SaaS bright spot in waning economy

In fall 2006, The Warranty Group Inc. CIO Tony Jackovich had a big problem. The Chicago-based company was being sold by its corporate parent to a private equity firm — and in the process losing much of its IT infrastructure. Jackovich needed to replace the back end of the company’s ERP system within four months.The Warranty Group — which provides extended service contracts on everything from electronics to homes — looked at investing in Oracle Corp.’s traditional PeopleSoft product but ultimately decided to go with the vendor’s on-demand version instead.

“It didn’t seem realistic to try to do that ourselves,” Jackovich said. “We didn’t have all the talent in-house. We didn’t feel there was time for a long vendor selection process.”

More and more midmarket companies are turning to such on-demand, or Software as a Service (SaaS) products, particularly in light of a weakening economy and pressure from all sides to respond to business needs faster and cheaper.

A survey last year by Forrester Research Inc. found that 16% of large enterprises and 15% of small to medium-sized businesses (SMBs) are using SaaS. That’s a 33% increase in the large-enterprise sector from the previous year and a 50% increase in the SMB segment.

And CIOs, especially in the midmarket, say they’re happy. In May, for example, a survey by consulting firm Saugatuck Technology Inc. found that 95% of IT execs at midmarket companies were satisfied with SaaS programs, higher than the overall satisfaction rate of 84%.

The SaaS model continues to win adopters because of its speed and ease of deployment. The most popular applications continue to be human resources, collaboration and customer relationship management, but more companies are also looking at the model for enterprise systems as well.

“Now that SaaS has matured and offers more options, many sourcing teams are reconsidering whether SaaS will work for their firms,” noted Liz Herbert, an analyst at Cambridge, Mass.-based Forrester.

Yet, there are concerns. The Forrester survey found that integration was the most common reason tech execs shied away from SaaS. Herbert said the problem is many SaaS products evolved as standalone offerings that their creators sold to business users and, therefore, did not focus on building strong integration tools, creating thorough documentation or writing prebuilt connectors.

Security is another worry. Some CIOs fret that SaaS vendors lack adequate hosting or backup facilities. Not all products are backed up in real time, Herbert said, meaning that data entered since the last backup could be lost for as much as 24 hours. Because of that, some CIOs insist on replicated storage at their own sites.

And the growth of SaaS means the marketplace is far from stable.

“Startup SaaS-oriented firms remain volatile, and market consolidation continues,” Herbert noted. “SaaS ecosystem is not fully mature and will likely witness the entrance of several large players during the coming years.”

But many midmarket CIOs are finding that if done right, SaaS is the way to go.

“There are areas where it’s a no-brainer,” says Bill McArthur, vice president of information services and technology at Scientific Games Corp. in New York. “On the enterprise side, for one. Why buy if you can rent? It reduces your TCO and your footprint.”

Scientific Games, which runs lottery and gaming systems for customers in more than 60 countries, needed a new payroll system a couple of years ago. The company looked at buying its own system but ultimately decided to go with an on-demand model from Automatic Data Processing Inc. in Roseland, N.J. The company has since gone with two other SaaS projects, including Concur Technologies Inc.’s expense system and Jungle Disk Inc.’s backup system.

“The downside is the perception of your engineers that they like full control of the apps, and total control of your data center,” McArthur said. “You have to give up some of that. But administratively, having the apps outside and not on your server farm is a breath of fresh air.”

The Warranty Group has had similar success with SaaS. Since fall 2006 the company — now a unit of Toronto-based Onex Corp. — has gone live with three SaaS projects and is deploying another one this summer. These include payroll, collaboration and a tax solutions.

The latest SaaS project is a sales performance management tool from Callidus Software Inc., which is replacing a homegrown system.

“The development time spent maintaining that solution was greater than the cost to go with outsourcing to a provider with greater flexibility and less IT dependency for a niche app,” Jackovich said. “The economy of scale and leverage wasn’t really there. It made more sense to take that out of house, where the capability for the dollar was much greater.”

Jackovich has evolved a methodology for considering what software model works best for any given project.

“We do a cost analysis on how much it would be to support,” he said.

“We look for solutions we can leverage. Is that app something we can support in-house, or do we need to add head count? How critical is it? Then we try to find the right provider. We don’t go looking for ASP software; we look for providers who can support it in both models.”

Michael Ybarra, Contributor

Michael Ybarra is a monthly columnist for and a former senior writer at CIO Decisions magazine. He is also the author of Washington Gone Crazy. Write to him at