated tenancy." This model maintains a separate environment for each customer to deliver a higher degree of reliability and scalability than a shared system, Garrish maintains. However, unlike the single-tenant models of the past, the IBM technologies allow SAP to offer many of the same benefits of a shared approach, including automatic upgrades, in a cost-effective manner. Salesforce.com (San Francisco), perhaps the best-known on-demand provider, rejects the idea that anything less than a pure multi-tenant architecture can provide the true advantages of the software as a service model. "If it's not multi-tenancy, then all you're really doing is taking the problems associated with traditional software and shifting them over to a third-party provider," says George Hu, senior vice president of applications at Salesforce.com. "A shared server allows us to serve thousands of customers together, do unique things, and deliver better economies to the end customer." Hu fends off criticism that customization and integration are lacking in multi-tenant SaaS offerings. Because these systems are built using standard Web services, integration is actually easier compared to traditional systems with proprietary application program interfaces, he contends. The Salesforce.com model also preserves all business logic and customizations and automatically migrates them when a customer is upgraded to the next release -- a process, he claims, that is much more difficult with traditional software. Salesforce.com's Application Exchange platform, launched in January, is another example of how an SaaS platform can offer greater integration, Hu says. Using the benefits of Web services, the Application Exchange architecture lets third parties post applications that are compatible with the Salesforce.com platform, and customers can download them directly and integrate them with the system. Since its release, there have been 8,600 installations of 251 applications in the exchange, including quoting and product configuration packages well suited to manufacturing. "It's a proof point of what you can do with multi-tenancy and the SaaS model," Hu says. Hidden Gotchas Despite such proof points, there are still lingering concerns about SaaS. Uptime is a key issue for customers, and a system-wide outage at Salesforce.com late last year didn't help to alleviate those fears. Hu says customers should research vendors' uptime statistics and redundancy plans before buying. In response to its outage, Salesforce.com upgraded some faulty software, replaced some hardware, and made architectural changes to improve its ability to scale. And the company became the first SaaS provider to offer full transparency to customers. Salesforce.com now posts its system status every day (http://trust.salesforce.com), giving customers first-hand knowledge of such facts as average speed of the system by server and number of transactions. Pricing is also an issue. While the subscription-based pricing of the SaaS model is typically more cost-effective than that of traditional licensed models, there are some points companies should consider to make a fair comparison. According to an Aberdeen survey on SaaS and SCM, nearly half of the companies surveyed found the total cost of ownership of an SaaS deployment to be the same as traditional, licensed software when they factored in paying for the SaaS system every year versus taking a one-time capital expense. In addition, getting approval for a one-time cost is sometimes easier than getting approval for an ongoing expense, Aberdeen's Enslow notes. Also, even though there are no big start-up fees with SaaS deployments, implementations like CRM and PLM may still require business process changes, something companies don't necessarily plan for when considering an on-demand product. "We've seen a gap in expectation in terms of what buyers think start-up costs are versus what they really are," says Rob Bois, research director for customer management at AMR Research Inc. (Boston). "Also, most SaaS vendors are selling multi-year contracts -- they're supposed to be a variable cost, but in reality, you're locked in, kind of like a cell phone plan." On the flip side, proponents say the subscription model changes the relationship between the provider and customer for the better, encouraging better service. Vendors can track how customers use their applications over the Web and thus can tailor upgrades and changes to enhance functionality and usability. In addition, the provider is always in the position of having to deliver because, depending on his contract, the customer can cancel at any time. "With SaaS, the success of the deployment is predicated on three things: Adoption of the application, customer satisfaction, and, most importantly, renewals," says Tim Minahan, senior vice president of marketing at Procuri Inc. (Atlanta), a provider of SaaS strategic sourcing applications. "An on-demand provider has to deliver value or, at the end of [the] term, they get shut off." To help avoid that fate, Arena Solutions Inc. (Menlo Park, CA), a PLM SaaS provider, now delivers a monthly report card to its customers that has all the relevant metrics surrounding its performance, says Michael Topolovac, Arena's CEO. So far, Arena has scored pretty high, according to Dave Sapuppo, vice president of manufacturing for Zassi Medical Evolution Inc. (Jacksonville, FL), a 21-person medical device company focused on products for the gastrointestinal (GI) tract. Zassi had a traditional PLM system in place, but it was too expensive to maintain, and it stretched the company's limited IT resources. Arena PLM replaced that system in 2004, and since it was deployed, Sapuppo has had no issues with security or uptime. "They're able to offer us better security than we could do ourselves -- we couldn't keep up," he says. Prior to making the decision to go with Arena, Sapuppo took a trip to the Arena data centers to see the security setup -- a move he recommends to any company considering the SaaS model. He also suggests making a security checklist to audit potential prospects and insisting on an SLA as part of the contract; his deal with Arena pays a penalty if Arena doesn't meet its end of the bargain -- a minimum of 99.5% uptime. In the end, experts say, it's best to focus on the functionality required in an application, not the delivery model. Says AMR's Bois: "Customers need to evaluate the same things as they would with any software application. If they stick to that, everything else falls into place."

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