In the June 2009 issue of HR Executive Magazine, Outsourcing columnist Lowell Williams writes, “Beware the Pros and Cons of SaaS”. This article includes warnings that apply particularly to small and mid-size organizations when evaluating what type of HRIS system to buy.
Traditional software involves a one time licensed purchase of software and it resides at your site. SaaS (Software as a Service) is rented and the vendor hosts the software application. This article will discuss some of the areas to consider when evaluating which type of HRIS will meet the needs of your company.
Standardized software in HR?
SaaS is a new and growing model that works particularly well in applications that have standard service that is used by all clients the same way. For example, our firm uses a SaaS product for customer support. This product allows our customer support representatives to view the client’s HR software application and provide hands-on guidance, whether it’s a training issue or debugging a data problem. Any software company regardless of industry, size, or culture can use this same SaaS application in exactly the same way.
Payroll processing is another example where the SaaS model has worked for years. Even though the payroll function can be complex, all payroll systems are subject to the same federal regulation, which makes it fairly standardized. In addition, the payroll function is quantitative and standard across companies and industries. For these reasons, the SaaS model works well for payroll. Where the SaaS model for payroll can be challenging is for those organizations that compensate employees in unique and creative ways.
Non-Standard and Evolving Processes
Like payroll systems, HRIS involves recordkeeping and creating reports for government compliance. In addition, an HRIS provides important information for analysis and to help management make decisions, such as who to hire, how much of a pay increase to give an employee, who to promote and who to layoff. The subjective criteria used to evaluate employee performance (customer service, how well they work with others, self motivation, independent judgment) along with the more quantifiable data (attendance, education) make data management a difficult and dynamic challenge. Because data needs can vary greatly from industry to industry and from one organization to another, HR systems (HRIS) cannot afford to be standardized.
The Lilly Ledbetter Fair Pay Act of 2009 makes it even more important to maintain a system that can generate the data and analytical reports to support your employment and compensation decisions. Specifically, it is important to track and maintain records of the pay history and decision criteria used by your organization: education, skills, proficiencies, experience, training, succession planning, performance evaluations, etc. Chances are that future legislation will again change the HRIS data tracking requirements.
Flexibility
Why is flexibility important?
In his “Beware the Pros and Cons of SaaS” article, Williams states, “HR executives should immediately recognize that this (SaaS) lower price tag also means lower levels of customization.” He then concludes, “The customer can access the system to manipulate and change data, but only within tightly constrained operating parameters.” That’s because the basic system, that the SaaS vendor maintains and updates, is used by many clients, so modifying the basic system for one client would affect other clients.
What happens when your needs change and your SaaS system does not track all the required information? When a salesman says that their SaaS system is “customizable”, often that applies to only an existing user-definable module. Is this level of flexibility enough to meet your needs?
Williams also warns that if you already use an application that cannot be adopted by the SaaS package, that application will have to remain and be maintained and developed in the traditional model. When doing the final cost analysis for SaaS, it can mean an additional cost to continue maintaining legacy systems.
In contrast, using traditional licensed software like HRnetSource, the client can modify the core database product, not just to add new fields or change a user-definable page, but also create new or modify standard screens to track the information that your organization uses.
HRIS Cost
SaaS is a sort of rental arrangement with limited up-front costs and fees. Since the fees can be adjusted periodically, the client is vulnerable to fee hikes. In the case of an HR system delivered via SaaS, a per-employee per month pricing structure is used. Hence, as the company grows, your costs continue to grow. And just like rent, your monthly costs continue indefinitely.
Under the traditional model, a software license is purchased up-front (or over a short payment plan) and then the software is paid for. You can continue to use your HRIS software for as long as it meets your needs, increasing your ROI as each year passes.
The long-term cost of your HRIS will often be significantly less under the traditional licensing option. Depending on the number of employees, the break-even point can be 6 months to one year. If the organization is focused on quarterly earnings, then consider capitalizing and depreciating the asset, to improve the quarterly earnings statement.
Let’s look at some numbers. The cost of using a hosted service for the simple core database may run in the range of $2 - $5 per employee per month, not including any start-up fees.
Using an average employee monthly cost of $3.50, we can see that the cost of a SaaS system adds up over time.
75 employees: $3,150 (1 year) and $9,450 (3 years)
125 employees: $5,250 (1 year) and $15,750 (3 years)
250 employees: $10,500 (1 year) and $31,500 (3 years)
Purchasing the traditional license of an HRIS software package will typically cost you more up front (although you can request a payment plan) than SaaS. However, the traditionally licensed software would be in your possession, reducing your ROI costs year after year.
Conclusions
The SaaS model is an effective option for organizations that track standardized data and use standard and routine processes. It is not as good a fit in HR where decisions are made using more subjective criteria and by industries or organizations that have unique HR functional and performance needs. Regarding total cost of ownership (TCO), the long run outlook brings a higher overall cost using the SaaS model. As you evaluate which HR system is the best fit for your company, think about what type of system will be able to record, report and analyze the data that make your company unique and competitive.
This article is written by Jeffrey E. Moe, president and founder of Auxillium West, developers of the HRnetSource™ Suite HR software. Auxillium West provides a full range of HR software for small to mid-sized companies. Using the traditional model, all our software is stored at the client’s site and is entirely open allowing the client to modify any aspect of the system. Clients can modify their system on their own or we are happy to help with that process.