HR SaaS: Kicking the Business Case Tires

Given the overwhelming interest in HR SaaS platforms like Workday, Oracle Taleo, SAP SuccessFactors and a plethora of others, we thought we’d share with you what we’re seeing as we’re working closely with both clients and Software-as-a-Service (SaaS) providers. More specifically, what we’re seeing in terms of the dissonance created by a turbo-charged SaaS market matched up with soaring client expectations around the financial benefits of SaaS.

In general, the market has three financial assumptions before the SaaS business case is even created:

  1. It will be cheaper to implement
  2. It will be cheaper to run
  3. I’ll only have to pay for what I use

We’re finding that one or more of these are not always true. Here’s why:

Implementation costs are not always less, especially when a client is already sourced

Although the implementation of SaaS platforms for human resources (HR) can typically be completed much faster given the lack of customization, the overall implementation cost is not always significantly cheaper. There are a number of factors that can affect this cost, including the client’s current hosting environment, ability to sunset existing enterprise resource planning (ERP) and hosting environments, the number of interfaces, and — importantly — the available resources from the client to assist in the configuration of the service. In an environment where the client has already sourced, the retained organization may not have these skills, so they need to be purchased from the SaaS provider or a systems integrator — which can significantly increase the implementation cost.

Financial terms are usually heavily weighted to the supplier

Many SaaS providers will expect a client to prepay a significant portion of the total contract value at the start of the implementation. Given that the starting point is usually a three-year term, this can be quite a significant sum. In addition, terms generally cannot be canceled and subscription fees cannot be reduced over the course of the term for volume reductions. We’re also seeing some suppliers opening with an increase to subscription fees over the term of the agreement as functionality expands.

The business case needs to cover a long enough period to avoid at least one upgrade

In general, clients should not expect a significant savings when comparing monthly subscription fees for SaaS to the all-in cost of traditional ERP, which includes the amortized license cost, the software maintenance fees and the hosting and support costs. In fact, we’re finding that when looking at a short-term business case (say three years) where an upgrade may not occur in a traditional model, the SaaS model may actually be slightly more expensive. The real savings with SaaS comes in avoiding upgrades, which means the business case needs to extend over a long enough period to account for at least one upgrade, and that could mean at least five to seven years. Looking at this length of time, the SaaS model becomes significantly better due to the avoidance of a large-scale upgrade.

Don’t forget about the impact to the income statement and the balance sheet

Unlike a traditional ERP model where the client typically procures the licenses and hardware up front and depreciates that cost over the useful life of the asset, SaaS monthly subscription fees are expensed as incurred. Depending on how the client looks at the business case (P&L versus cash), this accounting treatment change, coupled with the size of the investment, can have a significant impact on the financials.

If you’ve worked through a HR SaaS deal as a client or as a provider, we’d like to hear your feedback — agree or disagree?

About the author

Garrett helps organizations across industries assess their IT sourcing models, develop a business case fo change, evaluate and select HCM software and negotiate contracts. Garrett provides expertise in detailed financial and pricing analysis, human resources, benchmarking and complex contract negotiations to assist his clients evaluate and execute alternatives for HR, Benefits and IT sourcing strategies.  Garrett serves provides expertise in detailed financial and pricing analysis, contracting and Mark-to-Market (“M2M”) and is responsible for the review and normalization of all HRO pricing, contract and SLA data housed within ISG’s proprietary M2M database.