How SaaS-y is your HR software vendor? What does SaaS mean to you?

The term SaaS (Software as a Service) has become a hot topic among HR and L&D software providers.  In fact, many of the HR software buyers use stories about their “SaaS-iness” as their major selling points.

To try to help demistify this topic, I’d like to take some time to explain what SaaS means to a buyer of HR or L&D software.

(Seperately from this, we have started a research report on this topic, focusing on the adaptive nature of HR software platforms, which will help you understand the real differences among different SaaS software providers.)

Defining SaaS in the HR and L&D Marketplace.

The words “Software as a Service” very aptly define a new model of selling software.  You buy the software as an online service, paying for just what you need as you need it.  You sign up for the service with an annual or monthly fee (typically based on the number of users), and you then go online to use it.  Instead of purchasing the software for an up-front license fee, and then paying 18-22% of this per year for maintenance, you pay a recurring fee forever (typically 20-30% higher than licensed maintenance).

The important word in this definition is the word “service.”  While the real product you are buying is software, you do not “purchase it” and “own it” – rather you are buying a service agreement, which includes commitments from the provider to deliver features and capabilities, up-time, storage, network bandwidth, ongoing support, upgrades, and a wide variety of configuration and data options.  You expect the solution to have various tools, such as the ability to load HR records, the ability to connect it to other systems (through a rich set of programming interfaces), the ability to customize the workflow and look and branding, and the ability to develop a wide range of ad-hoc and periodic reports.

Additionally, instead of owning the software and running it in your own IT shop, you are now part of a community of customers using the software.  Today modern SaaS vendors help you connect to this community online, by accessing support, peer groups, shared content, and in the case of recruiting even shared job candidates.

The SaaS model is quite different from licensed software:  you have little or no IT costs;  you do not need to worry about software upgrades;  and the vendor takes responsibility for ongoing support, service, and protection of your data.  From the vendor’s standpoint SaaS is an excellent business model:   while they must invest in a re-engineered product and more hardware infrastructure, they develop software on a single platform and avoid the problem of multiple development teams working on multiple versions of the product.

What Defines a SaaS Vendor

Now, as to the topic of how “SaaSy” a vendor really is.  There is a lot of debate among technologists, product marketing people, and investors on the “purity” of a vendor’s SaaS model.  From your perspective as a buyer of products and services, I think there are really three important elements of SaaS to consider:  Product Architecture and Capabilities, Service and Support Model, and Pricing and Offerings.

1.  Product Architecture and Capabilities:

The first issue is the product itself.  Licensed software is developed to sell – so it is packaged up with installation scripts and tools to help you install it, configure it, and tailor it to your IT environment.  SaaS software is actually engineered very differently – while it may share the same features and capabilities of licensed software, the SaaS software must be engineered to run in a “multi-tenant” environment (multiple customers sharing the same server and possibly the same databaase), it must have tools for the user to configure their own environment without changing other environments, it must have easy-to-use tools for data import and reporting, and it must have programming interfaces (APIs) to allow you to connect it to other systems.

In the early days of SaaS, vendors implemented “hosted” versions of their software, where they actually run a copy of the software for you (this still takes place behind the scenes in many vendors).  Now, after 3+ years of maturity in this new model, the software itself is designed to accomodate many clients and the tools for user-based configuration are built-in.  Most SaaS vendors have application programming interfaces (API’s) available and are always behind in their efforts to add more.  (Every time a customer wants to connect the system to a new HR portal, an HRMS, a compensation system, etc. there is a need for more APIs.)

Historically, enterprise-class software had many advanced domain and security features which were not available in SaaS.  Enterprise class LMS software, for example, allows the system to be configured so that employees in a given country see software in their language, the course catalog available to their department, they have custom reports, and security rules which are custom to their country.  Such configuration takes years to build into the software, and when enterprise-class software companies convert to SaaS it often takes them a few years to re-engineer this level of configurability into the SaaS architecture.

As a customer, you may be interested in the details of a vendor’s architecture (ie. multi-tenancy), but you are likely to get a “sales pitch” which may not be of much value.  Ultimately what you need to worry about is:

  • How functional is the platform – does it truly have the features and functions you need?
  • How configurable is the platform – how easy is it to make it fit your organization’s workflow, security, and domain management needs?  Since you cant get your IT shop to modify it, the vendor must give you the tuning knobs to allow the system to meet your requirements.
  • How open is the platform – how will you get data in and out, and how well can you truly integrate it into other systems in your organization
  • How reportable is the platform – how well can you create the reports and dashboards you need to get information to make decisions.  Since you will not “own” the database and have direct access to the data, you cant necessarily just connect your favorite reporting tool to the system to build reports.  (Some vendors now have API’s to the underlying database itself.)
  • How much experience does the vendor have with upgrades, updates, and fixes?  How often will updates take place, how disruptive will they be, and what experience does the vendor have with updates?  What levels of uptime has the vendor provided during major new releases?
  • What is the performance of the system?  Does the system operate with sub-second response time around the world?  Can you rely on the system to behave consistently throughout all the locations in your organization?  Unlike licensed software, you will have little or no control over software and database configuration, so if the system does slow down you are pretty much stuck.

The best way to evaluate these details is to read our research, develop your own “use-cases,” bring in vendors for demos, and talk with references.  We always recommend that buyers talk with at least 3-4 reference customers who are similiar in size, industry, and sophistocation to your organization.

2.  Service and Support:

The second major difference between a SaaS vendor and a licensed software vendor is the level and nature of the support.

Licensed Software Model for Support:

Companies which ship software (e.g. Oracle, SAP, Microsoft) send you a working version of the product and then sell you ongoing technical support.  They may also provide professional services to help you customize, implement, and roll out the solution.  Their skills, tools, and support infrastructure is designed to help you with implementation, configuration, and bug fixes.

Their entire business model is built around selling you software and then charging you for ongoing support and maintenance.  In fact licensed software vendors have two seperate profit centers:  the R&D team which ships and sells software, and the services and support team which sells and delivers support and services.  Each of these teams is staffed, trained, and directed based on the revenue they obtain.  (And this sometimes creates problems, because it is often hard for a licensed software vendor to “give away” consulting to clients, often making customers dependent on the vendor for professional services.)

When licensed software vendors have business challenges they often cut back on support and upgrades to their software.  (We know of one payroll provider who did not add significant new features to its product for many years, although they are now fixing this.)   This means that for you as a buyer you must be very diligent about the long term viability of your licensed software vendor.  Your investment in the system is likely to be 4-5X the initial software cost, so you want to bet on a company that will continuously provide upgrades for years to come.

Yet if the vendor does go out of business or stop ugprading its software, you can at least continue to use it – and many companies demand their vendors to license them source code in the event they run into financial problems.

SaaS Software Model for Support:

In the SaaS model, the world is quite different.   In this model the software vendor now takes on much more responsibility.  They not only run the software for you, they apply fixes, upgrade it to new releases, and must provide you with tools to configure and manage the system easily.  Rather than “ship and forget” – they now “own” your success.  If you cannot get it to work, you are going to cancel your contract – so SaaS vendors by nature must provide deeper levels of support.

From the standpoint of their business model, they now co-mingle the product development, upgrade, and support team into a single business.  Their profit and loss is dependent on you maintaining your monthly or annual fees, and in most cases they do not charge you “extra” for support and upgrades.  (Many SaaS vendors provide a wide array of professional services offerings which are priced seperately.)

From the vendor’s standpoint, this means that they must make a much greater investment in service and support.  A SaaS software vendor must make a large and continuing investment in infrastructure, they must continuously monitor the system and each customer’s implementation, and they must build new features in a highly scalable, configurable way.  While a licensed software vendor may add a “feature” in a minor release, a SaaS vendor must make sure every feature is easy to use, configurable, and does not interrupt any existing application functionality.

I recently talked with a very large company who purchased a licensed LMS.  This organization has 100,000+ users and sells continuing certification training to a wide variety of medical professionals.  In order to get the system to work correctly, the company had to pay nearly $80,000 in customization fees to add the right level of e-commerce and credit authorization (yes, they probably picked the wrong product, but that is another story).  Their solution provider built these capabilities through their professional services team.  Suprisingly, when the new version of the software came out, the customer found that they could not upgrade.  The modifications which had been implemented were not “release-independent.”  This type of problem, which is very common with licensed software, would never happen with a SaaS solution.

So when you consider how “SaaSy” a vendor really is, spend time understanding how they do support.  Look at their experience with major new releases.  Talk with customers who have been working with them for several years.

Ultimately, as a buyer, you must do even more due-diligence on the support, service, and track-record of a SaaS provider.  In this model you are not buying a “product” like a DVD, you are buying a “service” like Cable TV.  If you don’t feel 100% confident that the provider can continuously meet your demands, keep looking.

One more war story:  a well-known SaaS provider of learning and talent management systems went through a major release upgrade two years ago.  Because the SaaS model was new and they did not actually have a true “multi-tenant” architecture, their entire customer base was very badly affected.  In fact, according to several of the customers I talked with, their entire system was down for several days.  Considering the nature of HR software, this is completely unacceptable in most organizations.  SaaS vendors, even more than licensed software vendors, have tremendous responsibility to keep you current and running.

3.  Pricing and Offerings.

The final thing to consider in the “SaaS-iness” of your provider is how they price and package their offerings.  Licensed software vendors will give you a trial or pilot implementation version of the software (which is a very expensive exercise) but rarely let you test-drive the system.  SaaS providers can do much more:  they offer free trials, they can give you a pilot solution for a small number of users, and they can give you small increments of functionality which you can upgrade easily over time.  SaaS providers offer multi-year contracts or you can purchase the software on a month-by-month basis.

The most successful SaaS provider we work with is Salesforce.com.  This company, which continues to blaze the trails in the SaaS market, offers four different “levels” of access to the system, each with different amounts of functionality turned on.  Simpler organizations can implement the low-end version at a low cost, and highly complex companies can implement the feature-rich version for a higher price.  In a talent management solution, you could start with a system that does simple performance appraisals, for example, and then upgrade to more complex succession management features in future years.

SaaS vs. Licensed Pricing

Fig:  SaaS vs. Licensed Software Total Cost of Ownership

While the SaaS model has these flexible pricing options, it also brings the problem of a “continuous recurring cost” to put into your budget.  Licensed software purchases can be budgeted as “capital” for purchase and implementation, and then “annual expense” for maintenance.   Most companies prefer to capitalize their assets – it allows them to spread their expenses over longer periods of time and improve their reported operating income.  SaaS software does not allow this flexibility:  the monthly fees start on day one and they go on forever.

In addition to pricing differences, SaaS providers now increasingly offer access to related data and third party application services.

Taleo’s Talent Grid, for example, will enable Taleo users to access online assessments, job candidates, research, and a wide variety of other sources of data as part of their online service.  Plateau’s i-content and Learn.com’s platform allows their customers to purchase, run, and manage more than 25,000 courses without ever needing to install a single CD.

These interconnected internet-based services will make SaaS solutions richer and richer over time.  When you evaluate SaaS providers, ask them about what additional online services, data, and third party partners they plan to add to their solutions.  This type of offering will increasingly differentiate SaaS providers from each other.

Bottom Line:  SaaS is Here to Stay

The bottom line:  SaaS is here to stay.  While the model is still very young and all vendors are implementing it at various rates of speed, we encourage you to look at these areas in detail as you evaluate the right HR and L&D software platforms for your company.

While SaaS is certainly an exciting, very high-value new model for enterprise software, it brings new complexities and issues.  We hope that this article, and our ongoing research, helps you make the best decisions about your own organization’s HR and Learning software solutions.

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  • Well written article. Most aren’t.
    The LMS example you mention above (my guess follows) is because the vendor did not have a desire to maintain backward compatibility. You cannot get away with that “so what?” attitude with an SaaS, at least – not if you plan on keeping your customers. Whenever I get a Q, I try to respond within 10 minutes, with the assumption being that they need a knowledgeable response immediately.