What factors affect the adoption of software as a service for core
business applications, such as accounting, human resources and
payroll? What is the long-term outlook for this software deployment
model?
Software as a service - renting hosted business applications to
customers, usually via the Internet - once appeared to be on the
verge of becoming a common method for deploying software. Recently,
amid the IT and economic slump, support for software as a service
has lost momentum and questions remain regarding the viability of
this software deployment model.
Software as a service will probably eventually re-emerge in a more
refined form that will be successful for certain applications and
customer types. However widespread adoption of this model will not
materialise for at least three years.
One of the issues discouraging adoption of hosted applications in
general has been the crumbling viability of application service
providers (ASPs).
However, for common business applications, such as accounting,
expenses and HR/payroll, much of the rental activity has not
involved third-party ASPs (at least not directly), since many
software vendors provide the hosted service directly to the
customer. Established vendors, such as Oracle and PeopleSoft, offer
their own applications as a hosted service through their
ASPs.
Specialist Internet application providers, such as NetLedger and
Employease, offer software as a rental service only, delivered
using a multi-tenant application model. The business viability of
many of these smaller Internet application providers continues to
be an issue.
Beyond vendor viability, the issues limiting adoption of
 | | "Software as a service will
probably eventually re-emerge in a more refined form that will be
successful for certain applications and customer types" | | | | | |
| | Paul Hamerman | | |
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rental applications include solution flexibility, control of
sensitive data and cost-effectiveness. Larger companies tend to
have more complex requirements, making them less suitable
candidates for hosted software solutions. Not surprisingly, most of
the adoption has occurred in the small to mid-market, where
solution flexibility is less of an issue.
Companies may also be concerned about data confidentiality in the
context of maintaining sensitive financial and personnel records
off-site via Internet applications. This is perhaps more of a
perceived than an actual risk, but a potential issue nonetheless.
Finally, the cost-effectiveness of hosted rental applications
versus on-site installations of licensed applications has not been
convincing. In many cases, the arrangement has offered no savings
or even proved more expensive. The specialist Internet application
providers offer a potentially more promising cost structure, where
software and infrastructure costs are spread across multiple
customers using the multi-tenant model.
Some change has occurred in certain application areas. Concur
Technologies, an expense management software vendor, has seen a
rapid increase in customer adoption of its ASP offering to the
point that hosted customers now account for more than half of its
customer base of 800 companies.
Employease has approximately 1,300 customers (small to medium-sized
companies) renting its human resources application. In general,
however, many specialist rental software providers are struggling
for survival and some, such as small-business accounting vendor
eLedger, have folded. Whereas eLedger was unable to obtain funding
to stay in business, NetLedger was recently propped up by Oracle's
$30m (£20.7m) cash infusion and rebranding as an Oracle Small
Business.
Traditional licensed software providers are also experiencing soft
demand for hosted solutions. The future promise of software as a
service was a major factor in Microsoft's acquisition of Great
Plains.
However, the company is sticking with a traditional
licensed, on-site software delivery model for existing products and
its new offering, Small Business Manager. Microsoft Great Plains
indicated to Giga that the software as a service model is not a
priority for it right now, but the company is redesigning its
applications for Internet deployment via .Net and still believes
that this model will be viable eventually. Oracle's E-Business
Suite Online hosted offering has approximately 125 customers
currently, but it has experienced slower growth than expected,
despite aggressive promotional efforts. Similarly, PeopleSoft's
eCenter hosting business has also been slow.
Although the software as a service delivery model for common
business applications has not lived up to expectations, it still
holds promise for the future. The potential is stronger in the
small to mid-market sector, where flexibility is less of an issue
and internal IT resources are limited. The benefits of quicker
software deployment, lower up-front costs and outsourced
maintenance and support appeal to many companies.
Solutions that were designed for Internet deployment and
multi-tenant hosting are more likely to be cost-effective and
solution flexibility and functionality will probably improve. As
the general application software market and economy as a whole
recovers and rental solutions mature, software as a service will
regain its lost momentum, reaching mainstream levels of adoption in
three to five years.
Clients should consider the software as a service model if both the
solution and deployment model meet their specific needs and if
vendor viability is a manageable and acceptable risk for them.