The single biggest obstacle to renting software is the basic inability to integrate different applications. Sharing data between a CRM program and billing software can be a challenge, especially if some of your applications are hosted while others are kept in-house.
Analysts say these issues will wane as IT departments move toward service-oriented architecture (which allows users to access specific software components and tools regardless of their operating systems), but for now, "integration issues are big," says Gartner's Correia.
"The subscription model doesn't lend itself to applications that need to be highly integrated with each other internally; they are set up for very core business process functions, like e-mail." And while most companies haven't even begun to think about integrating their subscription apps with other systems, it's important to consider how programs will mesh as the technology evolves, says Yankee Group's Kingstone. "You want to have a five-year roadmap so you don't end up with siloed applications. If you only look at one at a time, you won't be happy with the implementation in the long run."
That was the approach Joe Lindsay, president and CTO of QS Labs Inc., in Irvine, Calif., took when he decided to move some of his company's software to a subscription model. QS Labs, which develops compliance software for healthcare and life-sciences companies, uses Salesforce.com for its sales automation and CollabNet for some of its software development needs.
Although the systems at QS Labs aren't integrated yet, Lindsay says the company "chose vendors that would make it easy for us because they have open standards." And, he adds, "The rise of standards-based integration around Web services will eventually make integration easier, and cost effective." Gerry Hurley, director of IT for Washington, D.C.-based College Summit, a nonprofit organization that helps disadvantaged teenagers get into college, agrees. College Summit uses Salesforce.com for its fund-raising efforts, which provides an easily accessible CRM program to employees, most of whom travel regularly.
The Salesforce.com software is integrated with the organization's internal workflow software called CSNet, and Hurley is working to add College Summit's accounting software as well.
Here is a look at the four most popular ways to buy software.
Perpetual License The customer pays an initial license fee and may use the software in perpetuity. However, customers sign an update contract, and must pay additional fees for updates. This type of license is the most popular with users, and makes up over 90 percent of the software licenses sold.
Term License The customer pays an initial fee for the license and may use the software for an established term. Often, the fee is paid in a lump sum up front. Once the term ends, the customer must again pay a fee for a new license. The customer also generally has a maintenance contract of the same duration as the term-license contract.
Subscription License The customer has the right to use the software developed by the vendor for a contractually specified time, as in a term license. But unlike a term license, the customer has the right to subsequent updated versions of the software as well as a certain amount of technical support. There are two types of subscription licenses: The customer buys and runs the subscription in-house, or the customer buys the subscription that is hosted by the same software vendor.
Appliance License The software program is sold on a hardware device branded by the same vendor as a package of hardware and software. Most commonly, the software is available only on the vendor's appliance (board or blade) and is not for installation on a general-purpose computer. Other times, the software is configured so that it will work fully only in conjunction with the purchase of the hardware.
Source: Gartner Inc.
But feeding corporate data into the new system can also be a challenge, Hurley says. While there were very few hiccups in getting up and running with Salesforce.com, "the most difficult aspect of this was moving from a large number of disparate Excel spreadsheets to one system," he says.
In addition, because College Summit is a nonprofit organization and Salesforce.com's product was designed for business use, some of the organization's taxonomies had to be changed to fit the software program.
"In the nonprofit world we talk of the development group, the people who work on getting grants," Hurley says. "In the corporate world, they would be considered salespeople. But because they aren't salespeople, they don't have the same language or do the same reporting. So we needed a new naming convention." Salesforce.com recommended an outside consultant to help the organization with data conversion and preparation.
Control of applications can also be an issue. While it's true that a benefit of software as a service is that vendors handle upgrades, keep in mind that maintenance schedules may not conform to your business needs. "When they do their upgrades, we typically have to work on their schedule, and if it doesn't match ours, we have to make accommodations," says Towers Perrin's Lubanski. "There's not a whole lot we can do about it."
Analysts agree that for now, the best way to approach software as a service is to consider all the options. "Evaluate all the pricing models out there," says Correia. "Right now things are very muddy because we are in the middle of this shift. You have to start understanding all the models."