Software for Rent: Inquire Within

To hear the proponents of software-as-a-service (SaaS) tell it, owning and running your own software is so-o-o yesterday. Certainly, the considerable success of Salesforce.com, which had $497 million in revenues in its latest fiscal year, has caused many people to take a look at the idea of not owning software. Although the traditional own-and-operate arrangement is still the way most companies buy most of their software, should your company consider SaaS alternatives?

The Benefits of SaaS and Hosting

Software-as-a-service is a business model in which a company, usually the software developer, provides network-based access -- almost always on the Internet -- to the software and takes care of its operation, security, maintenance, and (usually) backup and disaster recovery. Typically, the service provider charges a monthly fee covered under a monthly, annual, or multiyear contract. This frees the customer from having to own and operate the hardware on which the software runs and from needing to implement, maintain, or update the software. In many cases, users can be up and running quickly because there is no on-site implementation process.

With SaaS, the software publisher can make changes to the application in small increments, sometimes on a daily or weekly basis. This can be useful early in the life cycle of a software category because features and functions will become available sooner and with less effort for the end users; for more mature types of software, though, this is less of a benefit. The up-front costs are lower because the user is not buying a software license and the hardware to run it, and implementation fees usually are less than what it would cost to install it on-site. SaaS vendors also have been faster to embrace open source software to support their offerings, eliminating some licensing costs and passing those savings along to their customers.

Some companies may prefer to outsource the operation of some types of software because they want to focus their internal IT people on more strategic applications, or they may not have enough skilled people to manage day-to-day operations. This often can be the case in midsize companies, which Ventana Research defines as those with 100 to 1,000 employees.

Another aspect of SaaS is that users are able to access the hosted application from any location that has an Internet connection. This can be especially useful for mobile workers, such as sales- or field support people, or for businesses that operate out of multiple locations, such as retailers with many small stores. Since the business activity is taking place "beyond the firewall," it may even be a smarter approach than handling the software on premises.

Why It May Not Be for You

There are three main reasons why SaaS and hosting may not be right for a company: adaptability, integration, and, in some cases, the total life cycle cost.

With SaaS, user companies typically compromise their ability to customize the application; the software may not have enough features and capabilities for their industry or the way they like to run their business.

As for integration, it's important to consider the data flows into and out of the software. For stand-alone applications, this is never a problem. However, integration becomes more difficult as the amount of data that the application shares with your company's other software increases. Also, if the application shares critical data and the time interval used to measure whether the data is current is subseconds, not days, SaaS may not be the best approach because it is a remote system, not in-house.

As for cost, the SaaS business model has some pluses and some minuses when compared to the own-and-operate approach. Economies of scale and specialization give the service provider an advantage when it comes to hardware, operating, and maintenance costs, but in setting the pricing, the vendor often recovers the software license cost in two to three years. If you plan to use the software considerably longer than that, you'll be paying for it more than once. This is fine if the operating savings and other benefits offset this. The SaaS approach may save on implementation expenses for some applications, but for more complex enterprise software there may be no savings over the on-premises approach.

SaaS for Finance

Renting applications has been most successful to date in customer relationship management (CRM) and human resources (HR), mainly for payroll services. For the finance function, offerings fall into three buckets: accounting, budgeting, and other services.

The accounting applications we list here are aimed at companies that are becoming too large to use Intuit's QuickBooks (which also has an online option) but are small enough to not have -- or want -- an on-premises application. If a company has a part-time CFO or geographically dispersed sites that must interact with the central enterprise resource planning (ERP) system -- for example, midsize retailers -- then having the software available on the Web is extremely handy for all involved. A SaaS-based accounting system also may be the best choice if a company wants to obtain a broad range of enterprise software capabilities from a single suite -- for example, connecting supply chain management and CRM to the accounting system.

SaaS-based budgeting and reporting software gives a company an alternative to desktop spreadsheets. Organizations that do not have a central data repository -- especially those that have many satellite offices or branches -- may find that using this service is the best way to collect and share business information. The budgeting and planning process, which usually involves a range of people, benefits from having dedicated software managed in a central location and tied to a central database.

Companies also can, and should, use this type of service for some other collaborative planning efforts, such as sales and operational planning.

One of the other services that can be useful to large as well as midsize companies is managing travel and entertainment (T&E) expenses. Most companies prefer to rent this software rather than operate it on-premises. T&E management software can substantially cut administrative costs, improve compliance, and improve employee satisfaction.

Looking to the Future

IT evangelists have an annoying habit of saying that their new approach will replace everything else that came before. SaaS is not going to be the only way that companies acquire software anytime soon. After all, many still run mission-critical software on mainframes, almost two decades after these were declared dinosaurs.

SaaS works well for certain types of companies using certain types of software. It may not be right for you today, but you should consider it as an option. New possibilities are appearing all the time.