The Hidden Traps of HRMS Software as a Service

SaaSIt seems that almost every HRMS/Payroll Vendor has entered the Software as a Service (SaaS) marketplace. Whether the vendor calls it an ASP, BPO, HRO, Outsourcing, Rightsourcing, Intersourcing, Subscription, Per Employee/Per Month (PEPM), On-Demand or the latest descriptive acronym, SaaS, it still attempts to position HRMS/payroll as a commodity – a “one size fits all”.

Much has been written of the benefits of SaaS. To a lesser, but growing extent, the short and long-term ramifications of SaaS are now being analyzed. The purpose of this paper is to examine those ramifications and their effect on both an organization’s staff, and its bottom line and integration issues.

Vendors tout SaaS for its ease of entry from a financial perspective – no upfront license fee, no annual maintenance and support costs, reduced implementation and set-up expenses and no hardware acquisition
costs. While these are seemingly compelling reasons to move from an “ownership” or License model to a “rental” or Subscription model, the medium and long-range implications, from a financial and productivity perspective, are often overlooked or, if considered at all, dismissed as less important.

It is important to understand the inherent differences between a right to use, on the one hand (SaaS), on the one hand and a License, on the other. SaaS is a mere right to use, conferring no ownership rights to deploy software as an organization sees fit. That right to use continues so long as an organization pays the monthly per employee/per month fee that the vendor sets. There is usually a minimum term, typically three years, which allows for a possible switch to another SaaS vendor at the end of the term and that, along with the ease of entry, creates an appealing solution to an organization. By the same token, at the end of the minimum term, the vendor may impose increased fees. Some vendors automatically increase fees by 10% irrespective of the rate of inflation. It is this non-commitment to a long-term solution by the organization and the uncertainty of future costs, which creates one hidden (or not so hidden) trap.

The traditional license model (whether deployed On-Premise or Hosted off-site) is the polar opposite of SaaS in that it’s a commitment to a long-term solution with all of the benefits of owning your own solution. Those benefits include your own database and control of the setup and configuration for your particular needs. Despite the appeal of SaaS and the one-size fits all approach, very, very few organizations deploy any sophisticated software solution in its plain vanilla form. Each has, or believes that it has, special needs, special processes and the like that require configuration or personalization beyond the standard deliverable from the vendor. To achieve that upfront ease of entry savings so highly touted, the sacrifice is to standardize your practices to what the vendor has declared are “Best Practices”. The “Best Practices” approach is just hidden code for required conformity to suit the vendor’s database set-up – a one size fits all approach in a multi-tenanted database.

As more organizations use more SaaS applications, many are just learning the hard truth that integration among all these off-premise SaaS systems is not easy and is falling on its IT staff. What were once easy when all of the systems were On-Premise become both a hidden expense to purchase middleware or pay for a service to facilitate the necessary integration and a significant time expense to manage the whole on-going process.

A recent article in Information Week highlighted some issues and problems that many are just coming to appreciate. The article pointed out that only 24% gained some capabilities over traditional On-Premise software, while 39% had to sacrifice some capabilities to use SaaS. When combined with those that felt that they have the same capabilities, the percentage rose to 76%, leaving just 24% that had a net gain. Considering the substantial 5 and 10 year total costs of SaaS, it may be one of the only “bargains” where in return for ease of initial entry you get less capability for more money.

A License model, on the other hand, offers the flexibility to configure your system to your needs – thus achieving productivity gains and enhanced Total Cost of Ownership (TCO) not achievable with SaaS.

The productivity gains referred to above are two-fold. A licensed system (whether deployed On-Premise or Hosted), fully configured for an organization’s specific needs and processes, by its very nature, makes the organization more productive. On the other hand, use of a system that forces the vendor’s idea of “best practices” will inevitably result in work-arounds, often by other means such as spreadsheets, or worse, manually.

The second aspect of productivity loss, when SaaS is used, occurs at renewal time. The organization, having left its options open to switch providers, requires its HR, Payroll, Benefits and IT staff to review the latest offerings from the incumbent vendor’s competitors, complete with demonstrations, proposals, meetings, etc. Even if the incumbent vendor is renewed, the disruption caused by this tri-annual event taxes even the most loyal and dedicated staff. Should a decision to switch providers be made, for reasons of cost or dissatisfaction, the subsequent project to switch taxes the staff even further.

SaaS is marketed for its low initial cost compared to traditional licensing and for avoiding costly upgrades. Twenty years ago the rule of thumb was that organizations replaced their systems every five years. The economic realities of the last decade and heightened fiscal responsibility have caused organizations to squeeze out the best ROI they can on every purchase.  For On-Premise deployments, software replacement time approaches 10 years, resulting in maximum ROI. SaaS Vendors also tout that there are no costly upgrades when you rent from them. In fact, costly upgrades belong to a bygone era. Today’s well designed systems deliver tools that allow a customer to readily perform their own upgrades. A simple spreadsheet comparison of the License model (On-Premise or Hosted by the vendor) versus SaaS leaves no question that the financial commitment to own (License) versus rent (SaaS) over the medium and long-term is significantly less

Despite the multi-tenanted approach by SaaS vendors and the economies of scale with that approach, monthly PEPM prices have risen dramatically. One leading vendor’s base price has almost doubled in a matter of a few years. In fact, it is not that uncommon to see the first year rental price exceed the first year costs for a Licensed On-Premise deployment. 

Setting aside the obvious long-term cost savings of a license, organizations that value their employees’ time and productivity will recognize the benefit of choosing a system that meets their needs for 10 years and beyond to avoid the turmoil of the selection process every few years.

The above comments are not designed to suggest that one model is clearly superior to the other. As an analogy, one look at the real estate landscape demonstrates that some people rent apartments while others purchase homes. Neither one is right and neither one is wrong. As long as an apartment renter understands that, in return for no significant upfront money, they take the apartment as laid out, the carpets as they are, and the paint color what it is, they are free to move at the end of the rental agreement to another apartment in a different location, with a different layout, walls and carpets with new rent starting all over again - a cycle that will remain unbroken for as long as they continue to rent.

PDS, of Blue Bell, Pennsylvania has been a leading provider of HRMS systems for over three decades. PDS’ Vista HRMS® is a browser-based suite of HR, Payroll, Benefits and Self-Service components that provides comprehensive, yet flexible tools to help you manage and deploy data across your enterprise. It includes extensive workflow capabilities and combines both position and employee management. Vista’s intelligent cross border capabilities manage both U.S. and Canadian employees in a single database.

PDS offers its Vista HRMS solution using a Licensed model for deployment either on-premise or with hosted/managed services in a single tenanted environment. In addition, PDS offers a Subscription model also. Unlike typical SaaS subscriptions, it, also, is in a single tenanted environment accessed through a Virtual Private Network (VPN).


Article offered by: PDS Software,®/