SaaS: Outsourcing out-of-control?

SaaS: Outsourcing out-of-control?

Summary: SaaS is effectively the same as outsourcing - you're handing control over business processes to a third-party service provider. However, while SaaS delivery shares many similarities with outsourcing as a delivery model, there are serious caveats customers need to consider

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SaaS is effectively the same as outsourcing - you're handing control over business processes to a third-party service provider.  However, while SaaS delivery shares many similarities with outsourcing as a delivery model, there are serious caveats customers need to consider.

For today's business executive, it's easy to get excited by the potential of SaaS-based offerings. The low-cost upfront investment and pay-by-the-drink pricing can quickly get you the business services you need without the painful customization and implementation impediments of yesteryear.  There is no more fretting whether your IT department has the expertise or resources to implement, develop and maintain the application.  Bottom-line, SaaS creates a business utility service that is revolutionizing the software and outsourcing industries, especially in the worlds of the manufacturing, marketing and HR executive. 

So what are the similarities and differences between SaaS and Business Process Outsourcing?

SaaS is like outsourcing because you're handing over control of service-delivery to a third-party and relying on it to look after the day-to-day operational delivery.  You’re also not paying anything for housing your data. But does low-cost mean low-risk?

Data concerns:  What concerns me with SaaS delivery is the lack of provisions for compliance, business continuity, security and privacy of data.  Moreover, there is often a far-reduced level of control over data and processing, for which a well-crafted outsourcing contract caters.  Outsourcing goes to great lengths to stipulate where data resides, how it is protected, who has access, which measures are in place to accomodate political or natural disaters, and how data management complies with regulations.  In addition, outsourcing providers are SAS 70 compliant, but are all SaaS providers?  With SaaS, data is being processed in the Cloud. But does the Cloud have parameters? Does a SaaS contract have any reference to where cloud is located?   These are questions you must ask when exploring these models.

Governance concerns:  The massive appeal of SaaS to outsourcing service providers is the reduction in customization for new customers, which makes their services less appealing from a price perspective.  The outsourcing Holy Grail is the one-to-many model where they can delivery common processes to multiple clients in a standard format.  SaaS delivers that model in spades.  If outsourcing service providers can acquire successful SaaS applications, they could hit a home-run with a utility delivery model, especially for business processes where buyers are willing to standardize onto a vendor model, for example payroll, general accounting, performance management, or CRM. 

Hence, customers looking to procure SaaS will have to change their business processes to fit with a SaaS offering. They do all the transformation at their end, hence this entails a very different focus on transition into a managed service model.

SaaS is too easy: what worries me is the lack of any upfront investment and how that impacts their governance over that business process.  It is a serious step for companies to enter into an outsourcing engagement, with significant change mangement required to establish governance over those outsourced processes. 

With SaaS, companies can sign up, flip a switch, and they're up and running with zero upfront investment.  Does this mean they are going to invest nearly as much attention on governing these processes?  My experience so far is no.  Companies move into SaaS because it is cheap and easy, and often overlook the internal business transformation then need to go through to manage these processes effectively in an outsourced environment. 

Outsourcing is a big investment, and the customer has to earn its savings overt time, while the service provider needs to earn its investment over time.   SaaS is not a big investment for the service provider, but it should be treated as the SAME investment for the customer.  If not, you could end up with an outsourced environment with no controls... not something that is going to be healthy for your business in this market.

Topics: Cloud, Banking, CXO, Data Centers, Emerging Tech, Enterprise Software, Outsourcing

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16 comments
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  • SaaS == Outsourcing

    Excellent observation.

    redrooz
    • SaaS is not the same as Outsourcing

      The fundamental differences between SaaS and
      outsourcing are:

      With SaaS you get economies of scale through
      the '1:Very Many' model. Therefore the unit
      cost of supporting, maintaining, purchasing
      hardware and data centres is lower than the
      outsourced model, simply because you have
      hundreds of customers all hosted in the same
      logical place.

      The application model is better than just
      outsourcing a regular app. There is one
      instance of the core app, which is
      automatically upgraded, usually about 3 times a
      year. So delivery of new features is instant.
      With an outsourced model hosting traditional
      software, upgrades are far more hassle.

      Payment model: an outsourcing model still
      requires high upfront licensing cost, with the
      associated risk.

      Time to value: Due to the higher level of
      abstraction in SaaS software, SaaS apps can be
      configured far faster than traditional apps,
      around half the time for equivalent
      functionality quite often. Again, outsourcing
      involved traditional apps which have longer
      development cycles.

      There are a few more, but I just wanted to make
      a point that they are not equivalent models.
      You may be interested in the following blog
      which talks about our perspective on Saas: http://www.computerweekly.com/blogs/IT-FUD-
      blog/
      nezproc
      • Different perspective

        Nezproc: You're looking at it from the vendor's POV. But from the customer's POV, using a SaaS supplier/model is EXACTLY the same as outsourcing. Where do you think it's different from the customer's perspective?
        NegotiatorJeff
        • re: Different Perspective

          Traditional "outsourcing" contracts have tended to be either hiring a firm to run our systems in our data centers, usually with some remote capabilities; or hiring a firm to run our applications and systems in their data centers.

          When clients of our shut down internal data centers for outsourcing, they shipped equipment to the outsourcing firm.

          SaaS is a form of outsourcing. You are not, however, hiring a company to run your application(s). You are choosing to run their application and, if it is a good app, customize it to meet your needs.

          In traditional outsourcing the customer owns the software assets (or has licensed them from a vendor that is usually NOT the outsourcing firm). With SaaS, your are renting use of an application.

          SaaS is more like mainframe timesharing services dating back to the late 70s and 80s. Who know that Control Data was on the vanguard of 21st century computing?

          Allen
          www.horizoninfoservices.com
          allenfalcon
          • Agree

            Yes, agreed. And the result of not owning perpetual licences and hardware is that there is not a big upfront cost, therefore less risk. This is very attractive from a customer point of view.
            nezproc
  • Good luck.

    :)
    HypnoToad
  • RE: SaaS: Outsourcing out-of-control?

    Your article raises some excellent points but it also paints SAAS with too broad a brush stroke. The majority of Enterprise-class SAAS providers:

    - Run their applications and store their data in SAS 70 compliant data centers.
    - When their applications are for markets that have regulatory oversight (like HIPAA as an example) they are well-versed in the issues.
    - Data is secured properly using multiple levels of firewalls, IDS/IPSs, etc..

    With that said there are plenty of smaller SAAS solutions that do not meet these requirements. Business and technology owners must never give up their responsibilities to perform proper due diligence, however. Doing so is not only foolish but it is irresponsible."

    John (@JohnFMoore)
    http://johnfmoore.wordpress.com
    JohnFMoore
    • Questions

      I'm starting a new venture and looking for a SaaS Learning Management System (there are probably 50). I'm very aware that whichever I choose, this company will be a key partner and a misstep on their part would have a huge impact on me. In addition to what you have mentioned, what else should I be looking for or asking from a SaaS provider? Are there contractual provisions that should be considered?
      rhyslud
  • Outsourcing = end of a company

    When a company starts 'outsourcing' it is a good time
    to get out while you are employed.

    I will never work for another big 'corp' style outfit.

    The small company is the way to go, it may require you to
    wear more hats and more hours, but by far a more rewarding
    career choice and be treated like an employee not some BS
    associate 'wal-mart' style of management.
    Christian_<><
    • Outsourcing = staying small

      Consider the perspective of a small company outsourcing something it needs rather than growing to develop that competency in house. The company can stay lean and focused on what they do best.
      rhyslud
  • RE: SaaS: Outsourcing out-of-control?

    JohnFMoore: It's nice to have a warm fuzzy feeling about SaaS providers not only understanding the issues that face potential customers, but also take care of the details.

    The truth is that being SAS70 compliant doesn't get you much other than a false sense of security... it doesn't solve the practical issues involved with data security and doesn't prevent data from getting out where it shouldn't.

    See: http://www.licensinghandbook.com/2009/03/09/notes-from-the-i-told-you-so-file/

    More particularly, turning your data over to the cloud opens it up to a whole other host of issues, not the least of which is the potential for a court to rule such data as producible under some sort of subpoena or court order. (http://www.licensinghandbook.com/2008/07/03/privacy-in-a-saas-world/) If that data were in YOUR data center, you could continue to fight as long as you could... if it's in the cloud, they only fight until they get tired of it.

    Another good practical issue brought up by the original author is that you are outsourcing part of your business - and thus, if you don't know how your current business runs, you could end up re-engineering your processes around the SaaS solution. If you ever change such solution (for example, if the SaaS provider goes out of business), then you're going to have to pay all over again.

    Not to mention the cost issues: http://www.licensinghandbook.com/2008/04/20/microsoft-trying-to-convert-you-from-perpetual-to-saas/

    Content ownership issues: http://www.licensinghandbook.com/2008/04/05/terms-of-use/

    And availability/service level issues:
    http://www.licensinghandbook.com/2007/04/04/service-levels/
    and
    http://www.licensinghandbook.com/2008/07/12/99999/
    NegotiatorJeff
  • Data concerns

    I understand the concerns over data all too well. Data storage, security, and privacy concerns are probably the number one concern for customers when moving to software as a service. Following along those lines is the topic of "Vendor Lock-in". What do I do if I want to switch companies? What happens if you go out of business? These questions are almost automatic for SaaS consumers.

    Like anything else, this is something that must be shopped. Consumers need to ask about the details about how thier data is being secured from both a network, application, and redundancy standpoint. They should also review and demand a strict Privacy Policy that protects their intellectual data. Consumers should also be given a "way out". In the even they want to switch, I think it is important that a vendor offer easy options to export their data.

    SaaS still carries quite a few flaws, but innovative solutions to these problems will certainly help the model dominate the way we all purchase software in the future.

    Vincent
    Service Management Link
    <a href="http://www.mhelpdesk.com">MHelpdesk</a>, <a href="http://www.mhelpdesk.com/service-management-software.aspx">Service Management Software</a>


    mhelpdesk
  • Airline Travel SaaS proven mission critical solution

    Contrary to the common wisdom - On-Demand / SaaS has been around for some forty years - at least in the airline and hospitality industries - and it was a key capability in transforming the industry for the better by increasing customer service options while lowering the cost of service to end consumers.

    Obviously I'm referencing the Computer Reservation System / Global Distribution System (CRS/GDS) vendors who were born from their airline parents out of the need for labor / process automation, complexity reduction and cost reduction (i.e., AA's Sabre, UA's Apollo / Galileo (now part of Travelport), DL/TWA/NW's Worldspan (now part of Travelport), and Eastern's System One which became Amadeus via Continental's acquisition of Eastern and subsequent sale to a European consortium led by Lufthansa, Air France, Iberia and SAS.

    Small to medium sized airlines, and eventually almost all travel and hospitality companies, never could have afforded marketing, sales, channel management, revenue & pricing optimization, and flight operations capabilities that the world's largest airlines brought them - had these SME carriers had to have built a CRS/GDS system for themselves. In fact, you could say that the plethora of airlines - and consumer choice and reduced cost to fly - exists only because these SaaS vendors deliver a "plug and play" capability and a "pay as you go" business model. The CRS/GDS vendors actully have a "one up" aspect to their business model over the new comer SaaS vendors - gain sharing - in that you only pay IF you sell (generate revenue).

    Some of the comments talk about data issues and security issues and regulatory compliance issues and industry vs company unique process issues as though this is something new - it is not - it has been solved before and can be solved again for other industries and other processes / functional areas.

    Do you really believe that Dave Duffield (founder of PeopleSoft, at one time the most widely used HRM and HRO / PEO outsourced solution on the market) can't build the Workday SaaS solution to the same level of quality? And if you take a look - Workday, and other SaaS solutions, are custom configurable to nuances of any business - same for salesforce.com.

    More importantly, do CONSUMERS of "fill in the blank" get any value from a company keeping a large internal IT staff, buying H/W, S/W, middle ware, communications, raised floor facilities and everything else required to internally source an IT capability - mission critical or not? The answer is rarely if not never.

    The bottom line is - a company is doing a disservice to their intermediary customers and the end consumer when they do not embrace a multi-company share IT service / outsourced IT service. The only reason not to embrace employing a SaaS business model now or in the future is - IT organization job protection, arrogance and a disregard for your customers and consumers.

    There is an assumption here - that a viable SaaS vendor "currently" exists for the capability (process / functional area) required at an acceptable maturity level required and with acceptable SLA warranties in place. If one does not exist - then a company has an opportunity to collaborate with their industry competitors to jointly build one.

    Customers should vote with their wallets and avoid companies who want to waste their money on non-value added capabilities.
    michaelwdenis
  • Outsourcing is not risk free either

    Phil,

    All the issues that you mention with SaaS are present with outsourcing, it's just (as you say) they get more attention because the deal is bigger.

    But the big plus that SaaS has (or should have) is that if the deal turns sour, or circumstances change, you can exit.

    Most outsourcing deals are predicated (from the supplier point of view) on the basis that the costs of technology fall over a three/five year period, so what looks like a great deal now looks like a lock-in in three years' time.

    The whole SaaS/Outsourcing/in-house financial model is often built on the assumption that the user's requirements won't change over the three year cycle. Even in the best of times, this is often a false assumption!

    John Paterson
    www.reallysimplesystems.com
    contrarythinking.wordpress.com
    JohnPaterson
  • RE: SaaS: Outsourcing out-of-control?

    my response:

    http://sightlog.sightlinesconsulting.com/public/item/230096
    tfoydel
  • Phil needs to do more research...

    Phil needs to talk to some enterprise-SaaS offerings, which btw aren't the same as cloud providers that raise many of the concerns in his post.

    As an enterprise SaaS provider, we offer in our default contract:
    - SLAs for response times, system availability, and disaster-recovery
    - Financial penalties for missing any of the above SLAs
    - SAS-70 Type II certification for both our operations and our data centers (primary and backup), that include security and privacy policies and testing
    - All data is owned by the customer and located in two data centers that customers can inspect/audit at any time

    One key thing customers get from SaaS is an order-of-magnitude cost reduction for customers versus outsourcing, because of SaaS's many-to-one infrastructure and operations (and innovation). Phil somehow turns outsourcing's excessive bespoke costs into a positive - the customer spends so much on outsourcing and is locked in for so many years that the customer has to spend lots of time figuring out how to save money with outsourcing, or something like that.

    In summary, three key messages:
    - SaaS is not the same as the cloud.
    - There are many enterprise SaaS offerings that provide exactly what Phil said is needed
    - Outsourcing of applications operations will decline significantly over time as SaaS takes its place with much better economics and ownership experience for customers.

    John F. Martin