What sets software as a service apart from the traditional system of software outsourcing is the pricing model. Instead of paying a lot of money upfront to purchase software licenses, buyers pay just for the use of the software. The monthly fee may be higher than it is for the traditional application hosting but there is no capital investment.
It's a little bit like buying a song off of iTunes instead of buying the entire record album, said Frances Karamouzis, vice president of research at the Stamford, Conn.-based Gartner Inc.
But the thing that makes software as a service so compelling is not the potential for cost savings but the rapid return on investment and the flexibility to update and upgrade the systems as needed with a minimum of hassles.
The new pricing model makes a huge conceptual difference when it comes to the service providers, according to Jeff Goldberg, senior analyst at Boston, Mass.-based Celent. It changes the relationship between the vendor and the buyer to an "on-demand" relationship, forcing vendors to come up with creative software solutions that can be implemented quickly.
Instead of having to wait some 18-24 months for new systems to be up and running, insurers can see results in just three to four months, maybe not throughout the entire company, but at least in one or two business lines in certain states, Goldberg said.
Even so, this is something that companies are approaching with cautious interest.
As companies emerge from the recession, they are looking for any edge that could give them an advantage over their competitors, Gartner's Karamouzis said. But the recession also has made executives wary of spending money with nothing to show for it. The quick return on investment offered by software as a service is critical because technology changes so quickly that it doesn't take long before systems become outdated or even obsolete.
And software as a service is not without its risks.
Cost savings, for instance, may not be as great as imagined. In fact, there may not be any cost savings at all. Go back to that iTunes example. Sure, one song may only cost 99 cents, but 200 songs can do some serious damage to the budget.
It's the same with software as a service. If you use a lot, you pay a lot. Companies need to find a way to keep track of these contracts that are proliferating from within their organizations and monitor usage, Karamouzis said.
Another risk is that a lot of contracts do not include service level agreements (SLAs), Karamouzis said. A Gartner review of the contracts for not just software as a service but other similar arrangements such as business processes as a service and procurement as a service, showed that 85 percent did not have service level agreements, something she thought was a bit shocking.
Ultimately, when something is in its infancy, that is when the risk is highest. As this service begins to gain wider acceptance, the risks will decline and the performance will improve.
But there's a lot to be said for anything that keeps insurers from getting locked into long-term legacy systems that become outdated before they are even implemented. And software as a service looks to be one way of doing that.
PATRICIA VOWINKEL has worked for national media outlets for more than 20 years.
April 1, 2010
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