What to ask before saying yes to SaaS, cloud computing

By Thomas Wailgum, CIO.com |  On-demand Software, Salesforce.com

Not surprisingly, SaaS vendors have decided there's no time like the present to make a full court sales press. In a down economy with slashed IT budgets, when there's no tolerance for 18-month software implementations and the price tags of on-premise software from Oracle and maintenance fees for SAP applications are not falling, software-as-a-service and cloud computing offerings become more attractive options for businesses.

(MORE ON CIO.com Eight Reasons Why Companies Still Say No to SaaS | SaaS's Impact on the Enterprise ERP Market | Five Best Practices for Implementing SaaS CRM )

Marc Benioff, the CEO of SaaS CRM vendor Salesforce.com, recently explained just why his flavor of the cloud computing model was best suited for today's troubled economic times. Forget big contracts with Microsoft, Oracle or SAP, and get beyond outdated hardware and software solutions, Benioff told CNBC in early October. Benioff said that Salesforce.com's "pay-as-you-go, elastic model" offers clients much more flexibility.

Recent predictions on the SaaS market appear to bolster Benioff's optimism. Gartner noted that worldwide SaaS revenue in the enterprise application markets was on pace to surpass US$6.4 billion in 2008, which is a 27 percent increase from 2007 revenue of $5.1 billion. By 2012, Gartner predicted, the market is expected to reach $14.8 billion.

But while there are elements of truth to Benioff's contentions and sound reasons that bolster Gartner's numbers, there is also a thicket of issues that those companies who rush into the cloud will soon discover. Here are five important considerations that business leaders and IT staffers must think about before they sign a SaaS contract.

1. Have You Prevented Against "Sticker Shock" Down the Road?

One of SaaS's biggest selling points is its simplified pricing model: those pay-as-you-go, per-user monthly fees. The term "flat" usually stars in a SaaS vendor's marketing materials.

However, companies are still confused by uncertainties in pricing models and contract agreements, note Forrester analysts William Band and Peter Marston in the May 2008 "Best Practices: The Smart Way To Implement CRM" report. (For more on rolling out SaaS CRM, see "Five Best Practices for Implementing SaaS CRM.")

"SaaS pricing models that seem simple and inexpensive (flat per-user monthly fees) can become costly and complex when users sign up for different pieces of functionality and support options," the analysts write. "Additional charges often apply for support, configuration services, additional functionality or going beyond a preset storage limit."

In addition, business users and IT staffers can also be "unpleasantly surprised by difficult-to-enforce service-level agreements or onerous provisions that kick-in at the end of the contract term," Band and Marston note.

2. Has IT Been Included in the Decision-Making Process?

It almost seems apocryphal that IT staffers wouldn't be included at all in today's SaaS decision-making processes. But the reality is that business stakeholders have become quite adept at navigating the software purchasing world: they know what they want and SaaS vendors oftentimes go straight for the business side to sell their wares.

"SaaS makes it easy for firms to roll out solutions quickly and without IT involvement," notes an April 2008 Forrester report, "SaaS Clients Face Growing Complexity."

There's a downside, however, to the business side's new freedom. "This can also mean that firms rush into their deployment, using the point-and-click wizards to configure the solution without having a long-term vision or specific road map in place," write Forrester analysts Liz Herbert and Bill Martorelli.

"Some SaaS buyers get into trouble by not thoroughly evaluating integration or customization capabilities at purchase time. They later go to IT with requests that the application simply can't support," note Herbert and Martorelli. "Instead, make sure to involve IT upfront to ensure that the application can support your needs before you buy in."

3. Is the SaaS Application Set Mature Enough?

Another reason for IT's involvement: Vendor selection is of paramount importance right now, especially as startup SaaS vendors and others selling their applications under the cloud computing banner might be here today, but gone tomorrow. "As SaaS continues its fast-paced growth, providers are quick to jump into the market with new solutions," write the Forrester analysts Herbert and Martorelli. "However, this makes it difficult for firms to feel secure about the long-term stability of their application purchases."

In the SaaS market for ERP software, for instance, the sheer complexity of the enterprise application suites makes it difficult for SaaS vendors to provide the necessary range of functionalities, notes Gartner analyst Denise Ganly, in the "SaaS Impact on ERP" report. Ganly writes that SaaS ERP suites-that combine HR, financial, operations, CRM and supply chain applications-won't be viable options for most large enterprises during the next five years.

Ganly points out that many companies today believe that SaaS ERP is "instant on," which means that it can be implemented with little or no intervention. "You just turn it on," she writes. "However, the business still must be re-engineered, processes redefined, integration points defined and so on." (See "SaaS's Impact on the Enterprise ERP Market" for more on this.)

Even the mighty SAP and its ambitious Business ByDesign on-demand offering has run into technical and integration challenges, and its plans for an SaaS software offering have been drastically scaled back.

4. Have You Calculated Total Cost of Ownership?

A late 2007 Forrester Research survey of North American and European software IT decision-makers found that "total cost concerns" was the second-most cited reason for why companies were not interested in SaaS.

In the rush to adopt SaaS, some companies may forget about potentially conflicting total cost of ownership figures. For example, TCO of "SaaS ERP suites likely will be significant and may not compare favorably with on-premises solutions," writes Ganly, in the Gartner report. This problem applies to vendors as well. SaaS vendors "often have unrealistic expectations of their operating costs," she adds. "The multitenant architecture needed for SaaS ERP suites results in high internal efforts and costs for the initial setup and the ongoing maintenance and upgrade of the system."

Bottom line: If the SaaS deal seems good to be true and the TCO calculations too rosy, the overall deal may be just that: Too good to be true.

5. Have You Considered All of the Integration Issues?

While SaaS applications can be implemented much faster than on-premise apps, there are still lingering and tough integration issues that don't magically disappear with SaaS applications (like, how does IT connect that new standalone SaaS CRM app to the existing legacy infrastructure?). The Forrester survey, for instance, found that "integration issues" was the top reason (66 percent) cited by companies that had said no to SaaS applications.

One critical integration challenge for companies is deciding just what kind of a SaaS integration provider they're going to use. An October 2008 Gartner report on the topic noted that "no single approach to SaaS integration will meet the needs of all, or even most, SaaS customers," writes analyst Benoit Lheureux, adding that "the range of choices can be overwhelming."

The four choices, outlined by Lheureux, include: a SaaS vendor's application programming interfaces (APIs) and technology; a third-party vendor's SaaS integration technology; an integration-as-a-service (IaaS) solution; and a professional services or a system integrator. "The challenge for customers is to know when to choose one approach over another," he writes. "The answer depends heavily on each customer's particular situation, including factors such as internal integration skills and overall B2B strategies."

Of course, not all of this can be figured out by business stakeholders, eager as they may be. SaaS analysts note that an IT implementation team that takes the time to build a strong business case for the SaaS application and implement it correctly will, in the end, deliver the most value to the business.

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