Time to Get SaaSy

Stephen DeAngelis

April 11, 2011

In past posts about supply chain trends, increased utilization of software as a service (SaaS) is one subject that threads its way through most of them. Gartner predicts that worldwide revenues from software-as-a-service enterprise applications will reach nearly $11 billion in 2011. [“Gartner Predicts $10.7 Billion Market for Enterprise SAAS Applications,” Fahmida Y. Rashid, eWeek, 14 December 2010] Supply chain analyst Lora Cecere has written, “The use of Software as a Service (SaaS) changes the game for optimization. The use of SaaS enables parallel processing, expert tuning, data cleansing, and benchmarking opening up new horizons.” Gartner analysts Tim Payne, Mickey North Rizza, Noha Tohamy, Dwight Klappich, William McNeill, and Chad Eschinger predict, “Supply chain management (SCM) technologies based on software as a service (SaaS) and the cloud will continue to gain traction, but mainly in process areas, with strong alignment to the unique characteristics of these delivery models.” The editorial staff at Supply Chain Brain has gone so far as to claim, “SaaS and On-Demand Systems Are The Future of Supply Chain IT” [3 March 2011]. The article begins with a quote from Kevin Hume, a principal at Tompkins Associates. He asserts:

“The convergence of constrained capital, limited IT resources, and demands for higher productivity functionality continue to expand the footprint for SaaS — and on-demand-based technology applications across the supply chain. SaaS-based applications are no longer the hype; instead they are the quickest and most cost-effective way to provide supply chain execution technology for 2011 and beyond. SaaS and on-demand applications will continue to grow across the supply chain landscape. There are several key points for companies to consider while contemplating what they want to achieve and how to adopt SaaS and on-demand as part of a supply chain technology strategy in the coming year.”

I’ll discuss more about adopting a supply chain technology strategy that utilizes SaaS later in this post. Authors of the Supply Chain Brain article note, however, that not all segments of the supply chain are good candidates for SaaS applications. They write:

“SaaS and on-demand applications have higher adoption levels in certain areas of the supply chain application landscape. Supply chain applications that require a high level of integration and collaboration – such as visibility, global trade management, transportation management, procurement – all have a robust SaaS and on-demand application market. Large-scale WMS [warehouse management system] applications (high transaction volumes, automation/sortation requirements) drive complexities that are not supportable by SaaS or on-demand products. However, most WMS applications with small- and medium-transaction volume have many SaaS and on-demand application offerings in the market.”

The authors recommend that potential SaaS users educate themselves about SaaS before pursuing strategies that rely on such applications. They continue:

“As with any emerging technology, it is important to have a clear understanding of terms and how they impact your specific operations. On-demand is probably the broadest application description, ranging from a single application that is available to multiple clients, to a client-specific application instance ‘hosted’ by a third party. SaaS applications are a single instance of code and data definitions that are made available to multiple customers (multi-tenancy). As a result of multi-tenancy, the volume of features/function options is somewhat more limited than what is expected in a typical licensed software application.”

The article concludes:

“On-demand and SaaS applications provide a compelling opportunity to dramatically reduce the technology investment burden managed by many supply chain organizations today. Now is the time to assess supply chain applications and determine the best adoption strategies for SaaS and on-demand supply chain applications that place organizations in front of the competition.”

So how does one go about assessing supply chain applications and determining the best adoption strategies for one’s company? Liz Herbert from Forrester Research offers five “considerations for sourcing professionals trying to get the most from SaaS.” [“How to Get Strategic About SaaS: 5 Key Considerations, CIO, 23 November 2010]. Herbert begins her article by noting that interest in SaaS is growing. She writes:

“Over the first half of 2010, Forrester’s IT clients asked more than 350 questions about Software-as-a-Service (SaaS). Buyers are no longer just asking ‘What is SaaS?’ ‘Who offers SaaS?’ and ‘Is SaaS secure?’ Rather, we’re hearing more sophisticated questions about how to incorporate SaaS into the overall application footprint, best practices for implementing SaaS, how to build governance and due diligence around purchases, and where to invest in organization skill sets as firms make greater use of the service. A deeper look into these inquiries shows that firms are approaching SaaS more strategically and in a more centralized way compared to prior years. In fact, 37 percent of questions centered on actively embracing SaaS. This means the siloed, business-led SaaS deployments of the 2000s are yielding to greater due diligence, planning, and integration with existing sourcing and IT processes.”

Of course cost has a lot to do with the desire to integrate SaaS applications with existing legacy IT systems and processes. At Enterra Solutions, our approach has always been to create solutions that complement rather than replace legacy systems. It just makes good economic sense. The remainder of Herbert’s column is devoted to “the types of questions [Forrester analysts have] received and suggestions for sourcing professionals to achieve a successful SaaS strategies.” She begins:

1. What new categories exist for SaaS applications? SaaS has come a long way since its early roots more than a decade ago, where it primarily gained traction in vanilla deployments of contact management, SFA, and HR. Today vendors are offering SaaS across almost every major software category—and buyers are considering SaaS for a wide range of applications, from email to ERP to IT management. Given the changing landscape, sourcing execs should educate themselves and their organizations on the evolving options across categories. It will also be important to keep in touch with suppliers (like EMC, IBM, Oracle, and SAP)—as many of these software giants are aggressively investing in SaaS through organic growth as well as acquisition.”

Large companies, like IBM, are interested in SaaS applications because they complement their promotion of cloud computing and the data centers they operate. However, companies that fail to look beyond the big providers for SaaS applications will be missing out on many of the most innovative and cost effective solutions being offered. Concerning this point, Bill McBeath, chief research officer at ChainLink Research, asserts, “SaaS offerings are front and center in the intensifying battle for share of the small and medium-sized business marketplace. While traditional mid-market vendors are feeling the heat, the large enterprise vendors will not necessarily make a lot of headway, due to the economics of their entrenched approach to sales, delivery and support.” [“The SaaS Battle for Hearts, Minds (and Wallets) of Small and Medium-Sized Businesses Heats Up,” Supply Chain Brain, 17 February 2011]. Herbert continues:

2. How should governance be structured for SaaS? SaaS has always offered fast deployment and the ability to roll out incrementally, which has often meant SaaS buyers fly under the radar screen of corporate governance. But SaaS is more than just an alternative deployment model; it has unique characteristics that require new ways of thinking about vendor selection, contracting, risk tolerance and organizational skill set requirements. Beyond these skill set shifts, leading sourcing execs are working to educate the business on SaaS and cloud, as well as developing SaaS position papers that business execs can reference, and contract templates and guidelines for SaaS and cloud deployment.”

To learn more about benefits and challenges of cloud computing, read my post entitled “The Cloud” Continues to Gather. In addition, there is an excellent in-depth article on cloud computing in Bloomberg BusinessWeek [“The Power of the Cloud,” 3 March 2011]. Herbert continues:

3. How does SaaS affect identity management, security standards, and business continuity? Buyers are becoming increasingly comfortable with the concept of SaaS, but there are still concerns around key areas such as physical and logical security, as well as disaster recovery. SaaS buyers should work with their security experts to outline what levels of security they require for various categories of SaaS. Security minimums may be higher for customer or employee data; retention and audit requirements may be higher for categories like e-mail. Sourcing and security experts should work to understand emerging SaaS standards (like SAS 80 Type II or ISO 27001) as well as emerging technologies that can help track or improve security.”

Certainly it is no surprise that security tops the list of concerns that companies have about SaaS applications and cloud computing. Herbert is correct in recommending that you do your homework. You want to ensure that companies with whom you do business meet high standards. Herbert continues:

4. What strategies are recommended for price negotiation and TCO analysis? While cost can be an appealing characteristic of SaaS, it also raises concerns as firms see larger-scale SaaS deployments and multi-year agreements. Beyond the obvious elements such as number of users, SaaS buyers can often negotiate lower prices if they’re willing to sign longer deals or opt for a higher or new edition of a product. It’s also important to consider longer-term flexibility, such as caps on price or locked-in options for future years, or an ability to scale down unused seats on an annual or quarterly basis.”

The authors of the first Supply Chain Brain article cited above also recommend that you analyze pricing models. They write:

“There are an ever-evolving range of pricing models in the SaaS and on-demand markets. Most models price integration services as an upfront consulting service. Beyond integration services, pricing begins to vary. Multi-tenant SaaS applications typically provide both one- to three-year subscription services. On-demand applications can provide similar subscription options, as well as transaction-based options. Companies should evaluate the requirements for seasonal peaks and determine costs across transaction and subscription options. It is important to look for ‘pay as you go’ options that allow companies to incrementally add additional functionality or modules as they gain experience with the initial deployment. In general, companies should not expect a single pricing model as they evaluate SaaS and on-demand application models. By looking carefully at each application’s peak loads and feature function requirements, companies can determine the best pricing option for their own application.”

Herbert’s final question and answer focuses on SaaS implementation best practices. She writes:

5. What best practices exist around SaaS implementation? Today’s SaaS buyers are more and more focused on implementation strategy—including business process strategy, customization, and integration. Some SaaS vendors have ramped up their professional services to provide best practices for success, quick-start implementation packages, and one-to-one consulting. Others have also ramped up a talented pool of systems integration partners that can bring business expertise as well as developer resources to SaaS deployments. SaaS buyers should consider where it makes sense to leverage these resources, particularly where they seek process help or lack in-house knowledge of emerging platforms like Force.com, NetSuite, RightNow’s CS Cloud, and Azure.”

In the second Supply Chain Brain article cited above, the authors conclude, “SaaS has become a powerful force to contend with, not just in sales force automation, B2B integration and TMS (the segments where the SaaS phenomena first took hold), but across the board in ERP, sourcing and procurement, PLM, WMS and almost all software application sectors.” At Enterra we like to think that SaaS means “solution as a service” rather than “software as a service.” Companies are looking for solutions not software. That is probably the reason that the staff at Supply Chain Brain concludes:

“SaaS solutions will continue to significantly outpace the software market as a whole. Double-digit growth will be the norm for SaaS companies, with many experiencing 30-percent growth or more. Traditional licensed vendors will continue their migration to provide more complete SaaS offerings. As a result, SaaS will gain significant market share year over year for the foreseeable future.”

That conclusion is in line with most predictions being made by other supply chain analysts. If you haven’t thought about a future for your company that includes utilizing SaaS applications, you might want to reconsider the course you are currently on.