On the positive side, it has enabled
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many SMBs to affordably invest in business tools that not long ago were prohibitively expensive due to high licensing fees. On the not-so-positive side, the delivery flexibility and pricing model of on-demand software have unleashed a torrent of new offerings -- many touted as 'must-have' applications -- making the SaaS market confusing and difficult to navigate.
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So what's an SMB to do? Don't panic. As they say, this is a good problem to have.
SMBs must show discipline, as the on-demand market can feel like a candy store. SMBs must be careful not to gorge on every SaaS offering they come across, but instead select the on-demand applications and services that will maximize IT dollars, which are often limited. Here are some tips on how to make the right SaaS investment:
- Define the business processes you want to automate. This may sound like something only large enterprises have to deal with, but it's equally important for SMBs as they explore the SaaS market.
That's because SMBs often operate on business processes that are embedded in their employees' heads, not on paper. That doesn't help much when you have to implement a new service or system. As SMBs spend a little time documenting business processes, their true needs become apparent, and the metrics that are needed to calculate return on investment follow. Taking the time up front to define business processes will simplify SaaS implementation and keep costs down.
- Compare apples to apples. Conventional software purchases have several components, including implementation, maintenance and hardware considerations. Smart buyers compare cost totals as well as the components when making a decision.
Although SaaS is often portrayed as a one-price solution, it's not necessarily so, and a savvy buyer will ferret out the details. Where are the extra charges in a vendor's SaaS offering? How many simultaneous users are supported? What is the service-level agreement? Is the vendor's data center mirrored? What is the estimated time to recover in the event of a calamity? The more questions like these that are answered, the better informed a SaaS purchasing decision will be.
- Check the competition. The notion that SaaS is automatically less expensive than traditional software options is often based on a total cost of ownership evaluation that may be out of date.
In the bad old days, enterprises spent millions on software and perhaps two or three times that on services. But those days are over (for the most part), and vendors have figured out how to simplify their offerings to the point that service costs for SaaS and traditional solutions are fairly comparable. Don't automatically assume that SaaS is the low-cost solution without also hearing what conventional vendors have to say.
- Negotiate. Regardless of your decision, don't be afraid to negotiate with a SaaS vendor just as you would with a conventional software vendor.
SaaS vendors like to project their earnings out many quarters and are often willing to cut deals to lock in revenue. Consequently, the best SaaS deals tend to come in the form of multiyear contracts that are priced below the advertised monthly charge.
- Don't stop there. Determine what happens at the end of the contract. The vendor will probably tell you that you can easily get your data out and go elsewhere if you like, but that isn't practical for many companies. That said, to avoid a big price increase down the road, ask for a renewal guarantee that stipulates that the monthly cost will not rise by more than a fixed percentage.
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Ultimately, SaaS offerings have the potential to save SMBs money, but the savings won't simply happen. To get the most out of on-demand software and services, just like with traditional software offerings, SMBs need to be informed and smart customers.
Denis Pombriant is founder and managing principal of Beagle Research Group LLC, a CRM market research firm and consultancy in Stoughton, Mass. Pombriant is a well-known thought leader in CRM who publishes frequent research and is often quoted on CRM and SaaS topics.
This was first published in August 2007