Enterprise Power Comes to Smaller Businesses Because of Software-as-a-Service, the latest and greatest business applications are now available to small businesses.

by Mathew Schwartz

Less risk, more reward? Regardless of how you do the math, software-as-a-service (SaaS) applications are providing smaller businesses with software capabilities that previously only larger companies could afford.

For example, when Steven Vine, deputy general counsel for Register.com, joined the company about a year and a half ago, the new CEO was pushing the company, which now has about 500 employees, from being just a domain name registrar to become a provider of online business services. Vine, however, identified one pressing challenge: "We didn't have a clear idea of which contracts we have," he says. That's because all business contracts were signed, scanned, and then saved to hard drives. Whenever a contract-related question arose, the legal department had to find and read through the entire contact to locate the relevant provision. This was a time-consuming process, especially as contracts average about 20 pages in length, and some reach 100 pages. Furthermore, it meant that crucial information -- such as customers' contract expiration dates and Register's own service-level agreements with suppliers -- remained in the legal department silo and those in other departments couldn't see them easily.

Many law firms address such problems by using contract management software. Yet Vine says there were few contract management applications suitable for his company's legal team of four users. Most software was too expensive or available only as an add-on to customer relationship management (CRM) or finance applications that Register didn't use. Then Vine began testing Mumboe, a document management application available via SaaS. Soon, he subscribed the entire legal department -- after getting the data-security green light from his IT department -- and in the future hopes to add HR and finance employees, too. "One of the nice things about Mumboe, in comparison to those other systems, is that it's focused on contract management, it fits my budget, and because they have a per-user pricing model, we can start small," he says. "And I don't say that in any way to take away from the fact that the system works, and it works well."

Like Register, many smaller businesses are now using SaaS applications to meet their business needs, large and small. And why not? On-demand applications typically have no startup costs, require no infrastructure investments, avoid vendor lock-in, offload upgrades, and don't require an IT staffer to baby-sit the application. Instead, they offer a predictable monthly subscription fee. Just sign up with a credit card and start using a new application the same day.

Yet despite the hype (SaaS poster child Salesforce.com alone spends a reported $500 million on sales and marketing annually) and the widespread availability of so many types of SaaS applications, this approach to software distribution is no cure-all. "Whether it's SaaS or it's on-site, you're trying to solve a business problem, and that's basically what you have to solve first," says Chris Harrick, senior director of product marketing for SugarCRM.

Not Sold on SaaS

Furthermore, not all businesses are ready to embrace SaaS. According to a survey of 250 business and technology professionals' SaaS plans conducted by InformationWeek in March 2007, one-third of companies say they're not planning to use SaaS at all. Their top concerns:

48%: Security
42%: Lack of a clear benefit versus traditional options
40%: Reliability/uptime
33%: Features/functionality
31%: Interoperability

Adopting SaaS can be a go-it-alone process -- suiting some companies more than others -- as, unlike traditional business software, many SaaS applications tend to stand alone, at least out of the box. And so far, few resellers or systems integrators are available to help, although that may soon change. "I wouldn't be surprised if we see in the next year some kind of brokers that would help companies navigate through all of the SaaS vendors and tailor offerings according to their needs," says Julie Craig, a senior analyst at Enterprise Management Associates in Boulder, Colo.

Why SaaS is Popular With Some

For many organizations, however, something about SaaS is already clicking. A March 2008 study by Access Markets International says 21% of small businesses (1 to 100 employees) and 31% at midsize businesses (100 to 999 employees) in the United States now use SaaS.

What's behind this popularity? According to Forrester Research, primary draws are "lower costs, quick deployment times, and mitigating IT staff constraints."

Some companies also like the fact that many SaaS vendors respond to feature requests. "You have much greater collaboration between the vendor and the customer," says Sean Rollings, VP of product marketing for NetSuite, which offers ERP and CRM via SaaS. "You don't just drop off the disk and wish them good luck for the next 10 years of ownership. You've got to meet the customer's needs, because at the end of the contract period, you've got to win that renewal."

Another likely draw is that SaaS offers complex functionality to companies of any size, says Treb Ryan, CEO of OpSource, which provides Web operations infrastructure and services for SaaS businesses. "The best example of that is Salesforce.com itself. Merrill Lynch is now adopting it, but it started as a small and midsize play," he says. In other words, many SaaS applications are good enough for enterprises, but affordable enough for small and midsize companies to also use.

Mania Goes From Spreadsheets to CRM

As a result, companies can now afford to replace ad hoc processes with dedicated business tools. For example, when the CEO and VP of sales and marketing at Mania Technologie AG, a German electronics manufacturer with 900 employees, wanted to replace the company's ad hoc, spreadsheet-based approach to sales and marketing with CRM software, they began investigating SaaS-based options for their 50 sales users, and ultimately selected SugarCRM. (Other vendors evaluated included Exact, SageCRM, and Salesforce.) According to Mania IT project manager Eddie White, "SaaS was an important step [in] allowing us to evaluate the solution at minimum cost and to get up and running very quickly."

Kicking the Tires

With so many SaaS options on offer -- from ERP and CRM to spam blocking and servers, to online backups and PBX-based telephony -- which SaaS applications should small and midsize businesses study first? Craig of Enterprise Management Associates recommends starting with the "low-hanging fruit." Namely, evaluate SaaS alternatives to any business software that's difficult to run on premises. Especially with ERP, CRM, and some HR applications, "it's big, it can be complex, and typically companies need specialists in-house to get it configured and keep it up and running. So if I were a small or medium-size business, I'd think that perhaps my investments would be spent better building up the business itself."

As with any type of software, buyer beware. Especially watch licensing, and study pedigree. For example, Register's Vine says he evaluated multiple document management SaaS options, but several had setup fees and required too many minimum users to fit his budget. Some also appeared to have been ported from older, packaged software -- and it showed.

Also evaluate security, how the provider backs up data, and service-level agreements. "You're still responsible for the levels of service you're providing to the business, so you have to be able to choose reputable vendors that will be able to give you the service you need," says Craig. "But one nice thing is, a lot of these vendors, you don't really have any contracts, so if you want to try it for a month, it's very easy to do that."

Mind the Ecosystem

When evaluating any SaaS business applications, also consider how they play with others. "These days it's basically integrate or die," notes Craig. Such integration is often based on APIs, "partner ecosystems," or both. With an ecosystem, for example, a vendor typically offers integration to its platform via a service-oriented architecture. Once built, anyone can use these new tools or integration capabilities.

The Salesforce AppExchange, which offers more than 700 compatible applications, is one example. Another is the SugarCRM platform, which the company says has 12,000 registered developers who have created 470 application extensions and helped port the open source application into 75 languages. As this suggests, long-term SaaS vendor success may have a lot to do with the popularity of the underlying platform, or at least the ecosystem in which the application can operate.

The Case for 'Incestuous' Software

All of these changes mean that on-demand software is looking less and less like the cutthroat world of traditional, packaged applications. Rather, "the SaaS vendors and the SaaS market are very incestuous," says Craig. "It's totally branched out from the enterprise software of the past, where it's very contained and very limited to basically my own company, to all these companies that are interacting."

Success seems to demand cooperation at least as much as competition. Yet what's especially striking is that many SaaS companies not only work together, but often literally run their businesses using each other's software. One proponent, OpSource's Ryan, says it's simply because of the math behind SaaS: "We're a midsize business, a couple hundred employees, and it's amazing the functionality that we have [thanks to SaaS]. We have sophisticated sales management tools and reporting (Salesforce.com), powerful ERP (NetSuite), and the most powerful ticketing system I've ever used, which is RightNow." At the same time, "we have a limited IT staff, really dealing with the desktop and laptops."

Say What You Mean, Mean What You Say

It's notable that SaaS vendors are drinking their own Kool-Aid and still alive to tell the tale. Of course, this alone doesn't provide any guarantees about the health and longevity of a particular SaaS provider. Yet with the relative ease of switching SaaS vendors if one folds or if an application's features and functionality stagnate, the power is in the hands of the user. For many, beyond the other benefits on offer -- lower prices, less risk, and freedom from vendor lock-in -- this alone may be worth the SaaS subscription price.

Mathew Schwartz has covered IT and business topics for more than 10 years as a journalist, researcher, and editor. His work has appeared in a variety of publications, including The Boston Globe, Computerworld, Information Security magazine, InformationWeek, the London Times, and Wired News.