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The invisible risk of Software-as-a-Service (SaaS) 1

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Peter Thompson
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The concept of SaaS is compelling and in principle it appears as the ultimate solution to addressing IT. This article brings to attention some of the concerns that GCOMM customers have. There are many other considerations of course, but if SaaS is on the company agenda – the following are worth investigating.

The emergence of software-as-service (SaaS) highlights a newfound business risk. Among various cloud-based offerings, it is SaaS that should raise the greatest concern for businesses embarking on cloud services. There are potential risks to SaaS and making an informed decision by reflecting upon and mitigating those risks is advisable.

Software as we know it

Until relatively recently, most software was downloadable and installable on a desktop or a server operating system which a customer owned and maintained. A customer paid upfront for the software which was provided on a “right to use” basis. Usually, optional ongoing software maintenance was purchasable and included some sort of support and upgrades as part of the offering.

When the customer decides not to renew the contract of ongoing maintenance, in almost all cases the software will continue to function. You could liken this to Microsoft Office. Many businesses are still using Office 2007 or even earlier editions as it still meets their requirements.

For some time, GCOMM has offered its customers software leasing, which is a pay as you use software. Again, the software is downloadable and installed on local systems meaning the customer has control over the hardware and operating system on which the software runs. Technically they are able to use the software even if they stop paying for it. The software would continue to function, albeit illegally, from a licensing perspective.

What is software as a service (SaaS)?

SaaS is the ultimate in cloud computing. The SaaS vendor is responsible for the hardware, operating system and the software application. It means that the customer no longer needs to be concerned with anything other than using the application. The vendor will provide the service on an ongoing basis for a recurring fee.

How is SaaS different?

The primary difference between SaaS and the traditional software delivery is that the SaaS vendor has far greater control. With the additional control comes greater negotiating power. SaaS vendors know that once you are committed to using their application, it’s going to be very difficult to renegotiate with them. This is why almost all software vendors are moving to the SaaS model.

Not all software is business critical. Many low cost SaaS offerings are effective, and in the event that they no longer meet the needs of the business, the subscription can be cancelled with little impact. However, if large data entry, storage, and customisation are in question and you put aside the marketing talk of why SaaS is right for your company, you can objectively work through some of the following potential risks.

The price risk

Pricing is an excellent example of a customer being exposed. Sure, the initial term and the pricing might be clear. But what happens after the initial term? Other customers have told us of “surprise costs”. These can come in different forms. For example, the excess charges for data storage or excess API queries. Sometimes these charges are not clearly identified in the contract but only referred to on the website.

Reduced negotiation capability

The ability to negotiate with the SaaS vendor is obstructed due to the delivery model. With the customer investing so much human resources in data entry, training, and probable customisation, the sunk cost is serious. To move from one SaaS vendor to another will cost a seriously large amount of money. Your SaaS vendor knows that. The more users the company has and the more money it invests in integrating with other applications, will in turn greatly increase the cost of migration, thus weakening the customer negotiating position.

To draw a comparison, people from all over the world have invested thousands of hours in their Facebook profile. Facebook is provided as a SaaS. What happens if Facebook starts charging $500 per year for access? Would you still use it? You might be able to retrieve your data in a near useless format but what happens to all of the time invested? You either make a decision to pay or suffer the consequence of losing your well-publicised profile.

The customisation risk

Some of our customers have experienced situations whereby entering into a SaaS agreement, the vendor has expressed their willingness to customise the software in order to address the customer needs. However, after the agreement was signed they were much less willing to make amendments to the program citing it wasn’t possible or the feature requested isn’t part of the long term strategy. It is the vendor’s decision as they are the owner and provider of the software. In one case described to us, the customer continued paying the contracted service fees, even though they did not use the software, since the customisations were central to their strategy. They have now moved to an in-house installed and managed application.

Principally, SaaS vendors are under no obligation to provide ongoing support to third party applications, develop new features, or support current features in new versions, as part of the service.

The suspension and cancellation risk

When disagreements between the end customer and the SaaS vendor occur, the vendor is in a very strong negotiating position. If the customer does not pay the recurring fee for some reason, the software can be locked, rendering it inactive for the customer. In the event of a cancellation, the vendor is not obligated to keep the customer’s data. By not paying the fees for the service, the customer will be in breach of agreement and be at the mercy of the software vendor.

Negotiation with SaaS vendors

During commercial discussions, a strong negotiation position significantly helps in the ability to drive a favourable outcome. Goodwill is not a strong negotiating position. With the nature of SaaS and the way it is provided, there is not much space for negotiation. The risks associated with software as a service are real. Customers of GCOMM are well advised to negotiate strongly with SaaS vendors prior to entering into an agreement. It is easy to get into the agreement and very expensive to exit.

Some software vendors, such as SugarCRM, advise customers to have the software provided as a service or available as a download to install on local systems. In our opinion it’s worthwhile considering the use of a platform-as-a-service (PaaS) from a vendor, like GCOMM, and engaging in software agreements where the vendor continues to provide the software in a downloadable format, like SugarCRM.

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About Peter Thompson

Peter Thompson
Peter Thompson founded GCOMM in 1996. He received his Bachelor’s degree in Software Engineering/Information Systems from Griffith University and his MBA from Nyenrode Business Universiteit in Holland. He believes in building great teams of people, both in business and socially.
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  • Vladimir Milanovic

    Thanks for sharing this Peter, it’s definitely something you don’t hear everyday when it comes to SaaS!