Jumping Into the SaaS Pool

According to Tier1 Research, a division of industry-analysis firm The 451 Group, we’ll see a tidal wave in the on-demand CRM market through 2010, as the software-as-a-service (SaaS) delivery model grows at a rate more than six times faster than that of its on-premise counterpart. However, with the adoption of SaaS solutions by large enterprises, some myths have floated to the surface.

A recent report by Forrester Research analyst Liz Herbert suggests that a SaaS model should comprise the browser, mobile device, email, and the desktop client. Herbert writes, "SaaS has evolved from its early roots of being limited-functionality, standalone applications with little or no customization or integration capabilities. It is now an emerging set of more flexible, extensible platforms that are attracting third-party vendors that create add-ons and become part of a broader ecosystem."

"Broader" may be an understatement: This year’s SaaSCon in Santa Clara, Calif., for example, saw a record 900 registrants, with large-enterprise executives making up much of the attendee and speaker lists. "They saw SaaS as an opportunity not only to respond to users’ business application needs but also to manage IT operations," says Jeffrey Kaplan, founder and managing analyst at Thinkstrategies. The explosive growth allows us to revisit some myths about large enterprises opting for on-demand.

Myth One: The small fry are the only ones swimming
Because of the flexible, pay-as-you-go pricing model, SaaS solutions remain a viable and attractive solution for small and midsize businesses (SMBs). In addition, smaller companies lacking IT support find leverage and increased flexibility in the Web-delivery model. But what about larger companies? "[We] found a long time ago that there was a significant level of interest and adoption of SaaS among large-scale enterprises," Kaplan says. "They weren’t ready to talk about it, but they did recognize the potential benefits of SaaS; they were among the first to bring in experts to see if [on-demand CRM] could fulfill expectations." SMBs may have led the dive into actual SaaS adoption, but around the same time, large enterprises were testing the waters.

In fact, according to Nucleus Research, growth in the on-demand market is apparent across all company sizes. "Initially a lot of deployment of on-demand CRM in the enterprise was small pockets of people under the radar," says Rebecca Wettemann, vice president of research with Nucleus. "What we are seeing more and more is that it’s a management decision to deploy a better CRM." A recent survey by Nucleus finds that 51 percent of organizations are now using some kind of an on-demand solution. The survey reveals that organizations -- small and large -- are adopting on-demand to support applications such as CRM, project management, content management, and e-commerce, among other functions. Surprisingly enough, the research shows that 63 percent of companies with more than 1,000 employees have adopted on-demand technology, compared to just 46 percent of companies below that threshold. In most cases, Wettemann says, it doesn’t make economic sense to not consider SaaS.

CRM remains one of the key focus areas within SaaS application development. "We saw about 60 percent of business [last year] coming from on-premise, and 40 percent from on-demand," says Ashu Roy, chief executive officer of eGain Communications, the maker of eGain OnDemand. "This year, so far the trend is about 50-50, and hosting has moved up steadily. We have also seen a lot of ‘mixed-mod’ implementations." EGain was previously tailored to the SMB, he adds, but in recent years has found more enterprise adoption. The SaaS movement is not slowing down: In fact, Nucleus says that 64 percent of all companies plan to consider implementing an on-demand solution in the upcoming year.

Myth Two: On-demand casts a net with holes, risks, and insecurity
In previous years, publicly traded companies worried that SaaS wouldn’t let them manage regulatory deployments. And those with sensitive data saw the Web as a threat and a concern. Now public enterprises see that SaaS might actually help handle security and privacy issues. A major advantage for companies with vast data is the ability to back up that data easily and rapidly. "Being able to do easy exports and backups is critical," says Chris Harrick, senior director of marketing for SugarCRM.

With this in mind, Nucleus shows that security concerns are the SaaS stumbling block less than one-fifth of the time. Wettemann says that a lack of familiarity with the technology may be a greater obstacle. Many employees are stuck in their ways and comfortable with the way on-premise works. Wettemann says that cultural reasons will keep certain companies tied to on-premise -- working with what’s most familiar. Bruce McIntyre, vice president for CRM at CDC Software, echoes that notion, saying that in no way will the on-premise ever completely fade away.

If concerns about security are fading, are the numbers rising? "As the big players move wholesale -- for example, Microsoft last year -- what you’re seeing is that the security issue is being resolved just by the adoption of large organizations," McIntyre says. Case studies and research -- and, perhaps, certain articles in certain magazines -- pointing out that SaaS does work for the enterprise all help garner attention and recognition among other big companies. (Again, note the increased SaaSCon attendance.)

"The idea that this is light and fluffy CRM is not true," Wettemann says.

Myth Three: SaaS leaves the technology staff high and dry
Yacov Wrocherinsky, founder and CEO of New York-based CRM consultancy Infinity Info Systems, says that the idea that the average corporate technology department throws its hands up once an on-demand solution is adopted is completely false. Deployments, he says, vary as businesses do. "It’s not just buying the software, it’s how you use it," he says. "It still requires tailoring and customization. It depends on [the] type of business. The hosted option is only a way of acquiring the technology. Everything else requires support." Wrocherinsky says that a hosted or SaaS model obviously frees up the tech staff to do other things, but it still requires time, maintenance, and attention.

What it comes down to is customization -- and with that, IT is involved more than ever. "IT is an enabler for enhancing the rollout plans across the enterprise," Roy says. "The business can start the process, but IT needs to be a partner to jumpstart the adoption and the unity."

On the same note, Harrick says, "When you get into the enterprise it’s just not true [that IT has no role]. It begins to resemble traditional software. Including IT in the implementation in deployment is absolutely critical."

Myth Four: The price of bait -- SaaS is always greener
"SaaS" and "low-cost" are often viewed as synonyms. However, when looking at the long term -- say, five years -- does SaaS really equal savings? Harrick says that on-demand is not necessarily cheaper in the long run. He warns companies looking at on-demand to take a good, hard look at versioning and functionality when evaluating vendors. He also suggests taking a peek at vendor investment. "Look at how much [the] vendor is investing into research and development, which really does make the product better," he says. "Look at where the investment is going -- is it going into sales and marketing? Or into development [and] trying to build a great model with servicing?" (For more on this, see J. David Lashar’s The Tipping Point column, "The Hidden Cost of SaaS," May 2008.)

From Roy’s perspective, enterprises know that the SaaS solution is not really cheaper. "They do believe that it’s a quicker time-to-value option," he says.

In another Forrester Research report by analyst Liz Herbert, several additional pricing factors are mentioned that enterprises must take note of when considering vendors and evaluating costs:

• Subscription fees: Most providers charge for maintenance, upgrades, and a level of customer support. Often vendors provide discounts for a large number of signees and for paying upfront.
• Implementation: Most SaaS companies offer low, quick-start implementation costs, but high-level customization can rack up a hefty price tag.
• Additional ongoing charges: Some SaaS companies charge for mobile use, mobile support, offline access, increased storage capacity, or even amplified customer support. Be wary.
• Training and help desk: Highly customized SaaS adopters often require custom training materials.
• Value-add services: Some on-demand providers offer additional services based on their tool or business process expertise, for instance, benchmark reports, quarterly health checks, and configuration-as-a-service.

Get ready, 'cause here it comes: the dreaded word -- recession. Analysts and experts seem to agree on one thing -- SaaS remains recession-proof. As the economy worsens and large companies look to tighten purse strings, putting down hundreds of thousands of dollars for licensing costs for on-premise software is unappealing and impractical. The on-demand solution becomes more attractive than ever.

"I think that the economy will, in fact, be a major driver for greater growth in SaaS. The pay-as-you-go subscription pricing is perfectly suited for companies trying to put greater cost savings in place," says Thinkstrategies’ Kaplan. "Large enterprises are trying to hold down capital expenditures -- [what] they would normally use to spend on software, [they can] shift to [the] operating line where they have greater flexibility," Kaplan says.

"In fact," adds Nucleus’ Wettemann, "what we’ve seen is that users of on-demand CRM tend to upgrade more quickly, deploy more users, [and] get greater incremental benefits at less cost than what on-premise would require."

No Myth: The enterprise is a fish of a different color
Roy, of eGain, says that one of the main differentiators between a large enterprise and an SMB is that large enterprises look at CRM solutions through a long-term lens -- often a five-year horizon -- and at implementation costs. This long-term commitment requires a knitted relationship between the vendor and the large enterprise, a relationship that just isn’t the same with the SMB.

Harrick of SugarCRM lists the top three needs of an enterprise SaaS initiative as data backup, control over software versions, and performance intelligence. Others suggest considering the following for on-demand enterprise CRM efforts:

• the benefits of a complete suite versus individual capabilities;
• mobility;
• the freedom of customization and adding applications;
• the benefits of tailoring the application for a specific vertical market; and
• social-networking capabilities.

So, who’s leading the space? Without hesitation when asked about the leader in the on-demand CRM space for enterprises, analysts list Salesforce.com. "[Salesforce.com] demonstrated the viability of SaaS in the large-scale enterprise by winning a number of brand-name companies over to SaaS," Kaplan points out. "Internally, it is changing its sales model to appeal to the large scale. Traditionally, [Salesforce.com] relied on Web telesales to provide to SMBs but also the [large] enterprises; they have recently been hiring traditional software salespeople to sell SaaS solutions directly to executive decision-makers." Honorable mentions include RightNow Technologies, Oracle On Demand (formerly called Siebel OnDemand), and, now, Microsoft’s Dynamics CRM Online (renamed and released in mid-April). [For more on Microsoft’s presence in this space, see our cover story, "Is Microsoft Winning the CRM Race?"]

Kaplan advises the following three strategic steps for an enterprise considering going on-demand:

1. Have an open mind about it. Know that there are now a great number of vendors and on-demand software to choose from.
2. Take a careful self-assessment of the current on-premise application. Have a well-rounded understanding of what it has taken not only to get the applications up and running but also to maintain them. Take into account all management costs. Once obtaining a handle on current cost of ownership, evaluate cost savings presented by a SaaS model.
3. Start by looking at the basic functionality of an on-demand model, but also look at any special features. A true SaaS option should improve ease of use, productivity, and maybe even collaboration between dispersed workers. Look for specific tailoring to your market. And see if SaaS provides greater reporting capabilities or greater audit ability.

In the end, you may find the water’s just right for your company’s dive into SaaS.

SIDEBAR: Swimming with and against the current
Perhaps getting the best of both worlds -- jumping seamlessly from on-premise to on-demand and back again -- is an option after all. The hybrid solution, or what some refer to as a "mix-mod" solution, is gaining in popularity, especially among enterprises that feel more comfortable with data held internally. Being able to switch between the two solutions is also appealing for an enterprise not quite ready to place its faith in the vastness of the Web.

The new reality is "very much going to force software vendors to supply both on-premise and SaaS as a suite to allow companies to choose and mix depending on what’s critical," says Bruce McIntyre, vice president for CRM at CDC Software. "That choice has to be fluid. Companies will need to move from one to the other and back."

"I think there will still be value for on-premise where companies want distinct, tailored selling premises," McIntyre says. "We believe that those will tend more to on-premise than SaaS and will want more control over [applications]. There will be a strong trend toward SaaS but a core of on-premise deployment where control is desired."

Contact Editorial Assistant Lauren McKay at lmckay@destinationCRM.com.

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