One of the things about being an analyst is that clients rely on you to cut through the hype and claims to find out about reality (or as close as they can get). I have had some interactions with some of our vendor clients and seen some blog posts about a press release Gartner put out. I thought I would use this post to clarify some things related to HCM and provide some perspective on some myths out there.
SaaS is important, but is still the minority - The press release makes an important point. SaaS is important, but in the grand scheme of things, in most markets, it is more about the future than the present (or the past). In the HCM market, we have found some segments with extremely high adoption (for example, E-Recruitment and Employee Performance Management software) and others with very low adoption (like core HRMS for organizations with greater than 2,500). We think that will change over time, but even with exceptionally high growth for core HRMS, it is still going to be single digits in terms of market share for large enterprises. What is important though is momentum. We see a lot of interest by clients around SaaS throughout all segments of HCM today.
SaaS is only for less complex problems - The press release includes something that I think is open to misinterpretation if taken out of context. There is a statement that says SaaS is for less complex problems. In Recruiting and Employee Performance Management, the largest, most complex global organizations are deploying SaaS for their hardest problems. It is starting to happen in other HCM segments as well. The context for the statement was around content, collaboration, and communications (primarily web conferencing) and CRM (primarily sales force automation) as the largest markets for SaaS.
SaaS is less expensive - It can be less expensive, but it is not always. Also, lower cost is not necessarily the right consideration. I think an example will illustrate. The names have been changed to protect the innocent. Client A owns a perpetual license for Vendor P's HCM solutions. It is a bundled license so it includes all of the HCM modules offered by that vendor including Recruiting. However, Client A is on an older release of Vendor P's solution and will not be upgrading for another 2 years at least. The older release does not have all the functionality required by the recruiting organization and is not terribly easy to use. Client A's recruiting organization goes to a conference and sees Vendor S's SaaS solution and it has everything they need.
So, what should Client A do? It is a bundled license so they cannot lower their maintenance fees if they do not use the Recruiting solution. Implementation fees will be similar. I just slipped that one in there. I have yet to see compelling evidence that SaaS is less expensive to implement. The things that drive implementation cost are largely independent of the solution selected and have more to do with customer complexity. In fact, some of the complexity factors like number of interfaces may actually favor Vendor P. Client A also already owns the hardware to run Vendor P's recruiting solution and has the technical resources in place to support it. There is no incremental cost savings from an IT perspective to move to SaaS. The only problem is that Vendor P's solution does not meet the business need. It does not have the functionality, usability, maturity (few of Vendor P's customers use it the way Client A wants to), or flexibility (not just the configurability, but also the ability to take on new functionality through more frequent upgrades) to meet the business needs. It may be worth it to spend the money for the Vendor S solution. The point is that cost does not tell the whole story. SaaS can be more expensive, but the business value may also outweigh the costs.
SaaS does not have “shelfware” - The press release is right on here. Most SaaS HCM contracts I have seen are not pay per use. They are term agreements based on the number of active employees (or employee users). The customer can run the solution for up to a certain number. However, if there is a downsizing event and there are fewer employees, there is typically no way for a customer to lower its fees, at least in the HCM world, unless they renegotiate (what is known as a cancel/rewrite) or as part of a renewal. Obviously, the vendor does not have an incentive to renegotiate during the term of the agreement (it is actually worse in that most contracts have auto-renewal provisions – Gartner clients definitely talk to us when negotiation new SaaS contracts or renewals). So, shelfware can be a real challenge for customers.
SaaS is low risk - Here is a dirty little secret. SaaS vendors are not perfect. They have had outages. They have implemented new versions which caused response time issues for customers. They have even made poor architectural choices that have limited scalability as they have grown their customer base. Multitenant architecture does not always equal scalable. There is risk. That is why technical due diligence is imperative. That is also why it is important to have the right expectations set via SLAs in your contract. It is also why the relationship/partnership with the vendor is critical. When problems do come up, you want to have confidence that the vendor will be there working with you to make it right.
SaaS upgrades have no impact - From my previous comment, you can tell that on occasion as a SaaS upgrade can have a very negative impact. However, even your average upgrade can have some impact. If the vendor changes its user interface, you may have some user training to do (you do not really think there is a zero training user interface, did you?). Even if you do not implement new functionality, you still may need to do some regression testing. The difference in the SaaS world is that it is lower impact, but more frequent. Some SaaS customers I have spoken with call it a different upgrade cadence (and it can take some getting used to if you typically upgrade every 4-6 years or more). Some SaaS HCM vendors bring out new functionality monthly.
Having read this, you would probably think I am pretty negative on SaaS. I actually do believe that it is the future in HCM solutions. However, it is a not a panacea. There are challenges and issues. Perpetually licensed, on-premise installed solutions will not go away any time soon. Like many technology decisions, you have to look at costs, benefits, and risks of the different alternatives and make the best choice for your organization. There is no right answer. There is only the best choice you can make at the time given the available information.