It is interesting to see the level of interest from ERP/HRMS vendors in the SaaS delivery model for HCM. These vendors are competing against SaaS talent management application vendors and want to fight fire with fire. However, when one looks at the reasons why customers are using niche and talent management application suite vendors instead of the ERP/HRMS, the SaaS delivery model is not the main reason.
Customers choose niche vendors and talent management application suite vendors primarily because of the depth/maturity of functionality (and domain expertise) compared to the ERP/HRMS vendor for the release that they are on. The end of the last sentence requires emphasis. ERP/HRMS vendors are investing significantly in improving their talent management functionality, but you have to be on the most current release to take advantage of it. The biggest adoption issue for talent management applications from ERP/HRMS vendors is that most customers do not upgrade frequently because of the time and expense associated with the upgrade. The functionality from ERP/HRMS is becoming "good enough" in many cases for customer needs. However, customers do not want to wait until they upgrade to get that functionality. The SaaS model allows customers of niche and talent management application suite vendors to get required functionality right away, continue to add new functionality with little disruption, and still allow them to migrate back to the ERP/HRMS vendor in the future (if they want to do so).
So, does the SaaS delivery model solve these issues for ERP/HRMS vendors? It will only solve the problem if the ERP/HRMS vendor changes its primary delivery model to SaaS (so upgrades become less of an issue) or if decouples the talent management applications from the core HRMS applications. If the ERP/HRMS vendor decouples the talent management applications from the core applications, allows it work on top of any of the supported releases of the core applications (and is delivered via the SaaS model), it could work. However, just supporting the SaaS model alone does not solve the problem.
The retention rates I have seen do not support the notion that many customers are migrating back to ERP/HRMS vendors at this point. However, do not be surprised to see it start to happen like it did in SCM and CRM because the solutions are becoming "good enough". If ERP/HRMS vendors leverage the SaaS model as I described above, it could accelerate that trend.