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The days of on-premises human capital management (HCM) systems could be numbered.
The innovation is going to be in cloud HCM and there's no turning back from that, although it won't happen overnight, according to Steve Bogner, managing partner at Insight Consulting Partners, a Cincinnati-based company that works with SAP HR and payroll software.
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Bogner's sentiments are echoed by Bill Kutik, technology columnist for Human Resource Executive magazine, which is based in Horsham, Pa.
"Forward-thinking CIOs and HR people fully understand the benefits of SaaS [Software as a Service] and it's just a matter of if they will bite the bullet on the 10, 20, 30, 40 million dollars they've invested over the years in their on-premise systems," Kutik said. "I personally believe that SaaS is the next generation of computing, just as client/server replaced mainframe and Web-based apps replaced client/servers."
Eric Kimberling, president of Centennial, Colo.-based Panorama Consulting Solutions, said in a recent article that one of the key benefits of SaaS and cloud ERP, which includes HR systems, is that software deployment is easier than traditional, on-premises implementations.
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Additionally, companies have more convenient access to the software, less need for an expensive IT infrastructure, and it's easier to maintain and upgrade cloud systems.
"This is a key reason why Salesforce, Workday, Plex Systems and other SaaS ERP systems have grown so aggressively in recent quarters," Kimberling said in the report. "In fact, our 2012 ERP Report reveals that the cloud and SaaS market has grown from 6% of all ERP implementations in 2010 to 16% in 2011."
With that in mind, what do HR vendors such as Workday and its competitors, ERP giants SAP and Oracle, have to do to convince companies to replace their multi-million-dollar, on-premises systems with cloud HCM?
Not only that, but what exactly does moving from on-premises to the cloud entail for those customers?
These questions take on even more significance for Workday Inc., a provider of on-demand human resources and accounting software that recently made its initial public offering of stock.
The startup has been gunning for its competitors' on-premises HR customers and winning some of them over to the cloud side. Customers including Chiquita, Google and Kimberly-Clark are apparently sold on the benefits of SaaS, even if it means ripping out their on-premises systems and replacing them with cloud HR.
Oracle and SAP recognize that their customers may want to rip and replace for a host of reasons, such as getting out from under a 22%-per-year maintenance cost on top of the expensive perpetual license, as well as getting out from under major upgrades every two years that make everything grind to a halt, Kutik said.
"Moving to the cloud also saves companies a fortune in outside systems integrator labor, or their own internal IT shops, and there's the ease of use and a better UI," he added.
Money changes everything
Many times, deciding to go with the SaaS version of an ERP or HR system versus on-premises comes down to the balance sheet and the office of the CFO, according to Kimberling.
"Most companies have varying degrees of comfort with increasing their capital investments, which can be depreciated over time, versus their ongoing annual expenses. CFOs that are more concerned with containing annual expenses are going to favor on-premise ERP systems," he said, "while those that want to limit capital expenditures and optimize their return on assets will lean toward SaaS."
But there are tradeoffs to moving HR to the cloud.
"While traditional, on-premise ERP implementations are notorious for being costly and risky in a number of ways, SaaS and cloud ERP systems lack some of the flexibility, stability and control desired by many executives," Kimberling said in the report. "So while it may be tempting to give in to cloud marketing hype, which there is plenty of in today's ERP market, it is important to carefully assess the pros and cons of SaaS and cloud-based solutions before making a final decision."
Bogner said he really hasn't seen many large companies -- those with 5,000 or more employees -- rip and replace their on-premises HR systems.
"When a company of that size and complexity gets its core HR system in place, it takes a lot of effort, so the thought of ripping it out and replacing it is a pretty big deal," Bogner said. "So it would take a fair amount of money and a good business case to justify it because there a lot of other priorities in the IT shops and the business areas."
However, the benefits of moving to the cloud -- flexibility, scalability, automatic software updates, pay as you go rather than large upfront costs -- are definitely part of the business case, he said.
"But in the space I deal with, SAP is pushing this integration where you can continue to have your core HR on premise in R3 and you can do [SAP] SuccessFactors in the cloud for talent management," Bogner said. "And SAP is integrating the two so that's a compelling story for SAP clients because they don't have to unwind the investment they have in their core HR to get the benefits of cloud talent management. And a lot of the benefits of cloud HR systems are in the talent management space."
Bogner said Workday can convince SAP customers to make the switch -- which they have already done -- by telling them that the software they're running is 20 or 25 years old.
"Workday will say, 'It's old technology. It's old ideas. It's not user friendly. And you have to keep this big investment in maintaining this on-premise hardware and software and maintenance and support. But you can get rid of all of that and get new functionality, a cutting-edge user experience and performance by going with Workday,'" Bogner said. "So that's the argument they come at it with, which is all true."
Why IT might resist cloud HCM
But customers come at Workday from a different side, Bogner said. The HR groups want to go with Workday or some other cloud system because they like the functionality of those systems, Bogner said. But the IT groups see things differently. They have big investments in skill sets and on-premises software and those are integrated with the rest of the company.
It's a tremendous cost to them to shut all that down and to ramp up on cloud technology, according to Bogner, because in larger companies the HR systems are embedded in the business processes. And these HR systems have so many different connections to the rest of the company that when you look at replacing them, there's a tremendous amount of integration work that has to go on, he added.
"There are technical risks [inherent] in integrating your new HR system into the rest of the company interfaces," Bogner said. "And there are integration data-model changes that have to be rippled throughout the company, which is why rip-and-replace is not so attractive to large companies -- at least [not] to their IT groups."
Despite these challenges, and uneven adoption across company types, the experts agree the long-term trend favors cloud HCM.