Special Report on HR Technology In SaaS Battle, Customers Win

A holy war is under way among HR product vendors over “software as a service,” or SaaS.

The phrase generally refers to providing software applications over the Internet rather than installing them on a company’s internal computers. But as this approach to software delivery has grown more popular and branched into multiple methodologies over the past decade, vendors have staked out contrasting positions on the subject.

The battle over what’s sometimes called “on demand” software comes with strong rhetoric among combatants. But it’s not clear whether customers need to choose sides—they may benefit from all the competition.

On one side of the fight are the fervent believers. These are vendors, including Workday and SilkRoad, that say a pure form of software as a service—in which all customers run just one or two versions of the software and it is provided only over the Internet—is the way to go.

On the other side is a range of software providers offering some sort of hybrid approach. They may allow for their software to be installed on customers’ machines or accessed via the Web. They may focus on delivering their software over the Internet, but put customers on a dedicated copy of the application.

Hybrid backers say their products offer benefits such as improved data security and more customer control over software settings and the timing of upgrades.

But SilkRoad co-founder Brian Platz says “pure” SaaS is used by the vendors of the best talent management software products. (Talent management software refers to tools for key HR tasks such as recruiting and performance management.) Platz also says the pure SaaS model has the lowest costs. Maintaining many versions of software is expensive, Platz says. And those costs increase further if the vendor also sells software to be run on customers’ internal computers, because extensive testing may be needed in advance of new releases.

“There’s no doubt that pure SaaS is going to win out,” Platz says.

Companies shouldn’t worry too much about the sectarian software strife, says Jason Averbook, chief executive of consulting firm Knowledge Infusion. Instead, they should appreciate their options and choose what’s best for them. “It truly is the Baskin Robbins 31 flavors of software as a service,” he says. “There really isn’t one way that’s better or worse.”

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Appetite for SaaS
Companies like the taste of SaaS. According to a 2009 survey of North American and European companies by Forrester Research, just 14 percent of respondents said they were not interested in adopting software as a service. And in late 2008, Forrester found that 29 percent of companies had tapped HR software through SaaS, making human resources one of the business functions that is using SaaS most heavily.

“SaaS adoption will become the direction of choice for many large and small companies,” Forrester said in a January report on HR software. “Application flexibility, cost predictability and ease-of-use make SaaS very attractive.”

Software as a service is largely a reaction to the way companies bought and ran business software for most of the 1980s and 1990s. Under the “perpetual license,” “on-premises” model, organizations purchased copies of applications and installed them on their own computers. In this scheme, customers typically pay vendors annual maintenance fees that can be 20 percent of the original license fee and entitle clients to tax updates and more substantial upgrades with new features.

The on-premises approach lets companies tailor applications extensively. But software delivered in this way is costly and time-consuming to implement and upgrade.

About a decade ago, vendors pitched the idea of hosting applications remotely and letting companies access the software over the Internet. This approach reduced hardware and maintenance headaches for organizations. But having to manage many customized applications for customers was not cheap.

So the idea of “multi-tenancy” gained ground. Just as the many tenants of an apartment complex share the same roof and infrastructure, applications with a multi-tenant design are run for multiple clients simultaneously—and at a lower cost for vendors. The principle is similar to the way consumer-oriented websites such as Google and Yahoo serve many visitors at once.

As the term “software as a service” emerged over the past several years, it typically meant a multi-tenant application delivered over the Web. It also generally referred to subscription pricing, in which customers paid to use the application for a fixed period of time. SaaS, then, offered the benefits of quicker implementations, lower upfront costs and fewer technology aggravations.

Still, the approach raised fears that a company’s sensitive employee data could be seen by unwanted eyes. Another concern has been that a single shared application would not be able to match companies’ idiosyncratic business processes.

But SaaS products have proved themselves on the privacy front and have become quite flexible by giving customers the ability to configure a variety of settings, says Karen Beaman, chief executive of consulting firm Jeitosa Group International. At the same time, she says, customers have realized that extensive software customizations lead to major hassles when it comes to updating the software later.

“Large companies are now understanding that SaaS has tremendous advantages,” Beaman says.

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Hybrid approaches
Nonetheless, some organizations prefer to stick with on-premises software, says Lisa Rowan, an analyst with research firm IDC. She says security-sensitive government agencies and large, complex businesses in fields such as manufacturing are more likely to shy away from SaaS.

“You’re still going to have a certain segment of clients for whom that just doesn’t work,” Rowan says.

HR software provider Accero gets most of its revenue from clients with applications installed on premises. But the company has joined the SaaS world in its way. Accero, whose human resource management and payroll system used to be called Cyborg, offers to host its software for customers and let them access it over the Internet. For its Accero On-Demand product, Accero does not have a multi-tenant setup. Each on-demand customer has its own dedicated “instance,” or copy, of the application. But Accero uses “virtualization” software to allow multiple clients to be running on the same computer server.

Virtualization software allows a single computer to create multiple virtual computer systems. By slicing up computer resources in this way, Accero’s operating costs are just a fraction more than a pure SaaS vendor, says Accero CEO Tom Malone. And Accero can continue to meet the needs of large customers who want more than a plain-vanilla version of HR software.

“They need a degree of customization,” he says.

Lawson Software has taken a similar approach. For customers that want software delivered over the Internet, Lawson provides dedicated copies of applications and uses virtualization technology to optimize its computer resources.

Lawson customers can choose between a version of SaaS where no customizations are possible or pay a higher price for the ability to make modifications that Lawson will maintain over time, says Larry Dunivan, the vendor’s senior vice president of global human capital management products. Lawson also offers its HR applications for on-premises installation.

As part of its overall SaaS strategy, Lawson is tapping the computing power of Amazon, which provides access to its computer servers via a product called the Amazon Elastic Compute Cloud. Dunivan argues that companies opting for a “single-tenancy” model of SaaS may prove to have the leanest model in the long run.

“As virtualization technologies are leveraged in combination with cloud computing, it’s possible that multi-tenancy won’t offer the lowest long-term cost of ownership,” he says.

Software vendors that insist on the purist approach to software as a service are “multi-tenant SaaS bigots,” Dunivan says.

Others in the hybrid SaaS camp include Softscape and Halogen Software. Softscape sells on-premises HR software, a multi-tenant application typically used by midsize businesses, and what it calls “Secure-SaaS,” in which each customer has a dedicated instance of the application and additional security features.

Steve Bonadio, vice president of product marketing at Softscape, says Secure-SaaS is appealing partly because it means customers aren’t forced to take upgrades, an aspect of pure SaaS that can throw off users and create problems with the way the software integrates with a customer’s other business applications.

Those upgrades, typically zapped out several times a year by SaaS vendors, come with new features but “can break what customers have already launched across their organization,” Bonadio says.

For its SaaS product, Halogen employs virtualization technology and gives each customer its own instance of the application. The company also sells its HR software for on-premises installation. The on-premises product entails testing new versions on a variety of computer operating systems to mimic customers’ computer setups. But the company says testing for those customers is largely done through software tools. “We work very efficiently,” says Donna Ronayne, Halogen’s vice president of marketing.

Vendors of hybrid SaaS products also make the point that the debate over SaaS purity is largely inside baseball: Customers don’t care about it nearly as much as vendors.

But the particular flavor of SaaS did matter to Nebraska. The state signed a deal with Cornerstone OnDemand last year for a suite of talent management software tools to be delivered over the Internet. Cornerstone is among the more pure SaaS players, keeping all customers on the same code.

Carlos Castillo Jr., the state government’s director of administrative services, says state officials appreciate the way pure SaaS prevents extensive customization by clients and thereby “encourages consistency across our organization.” Castillo says custom modifications in the state’s on-premises system for core HR tasks are expensive to maintain when the application is upgraded. “Customization always translates into higher costs for us,” he says.

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The purist argument
Even so, pure SaaS advocates say their products can accommodate even the largest, most complex companies. Workday points out that its single line of code is working at firms including Chiquita Brands International, Lenovo and Flextronics, which employs 165,000 workers worldwide.

Purists also downplay difficulties from the upgrades that SaaS vendors impose on customers. Roughly 10 percent of the changes sent out quarterly by Cornerstone OnDemand are mandatory, and typically involve the user interface.

“The remaining 90 percent of updates are optional for clients, and they can decide whether they want to activate them for use in their organization,” says Michelle Haworth, Cornerstone’s director of corporate communications.

SaaS flavor matters in terms of software vendors’ long-term viability, pure SaaS vendors say. If there are fewer lines of software code to develop and maintain, that translates to a “leaner model,” says Deepak Rammohan, director of product management for Taleo Enterprise, Taleo’s software product for large organizations.

“A pure SaaS model … leads to a leaner sales model, a leaner consulting services model and a leaner support model,” Rammohan says. “A leaner model for the vendor then also means a better price point for the customer.”

Taleo keeps its largest customers on one of two versions of its Taleo Enterprise application.

It has emerged to be one of the leading talent management firms, and a profitable one. Its revenue grew 18 percent last year to nearly $200 million, and it recorded a profit of $1.3 million.

Another major HR software firm pursuing the pure multi-tenancy SaaS model is SuccessFactors. “We actually turn away companies that will only do on-premise,” says Dominic Paschel, director of global public and investor relations. SuccessFactors, which spent $80 million on sales and marketing last year, posted a net loss of $12.6 million for 2009, but revenue grew 37 percent to $153 million.

Platz of SilkRoad says a typical customer company of a couple thousand employees can expect to pay about $80,000 per year for one of SilkRoad’s six modules.

“Hybrid SaaS vendors are fairly competitive with price. They have to be, or else they wouldn’t sell any,” Platz says. “They tend to, however, have less innovation and functionality. They are tied to that boat anchor of their licensed software.”

SilkRoad’s pure SaaS is selling fast. New sales grew 30 percent last year, Platz says.

But hybrid SaaS vendors also are doing a brisk business. Halogen, for example, enjoyed a 41 percent increase in recurring revenue last year.

Averbook of Knowledge Infusion says it’s generally a good time for SaaS in the HR arena. Companies with tight budgets for information technology projects are willing to let HR proceed with the relatively small investments needed for software delivered over the Web, he says.

Workforce Management, June 2010, p. 29-34 — Subscribe Now!