Agenda: Technology Avoid the Hidden Costs of SAAS

Examine all the expenses involved in purchasing and using software-as-a-service.

By Drew Robb Jun 1, 2013
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Human resource professionals are experts at staffing management: selecting, hiring, onboarding and retaining the right employees. But that expertise doesn’t always carry over to selecting, acquiring and implementing appropriate software. One of the first puzzles in this arena: determining whether the software should run in-house or be purchased as a service from a vendor—known as software-as-a-service, or SAAS.

"Determining whether SAAS is the answer can be as much an art as it is a science," says Cheryl M. Josler, PHR, director of shared services, HR information systems and payroll at Dartmouth College.

In some cases, the benefits are clear. For example, SAAS can offer a much lower initial cost in exchange for ongoing monthly or annual fees. But that doesn’t mean all enterprises should go the SAAS route. Hosted software may be a poor match for an organization’s needs, and, once all expenses are added in, the initial lower cost may not equate to long-term savings.

"Technology administrators need to be savvy in understanding the best and most cost-effective way to get business needs met," Josler says.

Below are features to negotiate and contractual elements to avoid when considering a SAAS purchase.

Unmask Hidden Costs

Gartner Inc., a technology consulting firm based in Stamford, Conn., predicts that companies will spend more than $22 billion on SAAS in 2015. There are hidden costs related to SAAS, but not all lie on the customer side.

"Most hidden costs of SAAS are borne by the vendor without any extra charge—securing the infrastructure, keeping it running 24/7, adding enhancements every few months, enabling remote access and mobile users, and so on," says Phil Wainewright, chief executive officer of Procullux Ventures, an independent cloud-industry consultancy based in London. "Where extra costs do apply, they tend to be for capacity or services that are beyond the scope of an average implementation, in which case it doesn’t make sense to include them in the fixed monthly or annual fee."

Contractual negotiations should clarify all costs involved with the service and clearly lay out all the terms.

Before signing a SAAS contract with a vendor, address these key items:

Support. The vendor may offer support tiers at different price levels. Find out exactly what each tier covers, and don’t overpay for unnecessary services. "Many organizations buy ‘extended’ support or ‘platinum’ services without knowing what they mean or how to use them," says Jason Averbook, chief business innovation officer at San Francisco-based Knowledge Infusion, an Appirio company. Averbook says these extended services often "don’t get used and the vendors don’t have the time to remind you to use them."

Growth and shrinkage.The ability to scale services up or down is oneof SAAS’ advantages. Include in the contract the ability to add users—at the same or lower rates—as need expands. Although vendors are usually happy to include provisions for increasing use, they may be reluctant to allow customers to scale back. The contract should be flexible in both directions, but the vendor may not offer this option without prompting.

Additional capacity. Standard prices may be based on a typical amount of disk space, number of e-mail addresses, number of applicants or other criteria. Make sure your company’s use falls within those criteria, or determine ahead of time how much additional service fees will be.

Ongoing integration. There may be initial costs for setting up and integrating SAAS with other systems your organization already uses.

Gartner estimates these costs at an additional 10 percent to 50 percent of the software and implementation costs. Initial integration costs will typically be laid out upfront, but what about the ongoing integration expenses? If the vendor is updating its SAAS every few months, and the software links to an existing HR management system or other software, who is responsible for performing repeated integration, and at what cost? If the customer pays, can the customer decide to skip an update if reintegration costs exceed the value of the upgraded benefits?

Monitoring and management. Although the SAAS vendor will do most of the heavy lifting, the customer is still responsible for functions such as monitoring the service to make sure service levels are being adhered to and managing internal security processes. Those internal expenses must be part of the budget. "When buying anything from the cloud, don’t wash your hands of all responsibility," Wainewright says. "It’s up to buyers to put processes in place so that they can monitor their spend and make sure that they are continuing to get value for money."

Training. The contract may cover training for initial deployment, but, given frequent software upgrades, ongoing training will be needed. The contract should describe who is responsible for the cost and delivery of retraining.

Renewal costs. When a company owns software, corporate leaders can decide whether to keep using the existing software or pay to upgrade to newer versions. With SAAS, once the initial contract period is up, the buyer must either pay whatever rates the vendor charges or find and deploy a new technology service provider.

Frequently, SAAS users discover at renewal that the price has gone up or that features previously included now cost extra. "As the vendor adds more features and functionality and moves upmarket, the pricing shifts up, too," Wainewright says. "A solution that was a good fit two or three years ago becomes more sophisticated than the client needs, with a new, higher price." To avoid sticker shock, try locking in prices beyond the contract period, with the option to extend the contract at those prices. Also, watch out for contracts that automatically renew without explicit authorization.

Backup and recovery. Ensure that the contract lays out data backup and recovery procedures and service levels and that they meet business needs. Contracts should specify the frequency of backup (continuous, daily or weekly), the media used for backups (disk or tape) and whether data are backed up to multiple locations as protection against loss. If the standard level of data protection is not adequate, establish the cost of the necessary higher level and specify this in the contract.

Escape clause. Make sure the contract has a reasonable termination clause that doesn’t hold the company hostage if the relationship with the vendor goes south. In particular, make sure the customer has the right to end the contract without penalty if product updates eliminate essential features laid out in the contract. There should be an unrestricted right to termination in the event that the vendor changes ownership.

Plan Your Purchase

To avoid hidden costs, members of the team tasked with selecting the software should discuss the above points. In addition, other questions likely will arise that are particular to the software or to the organization’s human resources and business processes. Josler says the first time Dartmouth tried SAAS, unplanned costs arose after the contract was signed.

For example, in a hosted benefits solution, college officials thought the monthly hosting fee would include creating a test environment for open enrollment and revising the base employment application to meet new state or federal changes, but such actions incurred hourly programming fees. The charges weren’t significant, but they were items Josler didn’t know about upfront.

"With each opportunity to evaluate SAAS versus an on-premise solution, your sophistication in understanding the questions to ask grows significantly," she says. "And it’s all about asking the right questions."

Drew Robb is a freelance writer based in the Los Angeles area.

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