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What SMBs Need from Software as a Service (SaaS)

Originally published October 7, 2009

By eliminating the need to process and host data on site, software as a service (SaaS) seems tailor-made for a resource-constrained small or midsize business (SMB). It allows users to interact with the application over the network and secures sophisticated enterprise solutions for the SMB that does not have the cash or ability to build and maintain critical, complex applications.

Once bleeding-edge, SaaS is becoming an accepted and highly popular purchasing vehicle for acquiring enterprise software, as suggested by an AMI report cited in Destination CRM magazine. AMI predicts double-digit annual growth for SaaS-based offerings from 2008 to 2013, while forecasting only single-digit growth for on-premises enterprise software in the same period. Clearly, many enterprises will commit significant resources to this application delivery method.

But before an SMB leaps into a SaaS deployment, executives need to take a careful look. The risk/reward ratio is higher for SMBs because they don’t typically have the IT capability or financing to quickly bring a solution in house if their SaaS provider goes belly-up. And just like large competitors, SMBs must pay attention to security, portability, data access and solution road maps. What could seem like the fastest path to a sophisticated solution could crush a company without careful planning. Here are the top things SMBs need to consider.

Financial Stability

SMB executives risk their reputations on new software and service contracts, so a little due diligence is in order. Is the provider profitable and, if so, for how many years? How many customers do they have today, and how does that compare to last year and earlier? What is the retention rate, and how is it calculated: monthly or annually? How much cash do they have in the bank? Do they have a larger parent company, and what is its credit rating? 

Legal Options in Case of Bankruptcy

A traditional software agreement gives you a copy of the software. With SaaS, a company is only receiving limited provisions of use. Traditional agreements give the licensee the protection of Section 365(n) of the Bankruptcy Code to elect to retain its intellectual property rights, but this hasn’t been clarified with SaaS. SMB companies can help lay the groundwork for this protection by including express license grant language in the SaaS agreement. It should clearly articulate what is being licensed, and include language from Section 365(n). 

Seek language in the agreement that provides for third-party escrow of all source code and related documentation. The escrow agreement should provide a release condition that would itself withstand bankruptcy attack. The SMB should then be able to gain the software and host it on its own systems upon the SaaS vendor’s bankruptcy and rejection of the agreement. SMB companies need to have the confidence and discipline to demand those rights in the SaaS contract.

Product Road Map

Don’t be wooed by low initial cost, speed of implementation and current feature set. Just as the competition is not standing still, neither should your SaaS applications. SaaS features may not be as deep as those required to support large organizations with more mature processes. It may be a challenge to customize the application to your unique needs, but future enhancements may present other options. Be sure to ask what version is online today and what version number is pending. Is it a major release or minor? What is the development schedule for next 12-18 months? When do you schedule staff for follow-up training? While SaaS feature improvements are more frequent and fluid than those of on-premises solutions, you should be mindful of product quality. The first release of any software or computer presents some inherent quality risks. 

Application and Data Portability

As a delivery model, SaaS may only suit you for a certain period of time. SMBs looking at SaaS should have a migration or exit strategy in mind – both for the application and the data housed in it. What if your SaaS application falls behind similar technologies in the marketplace? What if the provider files for bankruptcy? Some percentage of SaaS vendors will not survive, so how can you move elsewhere and maintain continuity? Larger companies have the staff to rewrite applications in house where needed. The SMB does not have that luxury. Conversely, your company may find a SaaS application so strategic for planning or production processes that you need to bring it on premises.

And you certainly don’t want your data held hostage. Don’t even bother with a provider that won’t return your data. One tip-off is if the provider is a bit of a laggard in upgrading the solution but has an extremely high retention rate. It could point to a data hostage situation.

Security

The prime reason companies shy away from SaaS is data security. Whether you are in a highly regulated industry or not, this is critical. Ask for security certification, employee policies and the number of recorded security breaches in past 12 months. You can spend more on security now, or you’ll be paying later. More than 40 states have developed their own “breach laws” that require a customer notification in the event their covered information has been compromised. Know when notifications are required and what actions you and your SaaS vendor can take to minimize or avoid notifications (e.g., encryption of covered information). 

More Important Questions to Ask

Not every SaaS offering is a huge time or money saver for the SMB. Some offerings are not that much more of a cost-savings than paying IT to install and maintain a piece of software. Ask these questions before you commit. Does SaaS provide access to solutions, platforms and process innovation that were otherwise unaffordable? Do SaaS delivery and subsequent subscription terms thereby free up capital for investments in more strategic areas? Does SaaS subscription allow for a speedy implementation, removing/reducing the training burden on staff or improving focus on other IT priorities? Does SaaS allow you to keep a steady growth trajectory or meet new customer requirements? What is the cost of not implementing SaaS?

The current recessionary market has put an improved focus on customer relationships and the technologies necessary to manage many communication channels to customers. But to deploy a SaaS application without considering all of the long-term ramifications, especially in this recessionary economy, is nothing more than a gamble. Overall, SaaS is a highly useful means for SMBs to deploy sophisticated applications with limited resource commitment. But organizations can still lose time, money, customers and credibility by not effectively establishing a few simple entry and exit strategies during a SaaS evaluation.


SOURCE: What SMBs Need from Software as a Service (SaaS)

  • Matthew Mikell
    Matthew leads Global Product Marketing for the SMB initiatives at SAS, the world's largest privately held software company. Matthew supports pricing, product packaging, strategic planning, external messaging and delivery via VARs, SaaS and cloud computing.


 

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