BlogERP: Jim Holincheck's HCM Software Blog

SaaS: Will It Survive? Is It Even In Danger?

Harry Debes, CEO of Lawson, created quite a stir in an interview where he pronounced that SaaS would "collapse" in two years.  Many others have weighed in on this including Vinnie Mirchandani, Jason Corsello, and Sarah Lacy.  They make the case for why SaaS will last and is good for customers.  One of Harry's arguments is that there has only been one really successful SaaS vendor, Salesforce.com.  He says:

"An industry has to have more than just one poster child to overhaul the system. One day Salesforce.com will not deliver its growth projections, and its stock price will tumble in a big hurry. Then, the rest of the [SaaS] industry will collapse."

There are arguably other successful SaaS vendors (especially in HCM as Jason notes).  However, Salesforce.com has been the poster child.  Joshua Greenbaum, who has previously predicted that demise of Salesforce.com, had an interesting post where he discussed Harry's comments.  He made an important point.  There are other factors at play in the success or demise of Salesforce.com beyond just the SaaS model.  However, he is not a big long-term believer in pure-play SaaS.  Joshua believes the future is a hybrid model (vendors offering the customer a choice of delivery models).

As I have said previously, I believe there is no such thing as a SaaS industry or market.  SaaS is a delivery model that is used in many different software markets.  So, I disagree with Harry on that point.  There is no industry to collapse.  Joshua (as well as Harry) is right though that SaaS is not necessarily the best answer for all software markets.  However, I believe Joshua comes to the wrong conclusion.  I do not think the industry will move to the hybrid model.  I think the industry will continue to have multiple models.  Different markets have different requirements.  Pure SaaS solutions may be appropriate for some and not for others.

There is nothing particularly wrong with multiple models from a customer perspective.  In the HCM software market, I find that that most customers choose the best-fit application first, then they evaluate the delivery model choices.  If SaaS is the only option from the best-fit vendor, then that is usually not an issue for customers.  If the best-fit vendor offers multiple options, then customers choose the best one based on their needs.  Harry's own experience with Salesforce.com is typical.

"We use Salesforce.com, and I like it. But I would've bought the product even if it wasn't SaaS. The success of Salesforce.com, in my opinion, has to do with their product being good, not because it's SaaS."

So, are you with Harry?  Is SaaS over-hyped?  Are you with Joshua?  Is the pure-play SaaS model untenable in the long-term?  I am on the record here and here (Gartner subscription required) as believing that SaaS usage will continue to grow.  What do you think?

Update

I received the following clarification today from Kathy Nottingham at Lawson providing additional color on its position on SaaS:

"While in APAC a couple weeks ago, Harry Debes was interviewed by ZDNet Asia.  He made some bold, broad statements predicting the demise of SaaS which created quite a stir in the analyst/blog world.  Harry stands by the general statement, but here are some points of clarification:

While Harry has strong opinions about the long term viability of SaaS, he and the rest of the Lawson organization are not trying to dictate application delivery options to the market, but rather respond to market demand.  Travis White posted an "opinionizer" article on lawson.com clarifying Lawson's perspective on SaaS.

http://www.lawson.com/wcw.nsf/pub/Opinionizer

While we have not seen significant market demand for SaaS delivery/deployment options for our general ERP solutions, we have seen interest in SaaS solutions in the HCM space.  Lawson is delivering SaaS HCM solutions to our clients and providing other deployment options as well.  Larry Dunivan provides more Lawson perspective on SaaS in the HCM space in his latest blog posting:

http://perceptivehrtech.com/

Hopefully, these articles provide a more complete perspective on Lawson's SaaS position.  If you have any questions about Lawson and pricing/delivery options that we offer to our clients, please contact me.

Missing the Point - Part 1

It has been awhile since I have done a post.  Between Gartner Symposium, the HR Technology Conference, and a week-long vacation, there has not been much time.  I was catching up today on reading my RSS feeds and there were a couple of posts that caught my eye because I think they really miss some fundamental points.  I will talk about the first post here and address the second post in Part 2.

On The Intelligent Enterprise Blog, there is a post entitled "How mature is the SaaS market?".  The question, in my mind, is missing the point.  There is no such thing as a SaaS market.  SaaS is a delivery model (and business model) that a vendor chooses to use to service customers.  It can be used across many different software markets.  There is a difference in the adoption of SaaS within software markets however.  Even within the HCM space, there is different levels of adoption of SaaS in different segments (e.g., high adoption in Recruitment, low adoption in Time and Attendance).

I do agree with the point about the success of SaaS has largely been around the edges of ERP solutions.  It will be interesting to see if SaaS-delivered can start to displace incumbent ERP solutions in large enterprises.

Oracle on SaaS and the SMB Market

There has been a lot of chatter "Larry Ellison Saying No to SaaS" in the blogosphere based on a post on Information Week.  It has been picked up on ZDNet and Intelligent Enterprise blogs as well.  Here is part of the transcript from Oracle's most recent earnings call.  You be the judge:

"It’s very different than SAP’s strategy which is to go after small companies; small companies with their new Business ByDesign, formerly known as A1S product. Now, we see the problem in that because we’ve looked at going down market. We’ve looked very closely at it, and we think it’s very hard to make money because there is no synergy. To go down market you need a new product and new product development teams. You spend a lot of money developing a whole new product for the low end. But you also need an all new sales force because we don’t call on those customers. We don’t call on small businesses, and it’s very expensive to call on small businesses. It’s very expensive to do ERP implementations in small businesses. The cost of sales is high. The cost of implementation is high. There are virtually no synergies in sales, marketing, and product development and support.

So while we think it’s an interesting market — the small market — because it’s large, we just haven’t figured out a way to make a substantial profit in that market. We think it’s hard to make money. Our strategy: add more value, go upstream, sell industry-specific software to our existing customers, and we’ll watch and see how SAP does going after small companies. Especially with in Software as a Service which we think is very interesting, but so far no one has figured out how to make any money at it."

Does this sound like that he is "saying no to SaaS"?  What do you think? 

Platforms and HCM Applications

Jason Corsello has a post about platforms with a HCM lens (based on a post from Marc Andreessen about three levels of internet platforms).  Jason points out that HCM applications are at the first platform level (Access APIs).  I think there is a simple answer to this though.  HCM application providers have not tried to be platform providers.  We may see that happen down the road.  However, I think what will be more interesting in the short-term is how new and existing vendors leverage level 2 (Plug-In APIs) and level 3 (Apps Run Inside the Platform Itself).  I imagine that we will see numerous Facebook plug-ins emerge (Jobster for example has already created one).  I expect that we will also see someone build serious HCM applications on the Salesforce.com Force.com (used to be Apex and before that AppExchange) platform.  CODA, a financial software vendor, announced this week that it is building financial apps on the platform (see Dennis Howlett's post on this).  It is only a matter if time for HCM for the reasons Andreessen outlines about level 3 platforms.

More on Workday

Workday recently announced its Financials products and it has received a lot of coverage in the press and blogging community.  Here is some of the coverage:

• Dan Farber and Larry Dignan describe the announcement from Workday (along with some graphics from the pitch)
• Nicholas Carr weighs in about Workday's pitch calling it potentially "The End of ERP" much like Salesforce.com pitched "The End of Software".
• Phil Wainewright does a nice job discussing the implications of Workday's in-memory database architecture approach and the flexibility it affords over the traditional RDBMS approach employed in ERP solutions.
• David Dobrin does an excellent job of exploring in more detail Workday's use of in-memory database and walks through an example (this goes in the I wish I had thought of doing that department) of how it can potentially enhance flexibility.  It is well worth the read.
• Dennis Howlett does a great job of explaining why Workday's approach to Financials is both old and new at the same time.  In addition, he discusses specifically in the context of Financials how Workday's approach provides additional flexibility.

Gartner published (now archived on Gartner.com) a First Take at this time Workday launched its HCM applications in November 2006 for those interested in our discussion of some of these points.

Two Tales of SaaS

The roles of SaaS is certainly a hotly debated topic.  I just saw two different views expressed recently.  First, in Red Herring, "Sassing SaaS" describes SaaS as hot, but focuses on its shortcomings.  It talks about the issues around security, customization, interfaces, service levels, etc. making SaaS not appropriate or desirable for certain industries and markets.  Second, in The Intelligent Enterprise Weblog, "Future of Enterprise Software in a SaaS World" describes how SaaS is already reality for many organizations and figures prominently in future buying plans.  It discusses how all the things in the Red Herring article, though important, are not critical issue.  The author argues that it is the acceptance of SaaS by enterprise IT organizations that is the biggest issue in implementing SaaS.

So which is it?  My experience with HCM applications is that only a small percentage of IT organizations are steadfastly against using SaaS.  They are concerned with security, customization, interfaces, service levels and more.  However, if it is the solution and delivery model that best meets the user needs, then they are supportive of it.  I find IT organizations more concerned with trying to leverage their existing applications and to minimize the number of interfaces they need to maintain.  The resistance is around using "best of breed" applications, not SaaS as a delivery model.

What do you think?  Is SaaS over-hyped?  Will SaaS vendors ultimately displace existing providers of enterprise applications?  Will SaaS vendors and traditional enterprise apps vendors continue to co-exist?

Why SaaS Alone Is Not Necessarily The Answer For ERP/HRMS Vendors

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.

More On Alternative Business Application Software Business Models

Phil Wainewright at ZDNet has a great post about how Mozilla is making a lot of money (the "bulk" of its $52.9 million in 2006) by including Google as the default search engine for the FireFox browser.  It demonstrates another alternative revenue model for business application software vendors.  I had previously discussed an ad-supported model and sponsored applications in this post.  However, this is a different twist.  Vendors would embed links to a variety of paid services into the applications, instead of advertising.  Phil uses Skype as an example.  If a vendor made a Skype extension the default for telephone number fields in an application, it could negotiate a micropayment deal with Skype for each call made through the link.

There are many opportunities here.  Address fields in employee/manager self-service could trigger micropayments for Google Maps or Yahoo! Maps.  How about a link on a total compensation statement that takes you to Payscale (a vendor gets a micropayment for each person it sends to Payscale that submits his/her compensation data -- which is automatically pre-populated of course)?  This is more subtle than advertising, but could prove also be very lucrative.

My Recent HCM Research

Here are links to some of my most research notes (subscription required):

The Pace of Consolidation Accelerates in the E-Recruitment Software Market -- Large vendors that have not had a presence in talent management are buying their way in through increasing mergers and acquisitions. Talent management vendors are trying to get to a critical mass to compete with the larger, more-established organizations.

Magic Quadrant for E-Recruitment Software, 2006 -- Due to the maturing market for e-recruitment software, Gartner has produced a Magic Quadrant. The vendors included here provide Internet recruitment applications for the full requisition-to-hire process to companies with more than 2,500 employees.

SumTotal Aims to Lead Talent Management Market With MindSolve -- By acquiring MindSolve, SumTotal Systems gains a strong talent management offering, including e-learning, employee performance management, succession management and compensation management applications.

Predicts 2007: Software as a Service Provides a Viable Delivery Model -- Adopt SaaS first using a modular and incremental approach. SaaS predictions provide overall guidance for SaaS delivery adoption and specific market outlooks for human capital management, e-commerce and integration as a service.

Workday's Initial HCM Offering Is Intriguing but Unproven -- The startup Workday's Human Capital Management software-as-service solution includes innovative technology and has had some initial success. Prospective customers will face the usual risks of early adopters.

Case Study: Workforce Analytics at Sun -- Sun used workforce analytics to understand the financial impact of and to target its spending around its mentoring program.

Clearing Up the Confusion About SaaS

Thomas Otter has expressed confusion about definition of SaaS (or the lack of agreement on the definition).  Nicholas Carr provides what Glovia is doing as an example of what SaaS is.  We, at Gartner, do have our own definition.  The Gartner definition has three requirements:

1. The application is owned, delivered, and managed remotely by one or more providers
2. The application is based on single set of common code and data definitions which are consumed in a one-to-many model by all contracted customers at any time.
3. The application is licensed on pay-per-use or subscription basis

There are different architectural models for SaaS, but they conform to these requirements.  Thomas uses an example of ADP as a SaaS provider.  Unfortunately, he is partly right and partly wrong.  I find a lot of people get confused between Outsourcing, ASP and SaaS.  Lisa Stone published a good research note that discusses part of this.  However, let me try to provide a relatively simple model based on the research that can clarify the different options on the continuum between On-Premise and Outsourcing.

Here is how to differentiate between the different options:

• On-Premise -- This is the easiest one and the one with which are the most familiar.  The client is responsible for the business process and the technology and technology support.  The application is installed at the client site (with each customer getting its own code).  A subscription model is typically not used, but some vendors do offer leasing options and financing (so it looks like a subscription).
• Application Management -- This is very similar to On-Premise except that the client contracts with a provider to maintain the application (either on-site or remotely).
• ASP/Hosted Solutions -- With this option, the client is still responsible for the business process, but the provider is responsible for the technology and technology support.  In this option, the provider implements a separate instance of the application for each customer.  There are several different economic arrangements possible ranging from subscription pricing to the client licensing the application from the software provider and contracting with the ASP provider just for hosting services.
• Software-as-a-Service -- With the SaaS approach, the client is responsible for the business process, but the provider is responsible for the technology and its support.  As discussed above, the application runs at the provider's facility and is based on common set of code and data definitions consumed by customers in a one-to-many model.  In addition, SaaS providers use a subscription revenue model.
• Payroll Outsourcing -- Payroll outsourcing is different from SaaS because of the responsibility for process ownership.  In traditional payroll outsourcing, the client is responsible for most of the inputs into the process (e.g., employee changes, pay rate changes, hours worked, etc.) and provider is responsible for the processing and the outputs (e.g., payslips, direct deposit, GL interface).  The technology used to deliver payroll outsourcing is SaaS in nature.  ADP runs AutoPay at its site.  AutoPay is a common set of code and data definitions consumed by customers in a one-to-many model.  In addition, ADP charges on a subscription/pay-per-use basis (i.e., the price is on a per paycheck basis).  It is the ownership of the process that separates payroll outsourcing from SaaS.
• Business Process Outsourcing -- In traditional payroll and benefits outsourcing, there is a split responsibility between the client and the provider for the inputs into the process.  In full BPO, the provider has direct responsibility for the entire process, including the inputs.  The provider also is responsible for not only the technology and technology support, but for process support (e.g., if employees have questions, they contact the provider).  There are a variety of delivery and relationship models for BPO.  For example, some providers will implement a separate instance of the application (like an ASP), but charge on a subscription basis (e.g., priced on per employee per month basis).  If you buy managed payroll services from ADP as a National Accounts customer, this is the model that you would use.  ADP would implement a hosted version of its Enterprise HR solution for that customer that is integrated with its payroll engine AutoPay and charge customers on a per employee per month basis.
• Business Process Utility -- The easiest way to think about a BPU is BPO meets SaaS.  Much like in BPO, a BPU would be responsible for the business process and the technology.  However, like a SaaS provider, the BPU utilizes a common set of code and data definitions consumed by customers in a one-to-many model.  In addition, it charges on a subscription/pay-per-use basis.

So, if you consider these definitions, ADP is really an outsourcing provider that leverages different delivery models for different parts of its operations.  Some of those are hosted applications.  Others are SaaS applications.

The big challenge for clients is sorting out what providers are truly offering and which approach best meets their needs.  That is something we help clients with every day.