WHITE PAPER The Impact of SaaS on the Professional Services Industry

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1 WHITE PAPER The Impact of SaaS on the Professional Services Industry Sponsored by: SAP Cushing Anderson November 2010 IDC OPINION Global Headquarters: 5 Speen Street Framingham, MA USA P F Software as a service (SaaS), sometimes referred to as "on-demand software," is becoming an increasingly effective and popular way to implement various business applications. This delivery approach has gained traction in application areas where there is value to "networked" or integrated functions within the application. There have also been large numbers of applications that embed business intelligence capabilities that take advantage of the integrated nature of the information with a SaaS application. Most significantly, there is a growing recognition of the positive aspects of total cost of ownership (TCO) for companywide, enterprise-level applications. There is little question that SaaS is becoming well established as a way to deliver business applications. Based on our research, over 50% of professional services firms are using some form of hosted application, and another 35% are considering it. The historical view among large professional services companies has been that a SaaS application is functionally limited; however, this view is changing. For small and midsize professional services firms, enterprise-level applications delivered as a service have been most appealing. Tight IT budgets prevent an adequate level of IT support and infrastructure to manage in-house application systems. IDC is also seeing a growing interest from larger professional services firms to identify opportunities to implement SaaS solutions. There is little question that the TCO can favor SaaS for both large and small companies. But the additional benefits of adaptability, comprehensive functionality, and ease of use also favor integrated applications delivered using a SaaS model.

2 IN THIS WHITE PAPER This white paper looks at the growing applicability of SaaS for enterprise-level business applications in the professional services industry. According to the anecdotal experiences of our client organizations that have deployed SaaS, a hosted option can drive significant cost savings, reduce initial implementation times, and bring new functionality with relative ease and convenience. SITUATION OVERVIEW The professional services industry is highly fragmented and includes more than 1 million firms worldwide. It is a diverse set of organizations that includes accounting, consulting, legal, and IT services firms and typically delivers project-based expert advice. It is a labor-intensive industry, and its primary product is an expert's time. Competition is intense in most segments because barriers to entry are typically low. With such intense competition, clients have come to expect a very high service level. Professional services firms focus their business management energy on optimizing the utilization of an expert's or a consultant's time. They attempt to develop service offerings or skill sets that clients will find compelling. Ultimately, they focus on properly charging and receiving payment from clients. Larger firms tend to broaden their offerings to ensure the completeness of the offering and to capture a greater "wallet share." Smaller firms tend toward specialization and deep functional or industry expertise and hope to foster deep continuing relationships with a small number of clients. All firms balance developing a talent pipeline with maximizing utilization rates. Client satisfaction and trusting relationships drive both repeat business and referrals in most professional services segments. Therefore, firms seek to ensure deliverables of the highest possible quality and strive to fully meet client expectations throughout the engagement process. Firms increasingly use technology to support all parts of their business: Finance and scheduling software are common, knowledge management and data warehouse capability help improve service quality, and client management and engagement management software are increasingly used to monitor and maximize customer satisfaction. The increased use of technology has both aided and hindered professional services firms' drive to improve their key value propositions. Issues and Technology Pain Points Faced by Professional Services Organizations Organizational Improvement Opportunities for Professional Services Firms Professional services firms are increasingly focused on three business imperatives: Creating profitable service value. Firms need to predict, demonstrate, and document the value they deliver to clients. Professional services firms whether a consulting firm, a law firm, or a custom printing house need to evaluate the impact of each project on each client. In addition to establishing transparent 2 # IDC

3 visibility into the value of each project to their clients, successful firms must manage their own portfolio to add value to both their clients and their own business. Ultimately, the goals are increased client satisfaction and increased revenue from a more aligned portfolio of services. Improving service delivery. Clearly, service delivery must meet customer expectations and improve profitability. But service delivery is also an operational issue. Consistent and predictable service delivery helps services organizations better predict resource utilization. This can impact pursuit of opportunities in the sales pipeline adjustment of the service portfolio mix. Strong service delivery capability helps organizations manage engagements and permits periodic or continuous improvement. More streamlined and predictable delivery turns into better operating profit both by delivering projects on time and by providing insight into ongoing needs and utilization. Improving project/client and business visibility. Visibility into all elements of project delivery and client life cycle leads to better decision making. As services businesses increase their ability to see into both specific projects and clients, it becomes easier to identify positive and negative trends in services, delivery, and utilization. Better visibility into client engagements can identify service value, staff skill gaps (or gluts), local or global utilization issues, or the poor utilization of other resources such as shared service centers or centers of excellence. Overall, better visibility into the complex process of service delivery can improve both the service offering and the profitability of the organization. Potential Opportunities with Integrated Work Processes The three imperatives mentioned above are often impeded by the technology and tools that professional services firms leverage. While professional services organizations are often quite sophisticated in the breadth and quality of the services they deliver, their own business practices often exhibit a weakness common to other industries. As a result, professional services firms are also struggling to improve: 1. Coordinated work effort. The goal is for every employee to work most efficiently. This requires employees to work off of the same information set. By leveraging a single data store, or a single version of the truth, organizations will increasingly be able to work within a single process flow. Most professional services workflows such as project plan to delivery, order to cash, campaign to close, time entry to payroll, or time entry to billing involve multiple organizations. Each involves some combination of marketing, sales, service delivery (or project delivery), and accounting. Even within functional areas, process flows are critical to project success, but they often are a convoluted collection of multiple practices or multiple applications such as coordinating a project plan with its execution or time capture. Through the integration of work processes, professional services firms should expect to improve the efficiency and coordination of work efforts. 2. Availability of information. The quality of business decision making is often constrained by the availability of timely and accurate information. Effective and useful reporting and business intelligence are by-products of an available set of reconciled, up-to-date and trusted information. Professional services management 2010 IDC #

4 teams are able to make meaningful business performance assessments and improvements when they are able to leverage reliable information whenever they need it. But availability of information isn't a desirable characteristic just for executives. Marketing, sales, and even service delivery professionals in the field need access to accurate, timely information, too. A simple example is as follows: If a customer changes his billing address on an online Web form, then accounting, without even knowing it, should be able to send the next invoice to the updated business address. Operational decisions might similarly be improved with the use of real-time dashboards leveraged by multiple layers within an organization. From a single data source, several levels of management can observe a single event and take appropriate actions: A project manager can observe a drifting project plan, a resource manager can identify available staff or other resources, a client services or engagement manager can work with the client to manage expectations or identify a root cause, and a finance manager can adjust profitability or revenue expectations. 3. Seamless user experience. A holy grail of service delivery is a seamless experience. But every time an employee (or a customer) accesses a business system and experiences a somewhat different interface, the opportunity for service breakdown increases. This risk is the same whether the employee is in a client-facing role or a support function. For example, if an HR employee cannot support a client-facing consultant's need for benefits information, the consultant's client might be impacted by the time the consultant needs to find emergency childcare or support an aging parent. Certainly, customer-facing employees in sales, delivery, and accounting require functional applications that support their workflows, and each may have a role in several processes. The ability of those employees to efficiently navigate whatever workflows are required can be a predictor of organizational productivity. Any opportunity to streamline those systems to a single interface, or experience, can increase productivity and the opportunities for client satisfaction. Each of these three opportunities for improved integration requires an underlying technology infrastructure that supports both data and workflow integration. In addition, these opportunities touch on an area of particular sensitivity to many professional services organizations: technology pain points. Technology Pain Points Professional services companies have done a good job of adopting complex business management tools across their enterprises. Large enterprises have led their small and medium-sized counterparts in integrated implementations, but adoption of integrated applications by professional services firms has been strong. On the heels of the global recession of 2008 and 2009, IDC sees a lessening of appetite among CIOs for major system upgrades or replatforming existing systems. However, even within this context, SaaS alternatives are growing in appeal. In discussions with our clients, IDC has found that professional services organizations face a number of pain points with their current business management system implementations. Based on our conversations with both CIOs and line-of-business executives, we see issues related to the following six areas: 4 # IDC

5 1. Cost. Our professional services clients report that controlling, maintaining, and reducing the cost of their IT infrastructure is an ongoing issue for CEOs and CIOs. Reduced IT budgets, along with climbing maintenance costs for traditional ERP implementations, are causing professional services companies to look for alternatives. In addition to these "obvious" costs, there are less obvious costs such as the cost of the staff necessary to manage information systems and the datacenter, the energy and space required for a modern datacenter, and the capital investment in physical hardware and communications equipment. Companies describe how they consider the opportunity cost tied to all of their expenses and especially to capital expenditures. 2. Functionality. Our clients also describe an increased importance of continually increasing functionality to on-premise software implementations. This increased customization is a double-edged sword for IT organizations. While improving functionality, IT organizations must pay the software vendor extra maintenance costs and must rewrite the customization when upgrading. 3. Mobility. Accessibility of the application from remote locations or by mobile employees is particularly acute for professional services firms. Professional services firms report an increasing use of virtual workplaces, and in many types of firms, employees work at the client site while leveraging their firm's applications. This increased use of mobile or remote workers is seen by professional services firms as both a business necessity and a factor that increases the complexity of their IT infrastructure. 4. Ease of use. Professional services leaders and their IT organizations also worry about the ease of use of key enterprise applications. Integrated application users almost universally decry the complexity of most enterprise applications in terms of both the amount of training required and the lack of an intuitive user interface. For many organizations, multiple add-ons to the core ERP cause a cumbersome interface experience for many users. 5. Scalability. Like IT organizations in many industries, IT organizations in professional services organizations report having difficulty balancing the cost and scalability of applications to quickly respond to changes in demand. Particularly in the current business climate, where many services firms struggle to understand the new baseline for their business, IT is challenged to provide the correct level of computing resources and services. 6. Business continuity. Professional services firms are concerned with business continuity/disaster recovery. Some firms such as consulting firms, law offices, and even accounting firms are professionally obligated to be aware of the continuity risks faced by their clients. This makes the leaders of those services organizations particularly sensitive to their own vulnerability to unforeseen events. Our professional services clients describe the urgency their CEOs, CIOs, and even CFOs place on developing business continuity/recovery programs and processes. This often involves some degree of infrastructure redundancy and the distribution of key systems across several locations to ensure continuity. But for most IT organizations, distribution and redundancy add an additional layer of cost and complexity, with limited ongoing business benefit IDC #

6 These six pain points are not unique to professional services organizations. However, they each point to a possible opportunity if a technology or delivery model can overcome them with a minimum of disruption. Definition of SaaS As the marketplace evolves, organizations and pundits use phrases that have evolving meanings. This document is concerned with two types of application delivery options: on premise and SaaS. For the purposes of this paper, they are defined as follows: In a traditional, on-premise software implementation, the software vendor sells a perpetual license and the firm installs and maintains the software application on its own servers. The professional services company is responsible for paying the initial license fee, some level of installation/integration cost, and an annual maintenance fee. In a SaaS deployment, the application is built from the ground up to be hosted by a third party that provides access to the software via the Internet. The software is licensed on a subscription basis, and the nature of the subscription pricing can vary. In some instances, it is based on the size of the user company (typically revenue based); in other cases, it may be based on the number of users or on transaction volumes. In either case, the SaaS license is a variable cost rather than a fixed fee, paid up front. Benefits of the SaaS ERP Model As SaaS applications mature in the marketplace, the benefits and trade-offs have become clearer. Yet, a number of misconceptions remain. Technology buyers should consider several areas as they build business capabilities through investments in applications and IT tools. Benefits of SaaS Are More than Just Cost The cost of a complex business management software implementation is often the starting point for a discussion and often a point where the discussion meets a quick end. In other research, IDC has identified several areas where SaaS system delivery costs differ from on-premise delivery costs. They are primarily the following: License fees. Both initial and upgrades significant for on-premise solutions Maintenance cost. Often 15% of license fee annually for on-premise applications Hardware costs. Often extensive for on-premise applications IT infrastructure costs. Possibly significant for on-premise applications depending on current infrastructure, such as when on-premise applications require operating system upgrades or changes to middleware integration and the cost for maintaining development and test environments 6 # IDC

7 IT personnel/support costs. Often significant for on-premise applications Security, backups, and disaster recovery. Often additional costs for onpremise applications Something often overlooked with a SaaS implementation is that the implementation process for a SaaS system installation may be similar to the implementation process for an on-premise installation, just not as long. SaaS implementations still require data migration, process alignment, agreement on naming conventions, and end-user training and familiarization. Other Benefits of SaaS Particularly in the current economic climate, where business conditions are particularly unpredictable, SaaS can offer benefits that extend well beyond cost, such as: Adaptability. SaaS is often described as being highly adaptable. This is enormously helpful to companies that may be looking for more flexible IT tools for easier expansion and contraction. Adaptability also includes using some modules in an application, but not others. This allows the application to be tailored to the requirements of the firm and allows for expansion as business requirements change. Ultimately, SaaS deployment allows for the range of implementation options from "point solution" to fully integrated "suite" of capabilities all from the same software product. Integration. Integration and upgrade coordination are also areas where SaaS can be a benefit. Large companies are delaying the refresh rates of IT systems, not only to postpone capital expenditures from up-front licensing fees and replatforming but also to avoid the inevitable business interruptions and risk from long or unpredictable implementations. Opportunity costs are associated with extending refresh cycles, and while these costs can be difficult to quantify, they may manifest in terms of lagging creation of new services, less visibility into client or organizational performance, and less optimal service delivery. SaaS can decrease the complexity of integration and, with the right solutions, can increase the integration between components or process flows. Application modernization. Application modernization has enabled companies to react quickly to changing business conditions. In the most recent recession, companies with more sophisticated and comprehensive tools were able to respond more quickly to marketplace changes and protect cash and profits. We expect to see application modernization activities, in one form or another, accelerate out of the recession. Functionality. There is a persistent view on the part of some technology buyers that SaaS applications are somehow "lite" and that functionality will be sacrificed. While this may have been true, and may still be true in some cases, particularly for less established players, IDC believes that it is generally not the case. Vendors in the marketplace are offering sophisticated business management applications via a SaaS model that sacrifice little functional capability to the on-premise alternatives while providing the inherent advantages of SaaS IDC #

8 Ease of use. As consultants, sometimes even contingent consultants or subcontractors, are required to access common business systems, the need for easier access, reduced training, and reduced support times is increasingly important. SaaS workflows are typically more intuitive, focused more on the workflow than an individual transaction. This results in a process and a system that are often more "user friendly" and easier to adopt and can be an additional fundamental advantage for SaaS delivery. Access anywhere. As professional services companies seek ways to reduce costly office space and increase the productivity of their workers, the need for system access for remote or virtual office employees becomes more acute. Webbased SaaS applications are universally available, and in appropriate cases, they are becoming available on handheld devices. This increases the value of both core and peripheral applications to professional services organizations. FUTURE OUTLOOK Clearly SaaS applications are maturing. The number of companies that either are using SaaS applications or plan to use SaaS applications in the next year has grown considerably over the past few years, suggesting that the barriers to adoption either real or perceived are being overcome. We see a bright future for SaaS across a broad range of application areas and for large and small professional services firms. SaaS is not without its problems, however. Functionality and security concerns linger, and while these concerns are more perception than reality, it is important when considering applications from a SaaS vendor that appropriate due diligence be applied to ensure that the functionality meets critical business needs. But this due diligence is the same for both on-premise and SaaS-delivered solutions. ESSENTIAL GUIDANCE Application delivery via SaaS is maturing rapidly, and SaaS is now a well-established alternative to traditional approaches for the delivery of business applications and IT tools. Beyond early-adoption categories such as time capture, project management, and recruiting, professional services companies are increasingly willing to consider enterprise-level functions that include financial systems, internal cross billing, milestone billing, etc. By using applications that are developed and delivered specifically for a SaaS model, organizations can improve implementation costs and timescales, streamline workflows, and increase ease of use. Based on our conversations with CIOs and technology buyers, economic results are positive. While we encourage users to look broadly at benefits, a cost comparison between SaaS applications and on-premise deployments generally favors SaaS, and most companies report meeting or even exceeding expected savings goals. SaaS is particularly compelling where: Business or transaction volume is either variable or unpredictable. Speed of deployment is critical. 8 # IDC

9 The ROI of an ERP implementation may be difficult to calculate. Capital expenditure budgets are constrained. In-house IT staff/skills are either limited or required for alternate tasks. As professional services firms investigate SaaS options versus on-premise options, IDC recommends keeping in mind five key points: 1. Clarity around key functionality. While SaaS offerings have closed the functionality gap versus on-premise offerings, it is important to ensure that the selected application is adequately robust and scalable and that it offers capabilities that meet your current and future needs. 2. Understand the economics. How are the usage fees generated, and what is the length of the contract? Can I easily scale usage up and down without any assessment of penalty fees? 3. Implementation/integration capability. What is the duration of the initial implementation process, and to what degree can the SaaS systems integrate with systems I might still need to have on premise? 4. How secure is my data? We've talked about the expectations for appropriate security measures; however, doing due diligence is critical to ensuring the robustness of the security provisions and disaster recovery capabilities. 5. How are new capabilities added to the product, and will they be available to my business as I need them? Lastly, and in many ways most importantly, remember that not all SaaS vendors are created equal. As we have pointed out, SaaS is a maturing capability. Make sure to select a vendor that brings experience, financial stability, and a good reputation for working effectively with professional services companies to ensure business benefits, scalable growth, and business continuity. Copyright Notice External Publication of IDC Information and Data Any IDC information that is to be used in advertising, press releases, or promotional materials requires prior written approval from the appropriate IDC Vice President or Country Manager. A draft of the proposed document should accompany any such request. IDC reserves the right to deny approval of external usage for any reason. Copyright 2010 IDC. Reproduction without written permission is completely forbidden IDC #