Looking Under the SAAS Model’s Hood

Common myths about software-as-a-service revolve around cost, ease of implementation and demands on information technology departments. - SECOND OF A TWO-PART SERIES

By Bill Roberts May 1, 2010

0510cover.gifTechnology managers often praise the software-as-a-service (SAAS) model for its quick implementation. Rollouts take less time to launch—often much less—than on-premises software, but adopters must be ready.

"You get to reap the benefits quicker," says Rob Jackson, global manager for human capital management (HCM) at H.B. Fuller Co. in St. Paul, Minn. "But you need to be ready to make decisions about your business processes." The specialty chemical company uses SAAS for HCM.

SAAS offers greater ease of implementation and maintenance than most on-premises software. But there are many myths about SAAS. It is wise to understand its impact on business processes, finances, information technology and users before you adopt.

In the HR Technology column in the April 2010 issue of HR Magazine, HR executives reviewed what they need to know about the SAAS model and its vendors. This article examines how SAAS impacts internal operations. It also dispels some myths found in vendors’ marketing materials.

"SAAS is the right direction for many HR organizations," says Heidi Spirgi, president of Minneapolis-based Knowledge Infusion LLC, an HCM consulting firm that has many clients choosing SAAS. But there are issues HR professionals "don’t understand. Buyers need to be better-educated."

The Low-Cost Myth

Many assume SAAS is less expensive than on-premises software. It often is, but not always. Over the long term—say, five years—SAAS could cost more than on-premises software, especially when a company has invested heavily in information technology operations.

"It varies," says Liz Herbert, senior analyst at Forrester Research Inc. in Cambridge, Mass. She says cost factors include the size, skills, hardware and networking capacity of a company’s IT group. Larger companies often do not adopt SAAS as quickly as others because they have invested heavily in IT resources for on-premises software.

HR executives considering SAAS should calculate the total cost of ownership for both options, but getting accurate information can be difficult.

"The cost of your SAAS subscription is a much more highly visible figure than the cost of supporting software on premises," says Steve Rugg, director of HR technology for United Air Lines Inc. in Chicago, which uses several SAAS applications for HCM. "A SAAS invoice comes once a quarter. You know exactly what the technology costs."

The only precise costs for on-premises software are license fees and implementation costs. The cost of internal IT resources and maintenance is often tough to gauge. Rugg compared one SAAS application with the e-performance module United was using in its HR information system. "We finally found the yearly IT maintenance cost. It turned out to be a wash with SAAS."

A chief financial officer’s view of SAAS can be skewed because accounting rules allow implementation of on-premises software to be treated as a one-time capital expense; a SAAS subscription is a recurring operating expense. Under accounting rules, a capital expense is a long-term investment that supposedly adds value to the company—and shareholders like that.

Imation Corp., a data storage company in Oakdale, Minn., wanted to adopt two SAAS applications for HCM. "We had gotten our chief financial officer and chief information officer involved early in the process—you have to do that. We thought it was a done deal," says Dan Arndt, HR information system and compensation manager.

Although neither application would be a capital project, one would have a large subscription fee. As a courtesy, Arndt presented it to an IT governance panel that reviews proposed IT capital expenses. The panel rejected the SAAS application because dollars were not available in the operating budget, Arndt says. As a capital expense, it might have been approved. Arndt did adopt the other, less-expensive application.

Some IT executives and chief financial officers are enthusiastic about SAAS applications for HR because these departments often rate low when it comes to allocation of IT resources. At Landmark Bank N.A. in Columbia, Mo., SAAS was the only way HR leaders could get a payroll application and an HR information system, according to Carol Karle, a Landmark vice president. The IT staff was so busy with mission-critical systems that "they were looking forward to not having a server dedicated to payroll processing," says Karle, who did not have to make a hard return-on-investment case to win IT leaders’ blessing.

The Quick-Fix Myth

SAAS is a quicker path to an application than on-premises software, but the time-to-use measurement is often exaggerated and staff involvement is often understated.

"It took more time and effort than I expected," admits Tanya Corners, PHR, vice president of HR for Claim Jumper Restaurants LLC, based in Irvine, Calif. The company adopted a hiring application to replace a paper process for its 46 restaurants. "To pick the business process apart, you have to get several people involved." The "process stuff" took time, she says.

"SAAS vendors will tell you that you can get implementation in as few as seven days or seven weeks," Spirgi says. But that only addresses the technology. "They can turn on the software, set up the users, and do the baseline configurations, but those events do not include all the work that needs to be done around business process, integration of systems or change management."

Software-as-a-Service: A Primer

In the software-as-a-service (SAAS) model, the vendor owns and operates the application and the database, owns or leases the hardware, and manages security and upgrades. The customer owns the data and accesses the application via the Internet with a web browser, usually for a per-user subscription fee.

In the on-premises model, the adopter buys a license, loads the software on its hardware, and implements and maintains the software. Upgrades require new licenses. The adopter owns the data, application, database, hardware—and any problems.

In its purest form, SAAS is built from the ground up for multi-tenant operation—meaning many customers share one instance of the software. Pure-SAAS vendors prohibit access to the code base for customization and instead offer configuration.

Multi-tenancy and a single code base allow the vendor to:

  • Manage one instance of the application for many customers.
  • Achieve cost efficiencies.
  • Implement SAAS quickly through configuration.
  • Upgrade software for all customers at once.

Understanding business processes and how they translate in SAAS becomes crucial: Arndt says nearly every function his users need can be made available through configuration of SAAS products for recruiting, onboarding, performance and compensation. It requires that his team take the time to think "out of the box."

SAAS does not allow customization. Users must be convinced that the functions they get will suffice. For example, H.B. Fuller’s staff members used different names for aspects of a process than the terms used in the SAAS application, and these could not always be configured, so there was an educational element for users. Jackson notes that benefits "far outweigh" the discomfort that comes with change.

SAAS applications are not your systems and cannot be tailored, Rugg says, so you need to have internal discussions with your clients. United’s HR professionals were able to configure SAAS applications for 80 percent of what users wanted. "Our users accepted the 20 percent that could not be configured," Rugg says, adding that training and change management are often overlooked during SAAS implementations.

SAAS rollouts need to be managed as projects, says Michael H. Martin, a principal in the human capital business of Mercer LLC in New York. HR professionals "must be prepared to pick up project management responsibilities that an IT staff would undertake in an on-premises implementation." Too often, he says, HR leaders assume the vendor will manage the project, and no one on the inside is managing risks. The HR staff doesn’t always think about change management, training, communication and risk mitigation.

The IT-Free Myth

Spirgi says vendors "will tell you that you can do this independent of IT. Fortunately, most IT departments will tell you they need to be involved."

Even at United—with a large, experienced HR technology staff—the IT staff was essential, Rugg says. One rollout involved 400 interfaces among the HR information system, SAAS and other systems. The IT staff also pulled data out of an existing system and into a new one.

IT staff was crucial to the Claim Jumper rollout as well. "IT was involved in all of our initial meetings," Corners says. "We wanted this to be as web-based as possible, with no additional information on our servers. IT was in favor of that and was helpful in making the decisions."

Naomi Bloom, a strategic HR technology consultant and managing director of Bloom & Wallace in Fort Myers, Fla., identifies at least three areas where IT needs to be involved:

  • Connecting interfaces.
  • Assessing security, the hosting infrastructure and other IT-related issues with the vendor.
  • Providing an understanding of any ripple effects the SAAS application may have on in-house systems.

"You need their help to assess things that the average HR person won’t know," Bloom says.

The Autopilot Myth

After an on-premises implementation, the vendor usually disappears until there’s a new version. In SAAS, implementation begins long-term relations.

Martin says, "I often get called in by clients to right the ship when no one in HR or payroll is operating in a vendor-manager capacity."

Take support services, for instance. With on-premises software, the first person an HR professional calls is a member of the IT staff. Depending on what else is happening, IT might leap on the problem. With SAAS, an HR professional would call the vendor.

"A vendor support desk may need time to get back to you, which is all the more reason to develop a good working relationship by having someone in HR designated as the SAAS vendor manager," Martin recommends.

Hence, satisfaction with SAAS hinges on HR leaders’ ability to manage vendor relations. "The SAAS model forces more contact with the vendor," Jackson says. "You have to be ready to take advantage of it."

Consider upgrades, which usually occur a few times a year. The power of user communities makes upgrades go smoothly. "Everyone is testing the same code," Jackson says.

Jackson also has experience with large HR information system vendors, and he notes that they try to create ecosystems, too. "Typically, it is reserved for a select few customers," he says. "With our SAAS vendor, every customer has the ability to help drive the product."

The best SAAS vendors are already using their communities to decide what functions are most desired and then providing those functions with each upgrade, Bloom says. This is not restricted to software features and could lead to expert systems with embedded intelligence.

For example, a vendor with hundreds of thousands of users could determine the half-dozen most common performance models, and the most popular by industry or geography, and then offer configuration options for those trends. The vendor can survey for common practices and make the results available free or as value-added offerings, Bloom says.

The potential for innovation is endless when vendor relations are well-managed.

Change Agent

Not every HR leader wants to spur innovation, however. Spirgi says that before adopting SAAS, ask whether your business is ready for innovation with every upgrade. "Some HR organizations can afford to stay with the old model because their HR practices are not the leading edge," she says. "The more you innovate and the more quickly you evolve HR practices, the more SAAS works for you."

United’s Rugg agrees: "The SAAS model is a great enabler of what I would call a short path to, if not the best practice, at least better practice."

The author is the magazine’s contributing editor for technology.

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