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Micah Fairchild Software-as-a-Service HRMS: A Risk/Reward Analysis

 By Micah Fairchild

Understanding the Pitfalls and Potential of SaaS HRMS

Commonly referred to as SaaS (Software-as-a-Service), "on-demand" or the cloud, subscription-based Human Resource software is increasing in popularity and positioning itself to be the software delivery model-of-choice for companies worldwide—regardless of size and especially for HR operations. In fact, Gartner research reported that, "[Human Capital Management] HCM software as a service (SaaS) continues to grow at two to three times the pace of on-premises solutions". Further, a 2009 Forrester study found that 85+% of organizations were interested in software as a service (SaaS) adoption. These results closely follow prior research which indicated that HR was chief among those business functions SaaS could be leveraged for. Says Forrester's Liz Herbert, "SaaS adoption continues to tick upward across all application segments, company sizes, geographies and industries, [and] HR remains one of the leading categories".

Though the creation of SaaS can largely be attributed to a reaction in the purchasing and application habits of organizations (beginning far away from the hallowed halls of HR), few people could have predicted that this delivery model would become what it is today. In fact, this method has grown so popular in such a short amount of time that multiple derivative methodologies, multiple approaches, and countless software vendors have now entered into the equation before some companies have even had time to evaluate SaaS 1.0. As such, given the vast amount of information that exists that is either misunderstood or vendor-hyped, we've put together this Special Report to help make sense of it—especially to make sense of whether the risks outweigh the rewards.

SaaS HR Implementation Risks

Software-as-a-Service (SaaS) HR Risk # 1: Economic Issues
To say that the competition in this market is intense would be a gross understatement. Couple that competition with a shaky economy and you've got disaster spelled out for many SaaS HR start-ups. In fact, recent work from the Society for Human Resource Management (SHRM) highlights that potentially several vendors could be out of the running soon due to a failure to sustain revenues, generate sales, and keep up with necessary market movements. Indeed, says Grant Thornton's Ralph Nefdt, "New challenges, such as high-speed change and the need for continuous innovation, among other factors, pose significant threats to Software-as-a-Service companies."

Because of these threats, don't underestimate the risks of deploying a SaaS solution. After all, the SaaS provider is holding your employee and company data and provisions must be made to ensure its access in the event the vendor company fails. SaaS vendors are incurring increased barriers to entry, increased costs of competition and a demands for faster pace innovation—while at the same time deferring revenues over long periods of time. It can be a challenging business model and not all SaaS vendors will survive. Hence, when considering the economic viability of a specific vendor, be sure to ask specific questions about company stability, financial strength, data transfers, liquidity plans, transition costs, and operational expenses; so that you don't wind up getting blind sided down the road.

Software-as-a-Service HR Risk # 2: Functional Issues
SaaS providers also have numerous risks in the way of functional issues that must be considered. Namely, it's incredibly important to clearly understand the capabilities of the software solution and the complexity of integrating the solution with other applications before any implementation agreement is initiated.

Regarding system capabilities, perhaps it's a combination of both human and organizational behavior, but few companies would openly tout that they are "just like everyone else". Indeed, differentiation is a hallmark of almost every company; whether it's in price, products, etc. As such, one of the most cautious pieces of advice we can give about SaaS mirrors the advice we likely all got as teenagers—don't go into a relationship thinking you can change into what you want (i.e. be sure you like the system you have and see customization as icing on the cake). Says Knowledge Infusion's Heidi Spirgi, "In SaaS, you are limited to the capabilities the vendor provides". Hence, we offer this caution because, even though vendors have come a long way from the first Software-as-a-Service offerings, the economies of scale afforded to SaaS solutions comes from multi-tenancy—making customization beyond the software constructs a fool-hardy enterprise for the vendor.

Regarding system integration, outside of fully-integrated talent management suites, many Software-as-a-Service options are departmental in scope. As such, selecting a SaaS solution can run the risk of failing to integrate with other HR programs, applications, and systems your organization operates. This can lead to islands of data, data errors, data redundancies, the need for multiple data warehouses, and worst of all manual data entry. Any one of the previously mentioned problems can then in turn make reporting a nightmare, can make analytics impossible, and can make strategic HR initiatives extremely difficult to pursue. Hence, ask questions prior to HR software selection to seek out what integration will actually look like from a given software vendor.

Software-as-a-Service HR Risk # 3: Operability Issues
One of the greatest benefits (and as such one of the greatest risks) of SaaS is its 24/7 operability framework. We say this because of the numerous plans, operations and functions that have to be set up in order for that operability to be successful, compliant, and secure. Indeed, as Grant Thornton's Issues and trends: Assessing and managing SaaS Risk study shows—"any HR [solution] that operates through the web gives up full control". Hence, assessing the operability risk of a given SaaS solution means doing due diligence to understand the vendor's:

  • information security plan, with particular reference to data privacy,
  • data center operations, with regard to real-time fail-over and data center delivery redundancy,
  • data governance structure,
  • disaster recovery plans (and specific methods and objectives),
  • compliance records and audit trail logs,
  • downtime records, and
  • information security audits such as SAS70 or ISO 27001

While many larger vendors are coming on board to the idea of independent, 3rd-party review mechanisms (e.g. ISO, SSAE, SysTrust), it's important to note that managing employee information extends beyond controls and efficiencies. The regulatory environment for data breaches is serious and executives must remain vigilant to the potential violation of obscure or country-specific laws.

Human Resource SaaS Implementation Rewards

Software-as-a-Service (SaaS) HR Reward # 1: Lower Costs
Because of the unique "lease" option of SaaS solutions, economic return is one of the more highly regarded and widely touted rewards of using software as a service. This is due in large part to the fact that there is no up front capital expenditure for software licensing, implementation costs tend to be lower, on-going vendor costs tend to be lower, and on-going IT labor and processing costs tend to be lower. Notice that we've said "tend to be" here. This is because, few arguments about software ruffle feathers more than saying SaaS solutions cost less than on-premises solutions. It is a generally true statement, but largely depends on the organization, its needs, the number of subscribers and the expected life of the solution.

While research from Yankee Group, Constellation Research, and vendor studies point to the fact that on-premises capital expenditures along with management and re-training costs still cost more than SaaS subscriptions, we believe that the more important reward for lower costs rests elsewhere. Specifically, the model of subscription allows for large capital expenses to be pushed aside in lieu of operational expenses, thereby changing the cash flow and making IT expenditures predictable. Regardless of your reward reasoning though, what is clear is that a cost-benefit analysis should be done for your specific company and situation. And please note that if you're going to conduct a cost-benefit analysis, multiple years should be looked at and every conceivable expense should be accounted for.

Software-as-a-Service HR Reward # 2: Agile Technology
Of the many rewards that can come with Software-as-a-Service HR solutions, business agility certainly tops the list in many people's minds. With an ever-changing landscape of compliance hurdles, economic issues, and competition for talent, the need to analyze, configure, and deploy a relevant workforce when and where needed is incredibly important. This is due in no large part to the fact that Human Resources is increasingly being called upon to deliver operational excellence along with the rest of the organization. This shift in attitudes about managing human resources (i.e. movement from "cost center" to "profit center") revolves around the organization's ability to adapt to those changing landscapes mentioned earlier. Software-as-a-Service solutions allow for that adaptability through scalable user counts, and quick, on-demand utilization. And as a Talent Management report puts it, "[That] agility is adaptability plus speed".

Of the major benefits that make SaaS agility such a reward, greater processing efficiencies is perhaps the most salient; driving lower costs for all manner of integrated or connected software. By doing this, SaaS allows organizations to: for example, quickly reconfigure a Sales team or redeploy a Research & Development arm to function more in line with what the market is dictating right now. Bottom-line, SaaS solutions let organizations act strategically instead of react defensively.

Software-as-a-Service HR Reward # 3: Time To Value
The final reward is perhaps the biggest in terms of recognized market benefit—speed of implementation and the corresponding time to value. In fact, a recent survey by Deloitte highlights that the 47% of organizations list "quick implementation" as the top benefit of Software-as-a-Service. Indeed, with no on-premises hardware or software, SaaS solutions allow for faster installations, faster updates, and consequently faster talent deployments. Of course without the time-busting upgrades of on-premises solutions, the hardware maintenance, and the increased management of additional IT personnel, you would assume that Software-as-a-Service speed would be faster. Yet, in large part, the reasoning behind this speed differential is that SaaS systems tend to be more intuitive, flexible, and user-friendly. Because of this, user learning curves are shortened, engagement statistics are improved, and full adoption rates are increased. Further, because speed is the driving force for HR value realization, cost savings can be used to further support strategic human capital components like service delivery, organizational design, and end-user (i.e. internal/external customer) satisfaction.

Human Resource SaaS Analysis Reviewed

SaaS is without a doubt, a successful and time-tested model for application delivery. Within the context of Human Resources, SaaS can aid in speeding up strategic initiatives, has proven its worth in scalability and flexibility, and has even shown signs of life in the all-too-difficult realm of mergers and acquisitions (M&A). However, the value, and ultimate appropriateness, of this type of software model depends largely on your organization's needs and the vendor your organization chooses. As it is with any capital or operating expense, analysis should always be done to ensure that risks and rewards are fully and objectively understood. End

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Few arguments about software ruffle feathers more than saying SaaS solutions cost less than on-premises solutions. While it is a generally true statement, it largely depends on the organization, its needs, and the number of subscribers as to whether it comes in above or below an on-premises figure".

 

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