Evaluating Software as a Service

Oct. 8, 2008
SaaS is not right for every company.

Software as a Service (SaaS) brings value to the technology marketplace. For certain companies under certain conditions, it is the optimal solution. However, SaaS is not right for every firm. There are downsides to selecting SaaS that, if not recognized upfront, can cause problems later.

SaaS is appealing because it is marketed as a quicker, easier, lower-cost alternative to software purchase. However, installing SaaS software on a Web server takes the same time -- one day or less -- as purchased Web-based software. Both options involve equal amounts of personnel training time.

Many software vendors fully integrate their individual applications or modules in the development process, whereas SaaS vendors typically acquire various applications, place them behind a portal and market them. Thus, when a subscriber selects among these applications, the SaaS vendor must integrate them behind the Web portal in order to support data sharing. Subscribers usually pay for this integration. Later, when the SaaS applications must be integrated with the firm's in-house software (e.g., ERP, WMS systems), the subscriber must again foot the bill. After all these expenditures, the SaaS subscriber still does not own the applications and, should a business disagreement arise or the SaaS vendor go out of business, the firm will be unable to execute vital business activities or even access its data. Would-be SaaS subscribers need to ascertain whether they will receive the source code if the SaaS vendor should go out of business and what, if anything, becomes of all the integration paid for.

SaaS vendors state that pay-as-you go models are economical because firms only pay for the services used. However, transaction fees, as they are sometimes called, are variously defined and can get pricey. Companies must fully understand how the vendor defines transaction to get a true sense of the charges they might incur. Firms also need to ask questions about licenses. Do both parties to a transaction -- sender and receiver -- each need a license? Due diligence is paramount to fully understand subscription terms and negotiate effectively.

SaaS vendors suggest that the total cost of software ownership is five to ten times more than subscription costs. However, the concept of return on investment (ROI) is ignored. Somewhere between 18 and 24 months after Web-based software purchase, a firm will reach a breakeven point where the system has paid for itself. Thereafter, annual budgets must only allow for maintenance fees, which yield value in terms of software updates and technical support. In the same 18 to 24 months, SaaS subscribers' integration, subscription and transaction fees will eventually equal software acquisition price. There is no ROI potential; only more fees in month 19 (or 25) and beyond. Over time, the SaaS subscriber will make payments exceeding twice (or more) the purchase price of Web-based software. Costs will continue to accumulate as long as the firm is an SaaS subscriber. So, while the upfront investment may initially appear less with SaaS, software purchase is actually less expensive over the long term.

SaaS vendors often mention innovation in the form of periodic application updates as an advantage. However, Web-based software sellers usually provide real-time updates, giving all customers the benefit of software upgrades made on one customer's behalf. More important, Web-based software firms typically created their software in house and work with it daily. As applications purchasers, SaaS vendors are either passing along another firm's changes or having staff work on applications with which they may or may not possess familiarity.

Data security is an important issue with many facets. There is no more secure option than owned software on a corporate server behind a firewall or in a data center. SaaS vendors place hundreds, maybe thousands, of customers on the same server. That means everyone's data, including key competitors, are sharing space. Is this proposition acceptable? Breaches can happen even with stringent precautions, so SaaS subscribers must determine whether this risk is acceptable.

Data access is paramount. If a firm cannot afford subscription payments, what happens? Does the firm immediately lose access to applications and its data? What about subscription rate changes? If a rate escalation is exorbitant, what options does a subscriber have? This is pretty clear-cut: pay the new fee or go elsewhere. Going elsewhere can get complicated because all the firm's data reside on the SaaS vendor's server and a firm may not be privy to either server type or the format in which data are stored. A firm will pay a significant charge to obtain usable data from the SaaS provider. Possessing disks or tapes with data backups is no solution, because absent the application to drive the data (or insight into database structure), they are useless.

Then, too, Internet access is an issue. When Internet service is interrupted, SaaS subscribers cannot access applications. Business comes to a halt. Firms with purchased Web-based software can continue to conduct business using their applications. When connectivity returns, they can update any activities requiring an Internet connection.

There are no "quick fixes" when automating business processes. Firms must ask questions and consider both the positives and the negatives. In the final analysis, taking ownership of business processes is a more secure option, given that system administration is no longer as complex and can easily be performed by a consulting firm on a periodic basis.

Wayne Slossberg is Vice President of QuestaWeb, Inc., a Westfield, N.J.-based provider of Web-based global trade management (GTM) and logistics solutions. QuestaWeb offers software for purchase and an SaaS model. http://www.questaweb.com/

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