Originally published February 20, 2007
The business performance management (BPM) software applications business engenders an ongoing debate regarding the choices that companies have when they purchase BPM solutions. The argument from some circles goes something like this. Companies have two choices: (1) an expensive, internal implementation and deployment of a Fortune 1000 enterprise software solution, or (2) a “managed service” offering of the same enterprise solution (sometimes leased from a third party) managed and deployed remotely. This approach is also known as Software as a Service (SaaS). The debate rages particularly intensely when companies with end revenues up to $500 million – the traditional Small/Medium Business (SMB) market – are the end users.
The good news for SMB enterprises is that they actually have more than two options, and many of the arguments put forth by proponents of the Fortune 1000 enterprise solutions turn out to be myths. Let’s examine some of these myths.
Myth #1: Software as a Service (SaaS) will soon be the only way in which companies access their software.
SaaS is an increasingly popular choice in some markets, with Salesforce.com in the CRM market being one of the few bright spots in a sector littered with failed hosted application offerings. But isn’t SaaS really the 2.0 version of the application service provider (ASP) business of the late ‘90s? However popular it is to talk about, claims of the ascendancy of SaaS to the throne in 2007 are overstated, and there has been little indication that this choice will soon be the only choice that matters. A recent Gartner study showed that SaaS offerings generated only about 5% of software revenues in 2005, and Gartner projects that by 2011, 25% of new business software will be delivered by means of SaaS. That equates to three out of four companies still choosing to manage applications internally in 2011 – and that’s for all applications, including those that don’t carry the outsourcing angst of BPM data. So it is a bit premature to declare the demise of the internally hosted BPM application.
Myth #2: SaaS always costs less than an internally managed application.
This is a common misconception, but the question shouldn’t be, “Which choice is more expensive?” The question should be, “How long do you plan on running this BPM application?” SaaS typically offers less expensive upfront licensing costs, but typically becomes more expensive than internally managed applications over a long period of time. A typical break-even scenario between a SaaS “rental” license and a perpetual license is three years. SaaS does save on hardware and software deployment costs, but for a typical enterprise BPM application, the implementation fees to map your business processes and customize the application to meet your specific needs are the same, regardless of your method of BPM application support and delivery. If you plan on running your BPM solution in concert with the lifespan of your general ledger solution, then your BPM software probably has a 10-year lifespan, making it less expensive to manage internally than SaaS in the end.
Myth #3: Enterprise BPM applications that solve Fortune 1000 problems can also meet the needs of the SMB market.
Given the size and potential of the SMB market (for 2005, Forrester Research estimated an SMB market of $348 billion, or 48% of all IT expenditures), it’s no wonder that the billion-dollar enterprise software vendors are trying to crack the market. However, many of them are responding by marketing “dumbed down” versions of their Fortune 1000 solutions, which might have a lower relative licensing cost but still carry onsite implementation fees that can cost many times the initial licensing investment. Furthermore, small and medium-sized business don’t need many of the advanced features offered in these packages, and few of them have the free cash to finance a six-month or year-long implementation effort, much less the opportunity cost of the business distraction it causes.
Myth #4: Implementing a BPM solution in-house requires a massive investment of time and money.
You’ll hear horror stories of dedicated project teams at small companies spending nine months or more to implement BPM software. This may be true in some cases, but certainly doesn’t need to be. Many mid-market applications are designed to be implemented in just hours and deployed in days or weeks, often with little to no IT support, sometimes entirely remotely on your schedule.
Which leads to the good news – there is another choice: mid-market BPM software solutions designed specifically for small to mid-sized companies, which can be purchased and successfully deployed internally for a total investment between $5,000 to $50,000, depending on the deployment. These solutions have all of the core features a small to medium-sized business needs, with the fast ROI that this market demands. True, these vendors don’t have the glamorous Fortune 1000 company logos on their Web sites, or sponsor nationally televised golf tournaments, but neither do they have the price tag or the headaches. Of course, they don’t have 100 percent of all the features that the enterprise software solutions have (how could they?), but they have all the core functionality a small to medium-sized business needs, at 10 percent of the total cost.
Does this mean that there is no future for SaaS? Absolutely not. There is clearly a segment of the market that likes to have applications delivered and managed for them, and as confidence in the security and reliability of these systems grows, it will be a popular alternative. That’s why many software vendors are working now to be ready to offer both versions of their solution when that day comes. For now, though, many thousands of companies in the $10 million to $500 million range have voted with their wallets on this debate and are happily running applications from a number of vendors who understand what small to mid-sized companies want in a BPM application: an affordable, easy-to-use solution that provides the critical BPM functionality needed to run the business, and which can be up and running in days or weeks with little to no IT support. They are perfectly happy to let somebody else pay for the golf tournament.