Software as a Service Is Gaining Ground

One does not have to closely watch the enterprise applications market to realize that the hosted delivery model is enjoying a new glorified, (or reinvented, if you prefer) status. Referred to as on-demand, utility computing, or software as a service (SaaS) delivery approaches, hosting has not only achieved buzzword status overnight, but the concept has been gaining ground through real deployments. Hosting was once known as application service provider (ASP), which has negative connotations stemming from the "dot.com propaganda, boom and bust," but this term is being replaced by these other, "sexier" terms (which are also quite possibly better value propositions). Industry giants (and some thought-leaders, which are not necessarily large vendors yet) are spending significant marketing dollars vouching for this old concept reborn.

Although there are subtleties and even distinct differences separating these terms and their associated business models, the various hosting flavors are all variations of the same market. New business models, markets, and providers are taking advantage of Internet-based technologies and standards to provide solutions based on the notions of standardization, interoperability, software component reuse, and automation. These terms describe a shift away from traditionally heavily customized (and supposedly unique) packaged software suites, owned and managed by user enterprises, which were expensive and time-consuming to develop, implement, and maintain (see The "Joy" of Enterprise Systems Implementations), and toward standardized, componentized, common, and lower cost software services sourced (and even cancelled) at will from service providers.

Whether referred to as hosted services, ASP services, SaaS, utility computing, or software on-demand, the idea is basically the same: instead of buying and installing expensive and pesky packaged enterprise applications, users can simply access applications over a network, with an Internet browser being the only absolute necessity. Thus, often there is no software and hardware to buy per se, since the application is used over the Internet and is paid for through a subscription or supported by a third party, such as an advertiser. Advertising-based software offerings emerged several years ago in the form of Web e-mail and Web calendaring. More recently, advertisers have realized that Web-based software applications are just another type of digital content that can be used to reach a targeted audience, and companies such as Google, Yahoo!, and Microsoft, are refining their capabilities to target users with context-based advertisements.
Burned by negative experiences deploying unwieldy packaged software suites on their premises, users are now wiser and more assertive. Increasingly, they are demanding software that is easy to purchase, easy to consume, and has tangible payback or return on investment (ROI). For users, their purchasing demands have almost become akin to retail purchases that can be made via credit cards. Rather than spending millions of dollars on software before seeing any inkling of ROI, users have started to demand a performance-based, shared risk model of software provision. The licensing and delivery of enterprise software products is therefore undergoing a fundamental shift from traditional upfront fees for perpetual licenses to incremental, per transaction, pay as you go (PAYG), or even success-based pricing. These are becoming popular alternatives, especially for small businesses and startups that do not have the same, large information technology (IT) budgets as larger, established companies. Companies can acquire software for a lower entry cost and pay for more only as their business expands (see Trends in Delivery and Pricing Models for Enterprise Applications: Pricing Options).

Though the price of hardware is decreasing and becoming more affordable, a major predicament remains: enterprise software applications, such as complex enterprise resource planning (ERP), supply chain management (SCM), product lifecycle management (PLM), and customer relationship management (CRM) systems, are often too expensive and too intricate for small companies to govern. While they can afford the necessary hardware, they do not have the IT staff and infrastructure required to support a major enterprise application. Relatively cheaper solutions are now becoming widely available, and vendors are addressing their customers' desire to use technology as needed. Users do not want to buy entire software packages or infrastructure when, typically, only a small percentage of the overall capability is used. User enterprises have also become more agile, requiring more flexibility in IT delivery and usage, as well as licensing and payment structures, and vendor business models. In the enterprise applications space, many customers are moving away from large upfront licensing contracts (with ongoing maintenance fees), to one that is variable, based on usage, and defined by a subscription-based relationship bundling the entire offering. There might also be a financial advantage to having the software be an expense rather than capital, which will depreciate over time.

A slew of recent moves by the most prominent contemporary market players may be another sign of enterprise applications' slow but ongoing evolution to SaaS, on-demand, and related hosted models. The market may be experiencing the beginning of the end of traditional user-based licensing on the customer's premises for a given period of time and product version. The vast majority of business application software vendors still generate most of their revenues by selling their software licenses (via compact discs [CDs] or similar physical media gadgets) based on the number of named or concurrent users or seats or on the number of processing hardware units (and sometimes on a per module basis, though this is often based on an unnecessary "wall-to-wall", "all you can eat" functional scope). Revenues are also derived from accompanying implementation services, post-implementation service, and support and maintenance, which are priced as a percentage (or more often as multiples) of these software license fees.

This model might be wearing out its welcome on both the vendor and customer side. For one, it tends to be cyclical, since vendors first sell their present product versions into the market, and then sell subsequent upgrades. Logicallly, sales revenue should peak after each major upgrade or product release, and then drop until the next one (on average every twelve to eighteen months). This creates a cyclical, yet erratic revenue stream, which, in turn, creates cyclical, volatile stock prices (for public vendors) and also has other business performance-related ramifications. Bundled with this is the inability of licensed, on-premise, packaged software to keep up with ever-evolving "best industry practices", since traditional packaged software is largely stuck in revolving major release cycles. These cycles require most of the research and development (R&D) effort to be spent on building and testing compatibility for operating systems (OS), databases, application servers, and other platforms.
On the other hand, many user companies are unhappy with the rigidity of the model, especially in terms of the tiresome and endless upgrade process, and maintenance fees that keep creeping up. This, coupled with the non-standard pricing, leaves them wondering what kind of deal they have gotten (and particularly whether they are paying for functionality they will not use any time soon). To put this into perspective: how often do we buy a lifetime's worth of snacks and coffee during one trip to the grocery store? Such shelfware comes in many forms, such as products that are acquired but never used, or modules that are bought as part of an entire suite. They are modules that were once bought to fulfill a function that no longer exists in the business, for whatever reason; and capabilities that have become redundant as they are replaced by new software applications. Though these gratuitous capabilities are hardly ever used, they still require license and maintenance fees. SaaS gives users the option of buying software applications as appetizers, which are far more sensible portions that satisfy a need. It decreases software bloat, and is far more kind to the IT system's "waistline". For more information, see Application Erosion: Eating Away at Your Hard Earned Value .

The widespread use of personal computers (PC), the Internet, and ensuing Web-based applications has had an essential impact on the way business applications are being sold and delivered. The development of Web-based applications has decoupled the user interface (UI) from the business application logic and its underlying software and hardware platforms. As a result, any user working at a PC with a Web browser can access a variety of business applications running on different software or hardware platforms in any number of different locations for the cost of a mere Internet connection. This decoupling has therefore allowed enterprise application vendors to begin to change their business model from traditional on-premise software license sales to the delivery of SaaS offerings.

However, a more important factor in the shift to SaaS might be a change in the way the software itself is created nowadays. Rather than software components being developed and bundled together to form a monolithic, rigid solution, systems are increasingly being developed as a "federation", "mash up" of services, or composite applications, which are only tied together at the point of execution. This will eventually enable alternative software components to be substituted between each use of a system, allowing much finer grained flexibility. A simple analogy is the use of an electrical appliance. The user does not directly negotiate with the electricity company to use power for the specific appliance. There are standards and controls, but they are broad enough that an electrical appliance can be plugged into the service without the user's notifying the electrical utility. On its side, the electrical utility takes care of the complexity of power generation, including matching capacity to demand, and it can change which generators and circuits deliver the power—all without coordinating these events with the millions of users who rely on the service.

The Imperative for Strategic Contribution

Most chief executive officers (CEOs) are challenging their human resources (HR) departments to make more strategic contributions to the organization. With HR traditionally viewed as a cost center, it is often difficult to know precisely what that means. CEOs, who are focused on growth, earnings, and shareholder returns, want HR to support corporate business objectives and to have the necessary data to support business decisions. These roles are necessarily integrated with HR's responsibility to ensure that there are qualified and satisfied workers when and where they are needed. The way to fulfill these roles is through process excellence, integrated HR systems, and accurate and actionable data from all HR departments. When these elements come together, HR can have a tremendous and meaningful impact on the bottom line.

It sounds like a lot to ask, but these demands are achievable today. And the HR department doesn't have to go it alone. There are technologies and service providers that can help move HR from the administrative rut, free up manpower for strategic tasks, and employ business intelligence capability to align HR with desired business outcomes.

The Role of Outsourcing

Human resources outsourcers play a critical role. Companies often choose to work with outsourcers to gain access to the latest technologies without having to make the associated capital investment. At most enterprises where HR functions have been outsourced, the initial tier of value is well-established. Processes are standardized and employee interactions are professionalized. Transactions are faster, more user-friendly, and less costly. As employee programs continually become more complex and difficult to administer, outsourcing consistently delivers high levels of service.

But it's that next critical tier where advanced HR outsourcing technologies are delivering strategic leverage by gathering and combining fragmented data from discrete vertical HR systems. When data from various departments is integrated into a reliable, consistent source of centralized information, HR can make better-informed and more strategic business decisions daily. The impacts of HR programs and practices can be assessed, and critical insights into the workforce revealed.

Sophisticated analytics can measure how HR systems and programs affect employee behavior and influence customer behavior (for example), ultimately impacting financial results and corporate growth. Companies are beginning to see that reducing HR administrative costs is only the tip of the iceberg. A new priority is to employ the technologies that provide data and analysis, in order to realize the savings that lie in HR.
For example, your time and attendance program tracks worker hours and absences, and is the entry process for generating payroll. A separate program handles short-term and long-term disability payments. Both of these systems are important. But viewed separately, they reinforce HR's traditional administrative role. An outsourcing solution that combines information from both systems and employs business intelligence functionality delivers a human asset management program that tracks absenteeism, peak work periods, and turnover. Now your data shows impacts on labor costs, overtime, and the amount of money spent on temps and employee replacement. This business intelligence can be used to closely align the workforce with long-term labor needs, manage absence and labor utilization, and thereby reduce operating costs.

Training, staffing, and recruiting programs can be linked in beneficial ways, too. There are lots of technology tools that enable prospective employees to submit r�sum�s online. But does your HR department use that information beyond the recruiting process? By integrating prospective employee data and skill sets against the company's development plan and training programs, qualified individuals can be "pipelined" into the organization over time, and existing staff can be educated. This ensures more strategic hiring decisions from the outside, and better use of existing personnel.

Succession planning is another key area where HR outsourcing can provide strategic value. For example, if a company has a 10 percent turnover rate, and it typically takes 30 days to fill a job, what does that mean for its staffing at any given point in time? It means the company is nearly one percent understaffed at all times. In an organization of 50,000 employees, that's 400 workers not meeting deadlines or producing, which negatively impacts customer satisfaction.

In that same scenario, add in the ramp-up time required for new hires to fill the open slots, and the "downtime" could be as much as sixty days per opening. Factor in absenteeism, short- and long-term disability, sabbaticals, maternity and paternity leave, job sharing, and other benefits, and the staffing levels are likely to be much lower than imagined. Using business intelligence technologies and analytics allows HR departments to better see and manage what is really happening with staffing levels, and predictive measurements can help plan more accurately for the normal ebbs and flows of business.

Selecting the Right Outsourcing Provider

As important as deciding to outsource HR functions, however, is selecting the right partner. Partnering with an HR provider is a critical business decision, and should be considered with the same due diligence as a merger or joint venture. Companies should be culturally compatible and share a common vision.

An outsourcing partner's service framework and delivery model should be engineered to meet your requirements, and there should be a clear definition of the scope of services and defined service levels. The objectives of outsourcing should be translated into service-level agreements so performance can be measured against stated expectations. Most large enterprises will want a full-service provider rather than one that handles just one element (such as payroll). References should be checked, and the provider should demonstrate capabilities in full-spectrum HR outsourcing (and have the financial backing to be around for the long term).

Remember, working with an outsourcer is not about giving up control. Rather, it is about finding the best ways to deliver quality service, impact organization economics, and provide the data that aligns the HR department with business outcomes.
In today's economic climate, all CEOs have a growth agenda that requires a solid and committed workforce—in other words, they need to have the right people in the right place at the right time. The true value of the human resource team will be measured in how well it aligns with this growth agenda. Effectively integrating HR business intelligence technologies is foundational to HR's metamorphosis from administrative cost center to strategic contributor to corporate growth.

Examples of Strategic HR

Here are some quick takes on how companies can strategically leverage HR for measurable gains. The impact areas and results in the list below are far from complete, and are provided here only as samples:

* Staffing levels: Aligning time tracking with disability and leave information fosters greater understanding of staffing needs.
* New hires: Melding r�sum� data with future business needs "pipelines" qualified individuals for impending job openings.
* Succession planning: Assessing skill sets of existing employees and overlaying it with upcoming job openings promotes hiring from within.
* Benefits cost: Integrating HR survey data with corporate goals can help predict changing corporate contribution rates that would result in more job turnover.
* Hiring assessments: Extracting data from various HR functions allows you to determine if increased hiring is due to growth and skill upgrades, or to unwanted turnover.

Essential Considerations When Selecting an Outsourcing Provider

Beyond general considerations with respect to the utility of outsourcing providers, there are specific questions which enable companies to determine the compatibility of a prospective provider:

* Do the provider's systems have the capabilities to meet specific technology and business requirements? Note that inadequacy with respect to this question can of course come on two counts: either the provider's systems are too "generic" to meet these specific requirements, or else (in the case where they do in fact address the particular requirements) they simply underperform.
* Does the outsourcer have a clear understanding of needed capabilities?
* Will the operation be transparent, both financially and managerially?
* Do the outsourcer and your company share a common vision?
* Does the outsourcer have a partnering mindset?
* Is the outsourcer's culture compatible with your corporate culture?
* Will the outsourcer be proactive in engaging your company to resolve problems?
* Are the scope of services and performance levels clearly defined in a service level agreement?
* Can the provider enable your company to deliver business performance impact?

By conducting a thorough review of the tangible and intangible elements underlying these questions, companies should be in a strong position to ensure that HR is not only a fundamental element for achieving corporate objectives, but an integral driver of success.