SaaS brings benefits, but be careful, analysts say

The financial gains can be significant, but get an SLA, user advises. Brian Fonseca reports

Managers are looking more closely at software-as-a-service as the number of unfinished IT projects grows, skilled workers become increasingly scarce, and upgrade and maintenance costs skyrocket.

Many large companies have long avoided hosted services because of concerns about security, customisation, integration and long-term costs.

But in recent interviews, IT managers at some organisations say they are turning to, or at least evaluating, hosted products as a way to offload management of some non-mission-critical applications. Further, some say the subscription-based pricing model can keep IT budget costs consistent and often lower than packaged or homegrown software.

In a report released in March, Forrester Research said that the use of hosted software products in companies with more than 1,000 employees grew by 33% from 2006 to 2007. The survey of 1,017 IT professionals found that the most popular hosted services are human resources, CRM and collaboration tools.

Ben Pring, an analyst at Gartner, says that despite IT managers' interest in hosted systems, many of them are "conflicted", in some cases because business units are signing contracts on their own. "[IT managers] see this as a threat," he says. "It's loosening their control and introducing security, vulnerability and integration headaches."

Nonetheless, managers are starting to realise that at some point, IT will become responsible for hosted products, whether it oversees implementation or not.

"They know at some stage, the business people who've gone out and bought this stuff will throw it at them," Pring says.

Basil Blume, executive vice president and CIO of Colorado Capital Bank, says his organisation uses more than 30 hosted applications, which account for 60%-70% of its software library.

He agrees that the thought of hosted systems can be "very disconcerting" because of fears that IT could lose control of applications and data. "They're concerned about their data," Blume says. "I am as well".

Still, the benefits of using hosted software have allowed the bank's systems to keep up with its rapid growth, Blume says.

About five years after its founding in 1998, the bank turned to hosted software to quickly add several new programs for customers. At the time, "we were a $50 million bank," Blume said. "Today, we're a $700 million bank, and many of those [first hosted] solutions are still the same."

The bank's IT managers have concluded that "the ability to scale without having to reinvent that infrastructure is a huge benefit," he says.

The hosted systems that Colorado Capital used include a key internet banking system hosted by Intuit's Digital Insight.

To internally implement that system, Blume says, the company would have had to spend significant amounts of money to bolster firewalls, hire a chief security officer, buy new servers and backup systems, and establish off-site disaster recovery facilities.

Mark Buzby, human resource information systems director at The Pep Boys, an auto parts supplier, says he is "optimistic" about the firm's plan to use a new hosted compensation system from Xactly.

"Obviously, with the economy the way it is, we're looking to cut costs just like any other retailer," he says. "[But] to be honest, there is a little caution going into this."

The company was set to start evaluating the service at 60 stores late last month to calculate the sales commissions of service desk workers. If that goes smoothly, Pep Boys will deploy the hosted software to 1,500 employees at its 500 remaining stores over a six-month period, Buzby says.

The company also hopes to use the software as a password-protected reporting tool for employees, managers and executives.

Buzby noted that Xactly has already successfully tweaked the application for Pep Boys in response to a change in its needs.

Xactly chief operating officer Evan Ellis says that vendors of hosted software are under growing pressure from corporate customers to provide applications that can be easily tweaked to fit IT and business needs.

IT demands are also forcing vendors to link internal legacy software and hosted systems and to offer corporate users improved service-level agreements.

Pricing scheme and SLA policies can vary among vendors, and IT managers should take a close look at each, analysts say.

"If you're looking at years three, four and five, is there a crossover at some point?" asks Forrester analyst Liz Herbert. "Some corporations believe that in the long run, software as a service is more expensive."

Gartner estimates that more than 60% of hosted software users today lack an SLA, despite the potential for service delivery interruptions, performance problems or changes in ownership.

Tom Lockwood, director of IS and logistics at Car Toys, says an outage at PivotLink Corp., the company's provider of hosted business intelligence software, convinced him of the value of a strong SLA.

Lockwood says the outage came when PivotLink opted to move Car Toys' data to new hardware late on a Saturday night without advance warning. PivotLink thought that installing new hardware on the last day of the month would cause little disruption, he says.

But it disrupted the creation of Car Toys' monthly reports. "That happened once, and never again," Lockwood says.

After the incident, the two firms signed an SLA that requires PivotLink to notify Car Toys about any planned upgrades, maintenance or outages.

Since then, Car Toys has become a believer in SaaS, Lockwood says, and it is now evaluating a hosted payroll application from Automatic Data Processing.

Gartner predicts that corporate adoption of hosted software will grow by 22.1% annually through 2011, more than double the projected growth rate for packaged applications.

But IT managers using hosted business applications warn that potential adopters should proceed carefully when selecting a vendor and conduct background checks, contact referees and perform due-diligence assessments of service-delivery track records.

"When you get past that honeymoon period," Lockwood noted, "things can sour in a hurry if you don't have the right people and the right relationship in place."

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