The Wave of the Future?
New applications that are designed to be easier to install and maintain than traditional ERP systems may change the face of HR technology.
By Grae Yohe
Human resource software is evolving, and Oracle Corp. is taking notice. HR applications are now available over the Internet, potentially eliminating the need to purchase licensed applications that users most host and maintain themselves.
A new software-design methodology produces applications that (in contrast to large enterprise resource planning systems) are composed of small, easily swappable pieces that make usage and maintenance of the applications much easier and less expensive.
Is Oracle concerned that these new technologies will render products such as its ERP systems obsolete?
Possibly, but the company does not appear to be taking any chances. Oracle's soon-to-be released new product, Fusion, will have all the functionality that its existing products do, but will employ both of these new technologies. Fusion will be composed of small, modular, easily maintainable pieces. And it will be available by subscription over the Web.
"Fusion is Oracle's effort to make a next-generation product," says James Holincheck, research vice president for Stamford, Conn.-based Gartner Inc. Oracle, he says, sees which way the wind is blowing and is making certain to set its sails accordingly by incorporating new technologies such as service-oriented architecture and Software-as-a-Service into Fusion.
These new technologies are a real threat to the traditional model for enterprise resource planning systems, in which software is purchased, installed and maintained at a customer's place of business, says Holincheck.
Service-oriented architecture, or SOA, is a modular type of software design in which small software "objects" combine (using industry standards such as XML) to do tasks that are handled in legacy systems by large blocks of proprietary code.
SOA's modular design makes maintenance much easier and applications far more compatible. Software-as-a-Service (SaaS, sometimes pronounced "sass" and referred to by many vendors as "on-demand" --
see sidebar
) eschews a large initial licensing expense in favor of a "leasing" model that lets vendors deliver the software directly to clients via the Internet, and requires little, if any, on-site
IT support. Combine these technologies and you have a truly next-generation product, with the potential for fewer tech headaches and, in many cases, lower costs.
"There's still a lot of angst out there about how big, how complex and how expensive [traditional] applications are to upgrade and support and maintain," says Holincheck. "The question is, are people so entrenched with [their ERP systems], and using them for so many parts of the business, that they could really give that up to move to something else?"
Gretchen Alarcon, Oracle's vice president of human capital management product strategy, says Oracle decided to develop Fusion using SOA and SaaS technology because it will allow the company to offer customers more flexibility, but wouldn't say whether SOA and SaaS will ultimately replace traditional licensed software.
"SOA is how Fusion applications are being developed," she says. "SOA is our application development model, while SaaS is a deployment model that customers might choose. Our goal is to give customers flexibility in our offerings, whether they prefer a traditional install on-premise, or an on-demand model."
Alarcon says companies that prefer to keep their data "close to home" may opt for an on-premise application -- applications the company will continue to sell, upgrade and support -- whereas companies that have limited IT resources might find SaaS more appealing.
Do-It-Yourself ERP?
For now, the ERP system as we know it is under no real threat of extinction. SOA is so new that few people know about it and even fewer can describe how it works. Fusion isn't set to debut until 2008, and the only vendor currently offering a from-the-ground-up SOA solution in the human capital management space is Walnut Creek, Calif.-based Workday -- which launched its initial release in November 2006 and does not yet offer the other components of a full ERP suite.
SaaS has become a buzzword of late but is still a minority technology. Gartner estimates that 15 percent of HCM applications are currently delivered via SaaS, but predicts that 25 percent of all business software will be delivered as SaaS by 2011.
Kevin Boylan, director of human resources for Bozeman, Mont.-based software firm RightNow Technologies, says his company never considered a traditional on-premise solution before deploying Workday, which is available only via SaaS.
"The initial costs [of traditional ERPs] are high," says Boylan. "The professional-services requirement surrounding the implementation, because of the difficulty of the implementation and the complexity of the systems, is high.
The ongoing total cost of ownership is much higher. In terms of integration and configuration, you need to have somebody who's a specialist. It always takes a long time and it always costs more than you think."
Integration and ease-of-use were also paramount, he says. During a recent compensation review, Boylan used Workday to access information about pay throughout the company with a few clicks of a mouse. He could have done the same with a traditional ERP, he says -- but only after it was installed, configured and interfaces were written.
Thanks to SOA, he and his colleagues were able to install the Workday software (without any IT help) simply by filling out electronic forms and selecting options from pull-down menus.
Boylan says he's certain that the do-it-yourself setup and configuration of SOA has saved RightNow a great deal of time and expense, and that the cost structure of SaaS has been far cheaper than the on-premise alternative. But does this mean SOA and SaaS are better? Analysts are reserving judgment on that one.
"[Legacy ERPs] are still the deepest-feature functionality solutions on the market," says Holincheck. "If you need that depth of functionality -- if you need a global solution -- they're the most proven."
The Cost Factor
The most common reasons for a move to SaaS is cost. There is no large up-front licensing fee, and hardwdare and manpower costs are reduced. Still, there's some disagreement as to whether SaaS is actually less expensive in the long run. Lawson Software, headquartered in St. Paul, Minn., is similar to Oracle and many other vendors in that it offers both an on-premise option and HCM On-Demand, which is delivered remotely.
According to Global Vice President of Human Capital Management Larry Dunivan, the software is exactly the same for either model. Oftentimes, the cost ends up being the same as well.
"We look at the three-year total cost of ownership in determining the per-employee, per-month price," says Dunivan. So by design, for a given company, neither option is less expensive at the three-year mark unless something unexpected crops up -- which does happen when a company maintains its own software in-house. Dunivan does stress, however, that choosing on-demand allows a company to fix costs to a predictable monthly fee.
He adds that, while SaaS/on-demand can have numerous cost advantages, large global companies may find that an on-premise ERP system is still less expensive in the long run. Because SaaS/on-demand solutions are typically priced on a per-employee basis, the flat fee for a licensed version plus the costs for the hardware and manpower to run and maintain it can often total less than SaaS/on-demand when a client has a large number of employees.
Authoria Inc., based in Waltham, Mass., has made the switch to on-demand for its entire product lineup. Senior Vice President of Marketing Nina McIntyre says the company will continue to support its on-premise customers and will continue to offer upgrades to that software. There will be no forced migration to the on-demand model, but McIntyre feels that with time, that option may well sell itself.
"People are accepting [on-demand] as a preferred way to receive our talent-management application," she says, noting that Authoria is seldom asked about on-premise software anymore.
As is always the case, the time it takes for return-on-investment is a matter of "it depends," as in, it depends which option is currently in place, how well it's working and how much time and customization effort has already been put into it.
"We had one customer in here who had to potentially spend $750,000 to re-engineer their core architecture in order to enable manager self-service," says Christine Ferguson, Workday's vice president of HCM strategy.
"Another customer was so highly customized that their last upgrade took them 30,000 man hours. When you talk to former [legacy ERP] customers, they recognize that they've hit a tipping point in their own lifecycle of enterprise business services that they either have to upgrade or -- in many cases -- they'd have to re-implement. They've just gotten so far along the path that if they change one thing, it's going to break everywhere."
Ferguson says it's the very monolithic nature of ERPs that works against them, which is why she believes the future lies in modular applications that are configured rather than customized. With a legacy system, specific business rules and other customizations are written in proprietary code. Upgrades require reviewing that code and everything referenced in it.
The nature of SOA applications means that instead of writing code, users are filling out forms and checking boxes to determine business rules.
As a whole, SOA and SaaS/on-demand are still quite young and unproven. But what if SaaS/SOA vendors expand their functionality? Will SOA and SaaS mean the end of the on-premise legacy ERP?
"That's the $64,000 question," says Holincheck. "At the point where you have products that have the same level of functionality, that are delivered in a way that reduces pain, could you see folks willing to move at that point? Yes, I think you may."
There's a big "if" here, he adds. If SOA/SaaS vendors can indeed encompass the entirety of ERP functionality, which includes functions such as finance and supply chain management as well as HR. If the advantages are significant enough.
If existing ERP vendors don't adapt, as Oracle is attempting to do with Fusion.
"When PeopleSoft first came around, people were already using stuff," says Holincheck. "They had mainframe-based solutions from McCormack & Dodge, MSA, Tesseract and Integral. How many of those names do you hear about today?"
August 1, 2007 Copyright 2007© LRP Publications
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