Procurement software purchasers must weigh pros, cons of SaaS vs. on-premises systems

Get insight on buying procurement software as SaaS vs. on-premises software. Read the benefits of procurement software in the cloud and find out when it’s better kept on-premises.

Organizations purchasing procurement software have many strategy choices to make, not the least of which is whether to go with a SaaS system vs. on-premises software. While SaaS can have lower upfront costs and faster implementation times, on-premises procurement software may offer more flexibility for customization and easier integration with other applications, according to experts.

Now many of the new procurement and e-purchasing deals are SaaS (also known as on demand or cloud-based systems), according to Duncan Jones, vice president and principal analyst of Sourcing and Vendor Management at Cambridge, Mass.-based Forrester Research Ltd.

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“[With this model] chief procurement officers can initiate a project without waiting for IT’s approval or assistance,” he said. “They can start small, generate ROI and pay for expansion of the program.”

But there are drawbacks of SaaS-based systems, Jones cautioned, such as security, integration (especially between on-premises and SaaS systems) and vendor lock-in.

“The third of these is the major gotcha,” said Jones. “SaaS is mainstream, but it’s still a relatively immature model, and we're only just beginning to see the first waves of renewals of SaaS contracts signed three years ago.”

Another expert agreed that there are pros and cons to both methods. The upside of going the SaaS route is a constant stream of updates and innovation, said Ray Wang, founder, Insider Associates LLC and Principal Analyst and CEO with Constellation Research. Another issue to consider with SaaS is that it’s configurable by changing settings available in the software, but can’t be customized, Wang added. If customization is required, on-premises might be a better choice, albeit with its own drawbacks.

“This lock-in [with on-premises software] is different as you don't own the IP but you do own the data. On-premise is great if you want to customize the product to the hilt. But it’s awful when you have to keep catching up on upgrades and patches and taking the system down to do this,” Wang said.

Wang and Jones agreed that on-premises options may have the edge for companies with strict security and compliance requirements or those that need to integrate procurement software with other systems. While integration is certainly possible between SaaS and on-premises systems, it may be slightly more challenging for some companies than just integrating two on-premises systems.

But another potential problem with the on-premise model, Jones said, is that the vendor gets paid when the software is purchased. So for some vendors, it doesn’t matter if it gets implemented or not.

“The major ERP vendors have sold millions of unimplemented e-purchasing shelfware,” said Jones. “In contrast, SaaS vendors tend to be much more motivated to ensure a client’s’ success, because they won’t get the renewal if the client is unhappy.”

How to choose

As with most application choices, whether to choose SaaS vs. on-premises procurement software depends on the specific business requirements of an organization.

“It's not about the deployment model but more about whether you are meeting the business need first,” said Wang. “Then you look at the technology solution. Then you look at cloud or on-premises.”

Wang suggests starting with a business model and well-researched business case.

“I'd go with cloud where I could if it’s commoditized,” he explained. “I’d go with custom development if I had a proprietary advantage. I’d go with on-premise if there's no other solution out there.”

Forrester’s Jones also recommends clients who are considering SaaS vs. on-premises to consider an exit strategy should the chosen vendor try to hike prices by 30% when their initial contract ends.

“With products such as e-sourcing, you could quite easily migrate to another solution, but if you have 20,000 people using an internal e-procurement service that took you two years to fully implement, then you’re probably going to have to accept the price hike,” Jones said. With that in mind, companies should have defined renewal options in the contract.

Is SaaS the future of procurement software?

Given the complexity of procurement processes, a new, third type of model may emerge, according to Dan Roehr, vice president of business development at Alpharetta, Ga.-based HCM Works.

“There's no way that [on-premises providers] can compete in terms of research and development (R&D), maintenance, release maps, customer-specific customization, one-by-one-off focus,” Roehr said. “In order to be profitable, their price points have to be at a place where, in reality, procurement cannot afford any longer.”

According to Roehr, it’s now difficult for organizations to support the costly on-premise infrastructure and justify the millions of licensing dollars the on-premise software fees may require.

Instead, he sees the future of procurement and supplier relationship management technology as delivering a basic and stripped-down framework that leverages an ecosystem of specialty vendors who can build out specialty processes such as item and service ordering, or add value and customization through “app like” plug-ins.

“It's happened successfully in the consumer world with Apple and it’s happened in the enterprise CRM world with the likes of SalesForce.com.” Roehr said. That model has proven to be an enormous success for the niche, specialty providers and, most importantly, enterprise customers.

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