Is HRO Embracing Software as a Service?

In the evolving HRO marketplace, SaaS is quickly becoming a sourcing model of choice for some budget-conscious employers looking for improved HR services. With big and small organizations jumping on the bandwagon, could software as a service replace traditional HRO offerings in the future? Read on to see if it’s right for you?

by Andy Teng

For the less adventurous eater, you might not be familiar with the Mongolian barbecue concept. A buffet-like affair, the diner himself puts together a selection of raw meats, vegetables, and special sauces. The amalgam is handed off to a cook who stir-fries it on a big, circular cooktop. What you get can be, well, a big sloppy mess or a rather tasty dish that tickles the palate. It all depends on the compositional skills of the eater.

For HR organizations considering outsourcing but are not ready to hand off control to a provider, here’s the option analogous to the Mongolian barbecue: Software as a Service, or SaaS. Because like the barbecue experience, the employer is still responsible for the input, but SaaS vendors offer up the domain expertise and the technological tools (think cooktop). And just like the finished dish, SaaS outcomes heavily hinge on the ingredients added.

But this sourcing model is increasingly finding traction with the HR crowd for several reasons. It can be the most cost-effective option for the right organization; SaaS offers myriad robust functionality, from recruitment services to payroll and benefits administration; costs are predictable because vendors charge by the user; and finally, new software updates are made effortlessly, requiring not a drop of elbow grease from the client.

On the other hand, it’s far from being a panacea for overworked, under-capitalized HR organizations. SaaS buyers are ultimately responsible for handling their own services. While the underlying technology performs the heavy lifting, clients must still run payroll, retain HR domain knowledge, and continue to provide services that HRO clients have happily turned over to their service providers. More importantly, HRO these days is less about shifting tactical work to vendors and more about transforming the organization to gain efficiencies. This high-value service is beyond the realm of SaaS. So for organizations seeking these strategic benefits, HRO remains the clear choice.

COUSIN OF ASP
Not familiar with how SaaS works? You’re not alone because it’s a relatively new sourcing model, and the market is still in a nascent stage even though some offerings have been around for years. Think of SaaS as a cousin to the hosted software model—which continues to gain momentum today. But unlike hosted or application service provisioning (ASP) models, SaaS offers greater efficiencies and potential cost savings. For HR organizations lacking resources for IT upgrades or process improvements, it’s an alternative worth considering.

“Software as a Service has been around for 10 years, but the concept has been around longer,” explained Naomi Bloom, managing partner with Fort Meyers, FL-based IT consulting firm Bloom and Wallace. Despite having been around for a decade, SaaS still confuses many in the HR community. That’s because the market, she said, often obfuscates true SaaS with hosted solutions.

OK, put on your propeller hats, because here’s the technical difference. In a hosted model, buyers may simply ask a vendor to host software they have purchased. All of the hardware maintenance and some patches may be performed by the vendor. This frees up the client’s internal IT department to focus on other day-to-day and strategic activities. However, the hosted model’s drawback is that buyers are still responsible for configuring the software to serve their needs. Moreover, the licensing cost as well as version upgrade costs can be the bitterest pill to swallow.

Under SaaS, the outsourced provider offers the technology backbone, the software, and maintenance for one price per user. The buyer never worries about IT or configuration—this is maintained by the provider. Furthermore, because all of the vendor’s clients share one database, updates can be made for everyone at the same time, reducing the cost or rollout. Similarly, changes in regulations such as tax rates, for instance, are also made for all clients simultaneously. (In techie terms, it’s called a single instance of multi-tenancy.) Moreover, because pricing is based on per user and not traditional licensing agreements, updates are included in the monthly charge.

A PLUCKY DECISON
That was one of the benefits that attracted HR leaders at Popeyes Chicken to SaaS. Stan Stout, chief people services officer for the nationwide fast food restaurant chain, said the Atlanta suburb-based company migrated HR services from an HRO provider to SaaS offered by Ultimate Software. This came after the company decided to abandon its investment in PeopleSoft, the platform it switched to in 1995. Previously, it ran an MSA mainframe environment.

Stout conceded that the past few years have been rocky for his HR organization, especially because its 2001 HRO engagement went badly. Shortly after realizing that internal investments in IT infrastructure and PeopleSoft were costly and distracting, the company decided to try outsourcing to a “major” service provider he declined to name. It became immediately apparent that the arrangement never caught on.

“We went with a major outsourcing provider. We stayed with it for a year, and it was not successful for us,” Stout said, adding that the company at the time had about 500 locations and was processing about 10,000 paychecks a week.

He said the company’s decision to outsource came after it became fed up with what seemed like an endless number of upgrades in PeopleSoft. With new version releases coming fast and furious, he said, Popeyes just couldn’t keep up with numerous installs.

“PeopleSoft was firing up new releases, it seemed, every 12 to 16 months. Once you fell behind [in upgrades], it was additionally painful to catch up, and it took additional resources,” he recalled.

And that has become one of the most alluring aspects of SaaS—HR organizations no longer have to worry about infrastructure investments. Industry observers point out that HR in many organizations is far down on IT’s priority list, and that means cutting-edge technology, process improvements, and other capital-intensive resources are often delayed. SaaS vendors deliver all of this in one neatly bundled package.

Because it typically costs less than full-service, end-to-end outsourcing, SaaS is aimed at mid- and small-market buyers who may outsource discrete services such as payroll or benefits administration. But as their needs have grown, these buyers are seeking services beyond what their providers can offer.

That was the case with Olathe, KS-based NIC, Inc., a provider of outsourced eGovernment portals. The company, which builds and manages U.S. government websites for 19 states and hundreds of local governments, recently began rolling out payroll giant ADP’s HR/Benefits Solution, a SaaS offering it acquired with its buyout of Employease last year.

Mary McCombs, the administration services director at the Internet company, said the company had been bogged down in paperwork prior to adopting the SaaS model. Although NIC had outsourced payroll to ADP for years, the company needed more HR functionality such as manager self-service.

“We had just wished there was a better way to get information,” she said, explaining that in the past, new hire paperwork, status change, and requests for reports were faxed in from managers located around the country. HR had to manually pull and send reports back. With 365 employees in 19 states, NIC had no easy and rapid way of providing centralized reports.

But since adopting the SaaS offering—integrated with its outsourced payroll services—managers have greater visibility into data and access to functionalities such as self-service, recruitment tools, event calendars, and others. These were all services the company had contemplated sourcing internally but decided against doing so.

“We looked at possibly developing our own and then we thought, ‘No way.’ It was not cost effective,” McCombs said. “It improves our organization in that managers can spend more time doing what they need to do.”

SERVICES FOR THE MASSES
Clearly, the great potential of SaaS is bringing enhanced HR services to the masses. Companies such as NIC that otherwise could not have implemented self-service and other HR tools on their own can turn to a SaaS model for added functionality. In effect, it equalizes the resources that small and large businesses have for managing their HR issues. Moreover, it’s an alternative for companies that simply feel uncomfortable with turning over control of core HR functions such as payroll, benefits administration, time and attendance, and others.

While analysts point out that the adoption of SaaS is accelerating, this model has, in fact, been broadly used in recruitment services for a decade. Companies such as Authoria, Vurv, Taleo, and Kenexa have offered on-demand recruitment services for years—albeit in very rough forms early on. And other software vendors such as Ultimate Software have migrated more of its business from an on-premise model to an SaaS delivery model, significantly cutting costs and making it more affordable to HR organizations.

One of the primary reasons for SaaS’ accelerating momentum has been the success of salesforce.com, an on-demand CRM services provider. The poster child of today’s SaaS movement, salesforce.com is widely recognized for its technological strengths, flexibility, and ease of use. Additionally, the company has adeptly made its platform so powerful that customers using its AppExchange service can share applications they’ve developed with other salesforce.com clients. This significantly expands the functionality of the SaaS model. But while it offers limited HR functionality, salesforce.com is mostly a CRM tool.

Even without salesforce.com’s participation in this segment, there are plenty of vendors seeking to deliver services. Many of today’s RPO providers offer SaaS recruitment tools, and broader HR applications are available from vendors such as Ultimate Software, ADP, and others. Many industry eyes are on the progress of Workday, the company run by PeopleSoft founder Dave Duffield. Perhaps the most comprehensive suite of SaaS services introduced yet, Workday’s solution encompasses human capital management, revenue management, resource management, and financial management. However, Workday is still a work-in-progress, and observers point out that it’s not clear how successful it will be as an SaaS offering once the build-out is complete. Furthermore, other software developers are eyeing SaaS model as an adjunct to their traditional on-premise licensing models.

With greater functionality and flexibility, will SaaS become the HRO killer? Some analysts think it will have an impact on the market, but its reach will be limited. Lisa Rowan, program manager for HR and talent management services research at IDC, said as compelling as SaaS is to employers, more likely it will mainly be a mid-market offering. She pointed out that many of the value-added services HRO providers offer are not available from SaaS. Process alignment, benchmarking, and best-practice expertise are usually part of the HRO solution. In addition, enterprise organizations that have significant ERP investments will unlikely abandon their existing technology to adopt SaaS.

“I still think that SaaS stands a better chance of being more of a disruption in the mid-market. It will be less so at the enterprise level,” Rowan said, pointing out that possibly many of today’s and tomorrow’s enterprise software may become SaaS models. “There’s nothing to say that this isn’t the way that Oracle’s Fusion is delivered.”

Some vendors say while many mid-market organizations are jumping on the SaaS bandwagon, some enterprise employers are also using their services. Linda Miller, the senior vice president of marketing for Ultimate Software, pointed out that one of her clients has 30,000 employees—clearly an enterprise-level buyer. Since first rolling out its initial SaaS offering in 2002, the company now has more than 600,000 employees on its model, and most of its new customers these days are opting for the on-demand service rather than Ultimate’s traditional on-premise software install. She explained that monthly pricing as well as other conveniences have been a key selling point among its sweet spot of customers in the 600- to 15,000-employee range.
“There is a great deal of appeal in the pricing, mostly because of the convenience of paying on a monthly basis, the benefit of not having upfront fees,” she noted. Miller said for larger clients, the appeal is in freeing up internal IT for other demands.

Still, some vendors believe that the fastest growth will come from small employers, those with fewer than 1,000 employees. Rich Watson, division vice president of major accounts marketing for ADP, reported that most of its outsourced services sold today are in the SaaS model, and he said this reflects a maturity of the industry. For established HRO providers such as ADP, it’s a way to more quickly roll out functionality to its existing customers who are looking beyond traditional payroll services. And for the entire industry, that maturity is reflected in a growing number of offerings.

“The technology is at a place now of providing a lot of different models. This provides the opportunity to develop products and deliver additional services,” he said.

Still, Watson stressed, SaaS should be viewed as a service and not just technology—at least from ADP’s perspective. With the company’s heritage deeply steeped in payroll services, Watson said the Roseland, NJ-based provider wants to make it clear that SaaS still requires the domain expertise that a service-oriented organization can provide.

“We still see ourselves first and foremost as a service organization,” he added. It’s leveraging technology to deliver a service.”

As HRO continues to evolve, SaaS may emerge as one more sourcing option available to employers. With the market increasingly becoming stratified, innovative service offerings may indeed lead to more outsourcing converts, whether they are end-to-end buyers, point-solution customers, or SaaS adopters. One thing is clear, though. HR has never had more tools at their disposal than today, and even more offerings are emerging on the horizon.

For a case study on one company’s SaaS engagement, click here .

Posted April 10, 2007 in Talent Acquisition

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