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11/3/2006
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Software-As-A-Service Faces Its Next Big Test

Workday, a startup founded by tech industry veteran Dave Duffield, introduces ERP applications as on-demand services.

Dave Duffield, founder and former CEO of PeopleSoft who lost a takeover fight with Oracle, is about to take another run at the software market, this time without the software. His startup, Workday, will offer ERP applications as pay-as-you-go services. The pitch: ERP, fast and easy.

Any professional who has experience with these financial, HR, manufacturing, and other business apps will be intrigued--and suspicious. ERP is notoriously complicated, so the prospect of no-hassle implementation and management is hard to ignore. Then reality sets in. What about data security, scalability, regulatory compliance, systems integration, and customization?

Starting this week, Workday will offer human capital management applications, including services for staffing (recruiting and hiring, leave management), compensation (benefits management and employee enrollment), and employee performance assessment. Next year, the company will expand into accounts payable and receivable, procurement tracking, and other financial applications. Supply chain and resource management apps will follow. Duffield describes Workday's offerings as a "modern day ERP system."

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But businesses may not be ready to run their most critical processes on software managed by a third party. "There is an element of risk, since you're letting part of your business out the door," says Bernie Sims, project director for KP SalesConnect, Kaiser Permanente's sales force automation system, which is based on Salesforce.com's software services. Given the Health Insurance Portability and Accountability Act restrictions under which the health care industry operates, the HMO forbids the 650 sales reps and account managers who use SalesConnect from putting clients' personal data into that system. The data stays in Kaiser Permanente's "highly, highly protected" legacy membership and underwriting systems, Sims says.

Medical device maker Biosite has been testing Workday's human capital management service for several months and is close to switching its legacy HR systems over. During testing, the company asked Workday to bulk up certain security features, such as improving how passwords are structured and how the service's user "roles" provide access to employee data, says Suzy Zoumaras, Biosite's head of worldwide human resources. No data is more sensitive than employee information, she says.

Biosite will likely replace its on-premises Pivotal CRM system with on-demand apps within two years. But echoing others we talked to, she expects that it will take longer--at least five years--for Biosite's management to warm to the idea of replacing the company's core JD Edwards financial system with a software-as-a-service alternative. "Financials are very different. They're very integrated with the business," she says.

SLOW TO DEVELOP

Software as a service is starting to gain favor for several reasons: It's relatively easy and inexpensive to implement; it's flexible; it doesn't require as much infrastructure; and its costs are more predictable. Gartner predicts that 25% of new business software will be delivered as services by 2011, up from 5% last year.

CRM services have set the pace, led by Salesforce, whose sales grew 64%, to $118 million, in its second fiscal quarter. Gartner estimates that software services accounted for 8% of CRM revenue last year and will jump to 12% this year. Many Salesforce customers are salespeople and department managers who got tired of waiting for their IT departments to implement company-wide CRM systems, so they acted on their own.

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