When salesforce.com roared onto the application scene in 1999, the model for delivering/licensing CRM applications changed dramatically. Although subscription pricing and hosted applications existed in other application segments, most notably HCM, salesforce.com became the poster child for the new software as a service (SaaS) model.

After this, many other vendors, including some traditional ERP vendors, were forced to rethink their delivery models and change the way they charged for these applications. Examples include Oracle’s recent acquisition of Siebel and SAP’s and Microsoft’s unveiling of CRM on demand. 

So what about the classical ERP suite? 

Has the SaaS model caught on in the mainstream ERP world? To answer that question, we must first define SaaS and discern the difference between SaaS and the hosting or application service provider (ASP) models. 

AMR Research defines SaaS as an application that:

• Has no upfront license fees associated with the use of the software (a subscription fee is generally billed monthly with a one- to two-year contract).
• Requires no IT infrastructure at the client site other than desktop devices and Internet access.
• Is deployed as multitenant (multiple customers sharing a single copy of the software) or single-tenant standard code maintained and upgraded by the vendor.
• Has support and upgrades included in the monthly service fee.

Hosting/ASP approaches generally require the customer or partner to purchase a perpetual or term license upfront and then charge separately for the hosting services. In these cases, an additional maintenance fee is typically tacked on for support and upgrades. Note, however, that the term “on demand” does not necessary mean the same thing as software as a service.

The market’s confusion about these terms was highlighted in a recent AMR Research survey of 500 application buyers. While awareness of SaaS was high (96% were familiar with the term), the definition of what constituted SaaS was fuzzy (only half of the respondents used a tight and defensible definition of SaaS). 

The SaaS ERP market

Enterprise buyers find many aspects of SaaS attractive. Most companies we talk to love the idea of paying for software based on usage, faster deployments, and low startup costs. However, companies expect to keep their ERP system for 10 to 15 years, and they are very demanding about functionality, vertical industry support, and vendor viability. These systems are designed to support an organization’s key business processes and manage its most critical information, and most management teams wouldn’t consider compromising functionality or vendor viability for an innovation delivery model. The stakes are just too high.

Here’s a look at the market today:

• NetSuite: SaaS—The only true software as a service ERP vendor because of its licensing and delivery model (single source code, multitenancy, no upfront license fee). From an ERP perspective, it has financials, customer management, purchasing, payroll, and inventory, but also has limited manufacturing abilities (light assembly only).
• Microsoft (SPLA): SaaS/ Hybrid—Microsoft offers a subscription hosted model through its Service Provider License Agreement (SPLA) partner program. With the SPLA program, software vendors can provide Microsoft’s ERP products as a service. Under the agreement, the service provider is the licensee of the software, and may provide access to and use of the software to one or more customers for a monthly fee, although AMR Research has only seen limited adoption of this option.
• Plexus: Hybrid—Plexus has a SaaS delivery model, but it does not require an upfront license fee. The maintenance fees and upgrades are included in the monthly hosting fees, and it will do fixed priced implementations. Plexus has full end-to-end business processes including full manufacturing plus quality, tooling, lean, and supplier connectivity.
• Oracle’s On-Demand: Hosted/ASP—Oracle charges up front for the license and maintenance, it has a hosting fee, and is not multitenant. However, Oracle offers its full-suite ERP system that can serve the needs of its largest clients without the need for in-house IT infrastructure.
• SAP (Powered by SAP)—The common delivery and licensing option for partners is the classic ASP model. However, some partners do have the option to host these solutions as a hybrid SaaS model. The partner holds the license and allows users to pay on a subscription basis. The partners are required to stay on the most current release, so although there is not multitenant, they do have a common set of source code.

SaaS is here to stay

Interest in the SaaS model is growing, with HCM and CRM vendors seeing the most success because of the narrow focus of their products and the importance of usability in applications in which adoption is always a major issue. 

In the next several years, many, if not most, of the enterprise application vendors will begin to offer SaaS as a delivery option along with perpetual licenses, term licenses, and enterprise licenses. Entry has no real barrier, and no vendor will be willing to lose a sale simply because the prospect preferred to have the software hosted and pay for it monthly. We are already seeing SAP, Oracle, and Microsoft offering limited SaaS options, and it seems very likely that they will expand those programs as interest grows.

The conventional wisdom is that SaaS will appeal to small and midsize companies, while large enterprises will choose conventional licensing. Not so fast. Many larger organizations like the SaaS model but are uncomfortable with the idea of multitenancy and want the option of bringing the software in-house or having it hosted by a third party if the vendor gets in trouble or they are unhappy with the service level.

If major ERP vendors begin to offer SaaS, some of these larger companies may find it very useful for fast-track deployments, smaller or very autonomous business units, or even as a helpful option when the business has a strong sense of urgency but a limited appetite for capital expenditure.