Good Reasons for Sticking With In-House, Part 1

From all indications, the Software as a Service (SaaS) model of developing and distributing applications is gaining traction and is poised for a phase of rapid growth, whether it be in small and medium-sized businesses (SMBs) or large-scale enterprises.

Estimated worldwide revenue for on-demand CRM applications increased 38.5 percent year-over-year to US$802 million in 2006. That market is expected to reach $2.2 billion by the end of 2010, a 31.1 percent compound annual growth rate for the 2006-2010 period, according to IDC research.

Organizations choose to go with SaaS because of ease of use and manageability, low maintenance costs, simple and quick deployment, lower cost of ownership and scalability, according to Springboard Research.

Yet there are at least a dozen reasons why organizations still prefer in-house application development and deployment. In-house software developers and systems architects are making use of the same Web services and Web 2.0 tools and methods as their counterparts to build scalable, native Web applications and services.

The Rising SaaS Tide

The enterprise SaaS market grew to $154 million in 2006 and will grow at a 66 percent compound annual rate between 2006 and 2010, according to Springboard Research.

“Our research shows that the primary reason why the maximum number of people — 32 percent — opted for SaaS is ease of use and manageability,” Bhoorender Panwar, Springboard’s manager of business development, told CRM Buyer. “The plug and play nature of SaaS indeed scores over traditional on-premise software buying as it does away with the need for elaborate decision making and costly upgrades which can also get tedious.”

CRM is the most widely used application in the Asia-Pacific region and globally, accounting for some 45 percent of total SaaS revenue in the Asia-Pacific region. Other popular applications include desktop office applications, e-mail, security/compliance, human resource, payroll and workforce management systems.

While the SMB market segment is the primary adopter of SaaS, vendors are also making inroads within larger enterprises.

“The recent wins by Salesforce.com, including Japan Post (30,000 users), Merill Lynch (25,000 users), Cisco (15,000 users) and Dell (15,000 users) goes to illustrate this change in trend,” Panwar commented.

“We are now at an interesting inflection point in the industry. The biggest challenge for on-demand today is education,” Salesforce.com vice-president of marketing Kendall Collins told CRM Buyer. “We believe that the industry is just starting to understand the true potential for on-demand solutions in the enterprise.”

As IT managers understand the potential and benefits of on-demand — customizable, easily integrated with front and back-office applications, easy-to-use and less expensive than traditional software — they soon realize on-demand is a viable option, Collins said.

“With no software or hardware to buy, install, maintain, or upgrade, on-demand is the option that saves the most time and money for IT, enabling them to spend more time and resources on solving business problems,” he added.

Reasons to Keep It In-House

Nonetheless, IT decision makers are taking a cautious approach to the adoption of SaaS and, more broadly speaking, to the adoption of related service-oriented architecture (SOA).

Nine percent of the 471 application software decision makers at top enterprises based in North America surveyed by Forrester Research last year are currently using SaaS. The same can be said of 11 percent of medium-sized business and 8 percent of small businesses. Another 7 percent of the latter said they are currently piloting or planning to pilot SaaS.

“We see some shift from custom to packaged. But if you look at a long-run perspective, we see that leading customers are still innovating and customizing, but not on areas like GL (general ledger), or financials, or HR (human resources). It’s more stakeholder-centric apps that touch customer, supplier, partner or employee,” Ray Wang, Forrester Research principal analyst and the report’s lead author and researcher, told CRM Buyer.

Integration issues and security concerns topped the list of reasons why survey respondents said they were not at all interested in SaaS. Total cost concerns, application performance and lack of customization followed closely behind. Inability to find specific applications, being locked in with a current vendor and complicated pricing models were also cited among the main reasons.

Organizations that require data to be on-site, rely heavily on real-time data integration, have extensive customization requirements, and prefer perpetual licenses were cited among those that typically prefer to develop and deploy applications in-house, according to Forrester Research.

SaaS adoption has also been hindered by associations with previous generation application services provider hosting services, Collins said.

“There are many misconceptions in the market about SaaS because it conjures up memories of the unsuccessful ASP (application service provider) or hosting models from the late 90s. A true Software as a Service solution is multi-tenant, meaning that all users share a single, common infrastructure and code base that is centrally maintained. Individual customer deployments are unique, separate and secure within the shared environment, rather than separate physical stacks of hardware and software,” Collins told CRM Buyer.

Measuring and Evaluating In-House vs. SaaS

While there are typically greater up-front costs to developing and deploying applications in-house — especially when comparing license fees with subscription fees — annual costs remain lower for the on-premise option but increase during upgrade cycles.

The latter represents around 65 percent of initial implementation costs in year eight of the 10-year horizon and total economic impact (TEI) methodology used in Forrester’s research.

“TEI depends not only on number of users but also on number of sites. ROI (return on investment) methodologies, such as TEI, provide a framework for discussions that compare SaaS versus on-premise deployments,” Wang stated in the Forrester report.

“In general, as the number of users increases, on-premise models increase in financial attractiveness. However, enterprises operating in multiple geographies with 25 percent or more users in remote locations benefit more from SaaS options. Hence, when calculating the number of users, focus on centralized users versus remote users.”

Among Forrester’s recommendations when evaluating alternative application development and deployment options is to consider hybrid models that allow for switching between on-premise and SaaS.

In doing so, decision makers should factor in and weigh the control and customization requirements addressed by an in-house solution against the scalability and adaptability capabilities offered by a good SaaS platform.

Good Reasons for Sticking With In-House, Part 2