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ON-DEMAND VS. ON-PREMISE – WHAT WORKS FOR YOU?
Seth Henry, President,
Arcadia Solutions
The software marketplace is changing rapidly. Most new entrants in the market are
offering software in a model called On-Demand, or Software as a Service (SaaS),
and many established companies are developing SaaS versions of their products. Essentially,
SaaS is software hosted remotely by a vendor and accessed securely over the Internet,
allowing customers to avoid the up-front infrastructure investment and ongoing maintenance
expenses associated with deploying software internally. The theory behind SaaS is
that it should be more efficient, since the company supporting the infrastructure
has the advantage of massive economies of scale compared to a client supporting
a single instance of software installed On-Premise. In turn, the customer gets to
focus on the technology’s business applications rather than the technology, itself.
In the last two years several companies introduced SaaS products for the Incentive
Compensation Management (ICM) space. This article discusses the key decision issues
facing organizations currently evaluating their options and deciding whether an
On-Demand/SaaS or On-Premise solution is the better option for them. As we see it
at Arcadia, three key issues drive the decision:
- Compensation Plan Complexity - Can your compensation plan and process fit
into a best practices-based model?
- Technological Capacity - Does your organization have strong in-house infrastructure
and data-processing capabilities?
- Data Integration Complexity - How complex are the data integration requirements
for your system?
Issue #1 - Compensation Plan Complexity
While complete coverage of this issue deserves more than this brief article can
provide (deeper analysis can be found here), we believe an overarching theme can be applied
to this space. The question is: can you articulate your compensation logic into
a relatively simple set of rules? Bear in mind, this goes beyond the calculations
and into all other associated business rules, such as debt/liability management,
hierarchy management, credit assignment, adjustment processing, exceptions, etc.
Chances are you have an ICM system already, and chances are good there is documentation
of that system. SaaS implementations, by their nature (and contract), limit the
amount of customization that can be done to the software product. If your system
has 400 database tables, your specification documents are over 500 pages, and you
have seventeen different rules to recover debt, be fairly certain your system will
not fit a 'best practices-based model'.
If you don’t currently have a best practices-based model, you will probably have
a hard time successfully working with a SaaS provider. SaaS providers are not generally
interested in taking ownership of highly customized systems and processes simply
because they lose most of their economies of scale in this scenario and become outsourcers
of your compensation department. However, it is worth considering whether you may
be able to use a SaaS implementation to drive your company toward a more standard
and easier to own compensation plan model.
Issue #2 - Technological Capacity
We have spoken with hundreds of companies about their systems and have first-hand
knowledge of the challenges our clients face running their compensation platforms.
One thing we find unique about this category of application is how infrastructure-intensive
the systems are. Whether running a custom developed system or a purchased product,
companies are constantly running into issues such as database sizing, memory management,
or plain performance degradation. These problems are difficult to isolate and debug
and can impact overall business performance. Our experience is that even very large
companies with sophisticated IT departments have difficulty providing in-house support
for ICM systems, given how IT resources are trained and allocated.
If your organization has struggled in the past to support your ICM system, chances
are pretty good that even a replacement system will present challenges. This should
be a driver to consider the On-Demand/SaaS model even if it means sacrificing some
functionality (per issue #1). To summarize our position on this issue, we offer
the following question: when it comes to your ICM system, wouldn’t you rather have
an 85% (functional requirements met) solution with 100% uptime than a 100% system
with 85% uptime?
Issue #3 – Data Integration Complexity
As a consultancy we find it interesting that companies procuring ICM software focus
so heavily on business logic, especially plan logic. Our analysis of implementation
projects shows that a significantly larger amount of money and effort goes into
data integration. Our average project has over 20 separate data feeds into the ICM
system. Further, our root-cause analyses of issues logged by clients shows that
bad data always causes more disputes than bad logic. Data integration is
one area where SaaS is less efficient than an On-Premise solution. Security requirements
are typically more restrictive when working with outside firms, and the tools and
mechanisms that can be used to move data through your firewall are more limited
than those that can be used in-house.
Whether considering SaaS or On-Premise, it is important to inventory all of your
current and future data feeds and understand the mechanism, size, frequency, and
logic involved in each one. This should give you a baseline to understand and estimate
the costs, benefits, and risks involved with each feed for both an On-Premise and
On-Demand/SaaS model. For example, you may have existing conversion logic that can
be reused in an On-Premise model but needs to be re-written for On-Demand. You may
even discover that most of your calculation logic actually resides in your data
feeds, and your current calculator is not the core issue (meaning you may not need
a new ICM system at all).
Bringing It All Together
While the recent introduction of SaaS/On-Demand offerings widens the spectrum of
solutions your organization can use for your ICM system, it is essential to recognize
that SaaS is not necessarily the best solution for every organization. If you start
your evaluation by assessing the three key areas of 1) the complexity of your compensation
plans, 2) your in-house technology capacity, and 3) your data integration requirements,
you will arm yourself with the information you need to make the right choice for
your organization.
Seth Henry is the President and Founder of Arcadia Solutions. Seth has over 15 years
of experience in technology consulting and brings a unique, refreshing vision to
the incentive compensation space.
BUILD VS. BUY - HOW DO I DECIDE WHAT'S BEST FOR MY UNIQUE BUSINESS?
Todd Levin, Senior
Consultant, Arcadia Solutions
One of the very first technology choices every company must make when talking about
Incentive Compensation Management (ICM) solutions is whether to build a custom system
or buy commercial-off-the-shelf (COTS) software. Each has its benefits and its shortfalls,
and it’s important that businesses understand the pros and cons of each path before
they embark.
What is the Value Proposition?
Let’s talk about value propositions. To sell your idea to the rest of the business,
you need to support yourself with a well thought-out business case. The value proposition
is the meat of your case, so I will give you some hints on what will help you validate
your decisions.
First, what is the value proposition for a custom-built system?
- Up-front costs - At the surface, a custom-built, do-it-yourself (DIY) system
can often be nearly half the price of a COTS software package. You get to choose
what functionality you get, so you don’t waste money buying features that you will
never want or need. To build the software, you get to hire the team you want, so
they will be less expensive and more focused on your needs than the integration
team a vendor will bring in.
- Flexibility - A home-built system can be infinitely flexible, so you can
adjust it as necessary to fit your existing business process and current needs.
When new features come up, you can guarantee that yours are at the top of the list!
In ICM, complexity is generally high, so flexibility is paramount to success.
- Integration - A DIY system can interface directly with your internal systems
and requires less complex logic to transform and load upstream data, saving time
and money down the line. One-off solutions are always cheaper than well-designed
ones, but often they can fit your immediate needs better than anything COTS can
provide. ICM systems typtically lie at the end of the data food chain, so the chances
are that you will have many other systems-of-record which need to feed your ICM
data. DIY integration makes sure the data gets there correctly.
So you are probably asking, why would I ever go with COTS software? Let’s
take a look at the value proposition for COTS software packages as well.
- Standardization - COTS software enforces a set of best practices for ICM,
and software companies will often recommend changes to your business process to
align with their software. As mentioned above, complexity is unusually high in ICM,
so the vendors almost always have a strategy for reducing complexity and still getting
the business results you are looking for. This helps streamline your business and
increase your competitiveness in the marketplace.
- Support – One of the biggest and most important reasons that enterprises
go for any type of COTS package (not just ICM) is the support and maintenance that
comes along with it. You pay maintenance fees and you get unlimited upgrades, bug-fixes,
and engineering contacts to help keep your application up and running day after
day.
- Functionality – Another reason to go with COTS software is the vast abundance
of features that you get when you buy it. You aren’t using complicated draws this
year? You might need it next year, and it’s going to cost you a lot of money to
build it when you do. Functionality is how the software vendors differentiate themselves,
so you will get a lot of features that you can utilize to handle more complex scenarios,
free of charge. If you want to drive behavior in your company, you can probably
utilize one of the built-in features provided by your ICM system rather than re-invent
the wheel.
Obviously, there are merits to both avenues and you need to choose the best one
for your firm. While I cannot tell you outright which way is best for your business,
I can share the knowledge I have which helps our clients to make this important
decision.
Going the DIY Route
Nearly 70% of DIY projects cost more when capitalized over time than COTS projects.
While your up-front investment in DIY is low, the costs grow exponentially: architectural
flaws are revealed which make it difficult to maintain, one-offs become increasingly
hard to manage, and your development team will grow and change, losing important
knowledge along the way. If you purchase software, you offload this cost to the
vendor, and it becomes their problem to resolve while you continue to pay a fixed
maintenance fee.
If you are considering a home-built project, you need to ensure you have the right
team with strong technical leadership, a consistent vision, and a laser-focus on
manageability and cost. If you have already started, you can bolster a weaker
team by creating an iterative project approach which constantly re-evaluates progress
as well as by getting an outside firm to audit your designs. Without a strong team
that understands how to tie system design trade-offs back to the project's core
business goals, your costs will continue to skyrocket and you will find yourself
struggling to predict the cost and effort associated with support and enhancements.
Once you have chosen to go with a home-built product, make sure that you budget appropriately
for maintenance and support. Businesses too often budget only the up-front
investment into a product and don’t give it appropriate resources to ensure that
the solution continues to operate at peak performance. Software companies charge
maintenance fees because they expect inaccuracies and inconsistencies along the
way: you should do the same. If you don’t know how to budget this type of work,
take what you get from a software vendor and double it – unless you are a software
vendor yourself, you probably won’t have the economies of scale that a vendor will
and you’ll need to employ full-time resources to maintain your solution.
Going for COTS Solutions
If you are considering a COTS system, you need to lay out your wants and needs clearly,
in writing, upfront. If you can’t elaborate your requirements, chances are you won’t
meet them. The key to success with COTS is communication between you and your vendor,
so make sure you are both on the same page about current state, future plans, and
expectations for support and maintenance. If you have trouble getting your vendor
to answer specific questions or they continue to push things “their way,” chances
are that you will have trouble getting them to fix that production bug which keeps
you from paying on time (at least not for the price you want).
Secondly, be willing to consider changes to your business to fit the pre-built architecture
of the solution. The vendors have built industry best practices into their
software, so chances are that their recommendations can help you to streamline your
business processes. If you and the vendor can agree to changes on both sides (you
change some of your processes, and they will add that feature you are so keen on)
than you will have a long and successful relationship.
Making the Decision
When it comes to making that go-forward decision, every business is different. If
you are willing to consider all the options with an open mind, chances are that
you will come to the right conclusion. Some of the worst debacles I have seen are
at businesses who don’t want to consider all the possibilities; they end up choosing
a solution which is inflexible, inaccurate, and more costly than they ever would
have imagined. Making the right choice is all about information, so make sure you
gather lots of it and you will be on your way to success.
Todd Levin is a senior consultant with Arcadia Solutions. He has more than 7 years
of experience with technology solution design, architecture and implementation in
various markets.
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