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The World On Demand

So-called "on-demand" software is taking HR by storm. But is it right for your organization?

Wednesday, March 22, 2006
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It's the buzzword of the moment: "on demand." From fast food to entertainment, Americans prefer not to wait for what they want. That extends to business software, too, as the rise of on-demand applications -- also referred to as "software-as-a-service" -- makes its mark on the corporate landscape, with companies such as Salesforce.com and others giving established players such as Microsoft Corp. a run for their money.

On-demand software lets companies pay a monthly fee to access applications directly from the vendor's servers, theoretically sparing customers from the headaches of maintaining and upgrading the software themselves. On-demand products also take much less time to install, in most cases, than traditional licensed applications.

Recently, however, the on-demand world was rocked by a series of power outages at Salesforce.com in December and January that resulted in customers of the San Francisco-based customer-relationship management vendor losing access to their software for up to six hours. The company has said it is taking steps to upgrade its infrastructure.

Critics pointed to the episode as an example of the potential risks of using on-demand applications. However, on-demand vendors in the HR space say service interruptions on the scale of those that took place at Salesforce.com are rare, and that most vendors take steps to ensure customers won't be left hanging.

"Any software application, whether it's in-house or externally hosted, is subject to downtime," says Jeff Beinke, vice president of product strategy at on-demand vendor Employease in Norcross, Ga. "The difference is that when it happens in-house, you rarely read about it in the press."

Jim Holincheck, a Gartner Inc. analyst who closely follows the on-demand market, says potential on-demand users shouldn't ignore incidents like the Salesforce.com outage, but they shouldn't necessarily be dissuaded, either.

"Performance and availability issues are a fact of life to some extent----it happens in-house as well," he says. "The best thing to do is to try and plan around it----contracts should have service-level agreements that talk about downtime.

A good contract will differentiate between scheduled and unscheduled downtime. I don't think it's something that's a barrier to acceptance of the model."

Growing Popularity

The use of on-demand software has skyrocketed among HR departments: A study released late last year by the Yankee Group, a Boston-based analyst firm, found that approximately 60 percent of HR software deployments as of mid-year 2005 consisted of on-demand applications, rising to 75 percent or more for specific functions such as performance management and talent management.

Meanwhile, Stamford, Conn.-based Gartner Inc. predicts in its latest Magic Quadrant study for the mid-market HRMS market that by 2008, more than 50 percent of HRMS purchases made by mid-market companies (those with between 500 and 2,500 employees) will be of on-demand applications. Finally, IDC, a Framingham, Mass.-based analyst firm, included four HR software vendors -- Ultimate Software, Taleo, Workscape and Workstream -- on its list of the "Top 25 On-Demand Providers," released last July.

The on-demand concept isn't exactly new: During the late 1990s, so-called application-service providers won business from small and mid-sized companies with limited staff and resources by offering them remotely hosted software. 

Although a number of HR-focused ASP vendors disappeared with the bursting of the dot-com bubble, some -- such as Employease -- continue to thrive, thanks in no small part to innovations that allow for "multitenancy." Multitenancy, which has been a big factor in the rise of on-demand, lets vendors use the same server to host multiple customers and gives them the ability to upgrade their customers to new versions of their software simultaneously. 

For its fiscal year ending in June of last year, Employease reported that new sales grew 90 percent from the previous year and by 69 percent for the final quarter compared to the same period in 2004. Meanwhile, Authoria CEO Tod Loofbourow says revenue at the Waltham, Mass.-based firm from its Advisor On-Demand workforce- management application grew by 300 percent last year from the year before, and now represents 75 percent of all the company's new business. Authoria expects its on-demand products to account for close to 100 percent of all new business before the end of 2006.

Jason Corsello, an analyst with the Yankee Group, says HR's appetite for on-demand applications has been spurred in part by the growing popularity of such products in the customer-relationship management industry, along with the improvements in usability and configurability that many on-demand vendors have made to their offerings. "On-demand products today tend to be much easier to use and more intuitive than they were in the past," he says.

Holincheck says some HR departments turn to on-demand software in order to free their IT counterparts to focus on tasks considered more vital to their company's core business, while others consider on-demand products to be an interim solution that lets them test out software before deciding whether to purchase it for the long-term.

Gartner also notes in its Mid-market HRMS Magic Quadrant study that the "total cost of ownership" advantage purported to lie with on-demand solutions may vary by company, and that HR leaders should use "appropriate analysis" in determining whether on-demand truly represents a cost advantage.

"You have to look at all of the various components that go into the costs" associated with on-demand and traditional software, says Holincheck.

"With the traditional model, you're looking at license fees, maintenance costs, hardware costs, the costs surrounding upgrade projects, versus the on-demand model, which typically combines the software maintenance and hosting into one monthly or annual fee and puts responsibility for upgrades and maintenance with the vendor," he says. "However, not all of those system-support costs go away with on-demand. You're still responsible for what happens within your firewall in terms of connecting with those services."

Last but not least, security is also an oft-cited concern when it comes to on-demand solutions, particularly with regard to data protection. Holincheck says potential customers should conduct the necessary due diligence in this area, to include conducting the same level of security audits they'd perform on their own IT infrastructure.

The Large Factor

On-demand was originally seen as a benefit primarily for small to mid-sized firms that lacked large IT departments. Today, some vendors say that large companies are also eyeing on-demand products as a way to conserve resources without sacrificing functionality.

"We've got multiple customers with more than 10,000 employees," says Employease's Beinke. "Large companies are accepting the on-demand model. It gives them the opportunity to design new benefit plans and implement them quickly, which you can't necessarily do with traditional software."

However, Corsello sees interest in on-demand applications remaining primarily where it has in the past: among smaller to mid-sized companies, although some large companies have expressed interest in on-demand applications via outsourcing arrangements.

"Some companies leverage the on-demand services of niche providers, such as Deploy Solutions or SuccessFactors, via an outsourcing contract. But for now, the market share fought over by companies like SAP and Oracle, the Fortune 500 -- that's a separate market."

Large companies will remain a challenge for most on-demand HR vendors due to their greater need for customization, says Corsello. "With a typical SAP or Oracle deployment, you have the ability to do lots of customization," he says, adding that most on-demand vendors offer only "white box," or non-customized, versions of their software. "Many large enterprises don't want to have to tweak their processes."

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Holincheck agrees that on-demand will probably see less adoption among larger companies.

"I think the [on-demand] model can apply to large enterprises, and we're starting to see more acceptance, but is it going to be predominant in large enterprises? Probably not."

One large company that is using an on-demand application is Compass Americas, the Charlotte, N.C.-based U.S. division of the Compass Group, a global provider of food services based in England. The company has been using Authoria's on-demand recruiting application since 2004, for which it has licensed 10,000 users.

Having an outside firm host the software for certain functions is part of a general business trend, says Danielle Larocca, vice president of HR information systems for Compass Americas.

"Ten years ago, we wanted to host everything ourselves," she says. "Now, the trend is to let outside companies do all the work for you."

Larocca says that having a good service-level agreement is key when using an on-demand solution, particularly one that categorizes different levels of customer concerns.

"This way, you can escalate the categories you consider most important--for example, if the system is down for more than two minutes and it's not for scheduled maintenance, that's a 'priority one' and it will be resolved in one hour," she says.

As for security, that's something Larocca says Compass Americas takes very seriously.

"We have a large laundry list of requirements for companies hosting our solutions, such as server redundancy, encryption--that goes into every contract, and Authoria met all of them," she says.

As for customization, Larocca says she's satisfied with the flexibility that Authoria offered.

"They built the product to be flexible enough so I can turn options on or off at my leisure," she says. "For example, our job-posting process for internal candidates differs from the one for external candidates, and the system accommodates that."

Tim Toterhi, associate director of global learning and development at Quintiles Transnational, a 16,000-employee clinical testing firm based in Research Triangle Park, N.C., says his company implemented an on-demand performance-management solution from SuccessFactors because it was looking for speed and standardization.

"We were using multiple systems and wanted to streamline our processes," says Toterhi. "We also wanted someone who does this sort of thing all the time to help us run the show."

Quintiles decided to purchase a new system after internal surveys revealed that managers weren't happy with the company's existing performance-management tools.

"We decided, here's something basic we need to get right, because we're keen on driving customer satisfaction and you do that by engaging managers and employees," says Toterhi. "By compressing the timeline for installing a new system from five or so months to two months, we showed employees and managers that we're serious about helping them get the development they need."

When it came to security, Quintiles' IT conducted a security audit and uncovered no problems, he says. A bigger concern was ensuring that all of the company's far-flung locations could support the new application from a bandwidth perspective.

"That's why we rolled it out to our main hubs first, and deployed it to our emerging areas later on," says Toterhi.

As for customization, Toterhi says that wasn't even an issue.

"We'd had all these different systems and platforms to deal with, so we were actually looking forward to one consistent application," he says.

One recommendation Toterhi offers to potential on-demand customers is that they ensure their internal data is clean and structured properly before handing it over to a vendor.

"Otherwise, you'll spend a lot of time on data clean-up, and you don't want that," he says.

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