TRENDS

March 10, 2005

For Swagelok Co., the decision to purchase human-resources software as a service demanded a great deal of discussion and investigation.

“Our company is privately held and very conservative about keeping company data close to the vest,” says Bruce Battista, HR information systems manager at the Cleveland-based manufacturer of fluid system components. “We had always done payroll in-house… In a company with 3,000, only two people knew everybody’s salaries.”

Nevertheless, after performing its due diligence, Swagelok opted for one of the fast-growing trends in IT: purchasing software as a service (SaaS), also known as the application service provider (ASP) model. The company traded in its VAX-powered legacy HR application for a hosted version of Ultimate Software Group Inc.’s Ultipro.

More and more companies are dumping traditional perpetual software licenses for hosted applications purchased on a subscription or pay-per-use basis. The benefits of SaaS can be persuasive, starting with its lower up-front cost. The hosted model also makes powerful applications available to smaller businesses that couldn’t otherwise afford them. Upgrades are less of a headache as well.

However, using an ASP does bring new challenges.

As Swagelok struggled with, it means ceding control of critical company data to a third party. That kind of move demands stringent service-level agreements (SLAs) to ensure the privacy and security of that data, and in many industries there are tough regulatory hurdles.

Moreover, companies struggle with the challenge of integrating SaaS applications with existing legacy software.

Rent vs. Buy

While a traditional license for serious applications, such as customer relationship management (CRM) and enterprise resource planning (ERP), can easily cost hundreds of thousands of dollars, hosted versions of the same apps typically cost $50 to $100 per user per month.

For many small- to mid-sized companies, the mere fact that these applications are within reach is a major victory. SaaS brings big-time CRM capabilities into the price range of a vast new group of potential buyers.

And don’t think the vendors are unaware of the new markets.

“The service model provides a constant annuity revenue stream, moving away from the spiked quarterly model” that prevails with traditional software sales, says Fred Hoch, vice-president of software programs at the Software & Information Industry Association (SIIA). “Also, [SaaS] changes vendors’ relationships with the customer — and vendors are in need of better customer relationships.”

“All the big vendors have seen this confluence of trends,” agrees IDC analyst Dan Kusnetzky — especially, he notes, the prediction that SaaS will soon account for a much larger percentage of overall business-software sales. Vendors are responding by offering attractive hosted rates.

Swagelok’s experience confirms this. Battista says when the company compared traditional licensing fees with SaaS costs for the same applications, “it was clear from the pricing structure that they were steering you in that [hosted] direction.”

Page 2: SaaS Upgrades

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