SaaS: Taking the Worry out of Service

SaasheadLucent Technologies, the telecommunications equipment giant, outsources
upward of 85 percent of its manufacturing to its contract manufacturers’ 20-plus locations worldwide, along with its own integration centers. Needless to say, it’s not easy to coordinate across different time zones and different vendors.

So Lucent has contracted with Kinaxis, a software provider offering specialized coordination services for electronics manufacturing services (EMS), to integrate data from the manufacturing resource planning systems of those various contract manufacturers. Using Kinaxis’ RapidResponse, “Everyone can see what needs to happen and who needs to act,” says Arvind Ballakur, senior manager, supply chain networks at Lucent. “The only way we can effectively manage our supply
chain is through global visibility and close coordination with our partners.”

Ottawa-based Kinaxis is offering its applications through a “Software
as a Service” (SaaS) model, one of the hottest trends going in
information technology. Customers like Lucent are no longer paying
perpetual licenses, with the expectation of periodic patches and
upgrades; instead, they are paying for the software usage through
regular (often monthly) subscription fees, and the applications are
available through the Web, not through their own I.T. systems.

In recent months, spurred by the widely reported success of
Salesforce.com’s SaaS application, this new licensing model has been
picking up converts like dry grass caught in a prairie fire. It’s
penetrated deeply in a number of niches, especially customer
relationship management (CRM), human resources and logistics.

Its popularity is easy to understand. CFOs and CIOs love the idea that
they don’t have to deal with a major capital expenditure for a new
software system, with the associated consulting and training time. Nor
do they have to worry about maintenance. Instead, the software provider
makes the application available around the clock and is responsible for
everything related to operating it and ensuring its currency and
viability.

The key characteristics of SaaS, according to analyst firm IDC, include:

  • Network-based access to, and management of, commercially available software;
  • Activities that are managed from central locations rather
    than at each customer’s site, enabling customers to access applications
    remotely via the Web; and
  • Application delivery that typically is closer to a
    one-to-many model (single instance, multi-tenant architecture) than to
    a one-to-one model, including architecture, pricing, partnering and
    management characteristics. With that, there is little or no
    opportunity for individual company customization. SaaS is essentially an outgrowth of the application service provider
    (ASP) model that gained popularity a few years ago. With an ASP, a
    company essentially turned over its relevant function — payroll,
    procurement, etc. — to the software provider, which “hosted” the
    application on its servers and gave the company 24/7 access to the
    system.
  • SaaS represents a step up from ASPs, however, vendors say, because
    the relationship is no longer with one customer, but many. Roy Cashman,
    chief technology officer at Transplace, a logistics technology and
    transportation management services provider based in Piano, Texas,
    refers to its “multi-tenant environment.” By hosting many companies, he
    says, Transplace gains economies of scale and the wherewithal to update
    its software to improve the portal and the related analytics.

    EthicsPoint, a software provider in the governance and risk management
    (GRM) space, has been an ASP provider for years, helping companies
    manage whisteblower hotlines with report resolution tools. With time
    and advances, and with additional pieces of architecture and structure,
    as well as a core system and different application protocols that
    support SaaS, delivery and functionality are far easier, says CEO David
    Childers. “You have more tools and process consistency,” he says.

    Industry analysts say that the mystique of on-demand technology like
    SaaS is quickly disappearing. A recent IDC study projects worldwide
    spending on SaaS to jump at a 21 percent annual growth rate over the
    next three years, reaching $10.7 billion in 2009.

    Even in its early stages, SaaS has quickly become a viable alternative
    for companies looking for comprehensive solutions in areas like
    compliance, governance and supply chain management. Beth Enslow of
    Aberdeen Group noted in a March 2006 research report that about half of
    participants in an Aberdeen survey say they now use or are considering
    using on-demand applications to manage select portions of their supply
    chains.

    “Current on-demand SCM [supply chain management] users report
    overwhelming benefits from the on-demand model, especially in
    implementation speed, maintenance ease and return on investment [ROI],”
    Enslow wrote. “Moreover, nearly half say customer service is better
    from their on-demand vendors than from their traditional supply chain
    vendors, an outcome of the fact that on-demand vendors are on the hook
    every day to make sure their applications are operating well for their
    clients.”

    ROI has indeed been a huge selling point for SaaS, especially in tight
    spending environments. Randy Littleson, vice president of marketing at
    Kinaxis, says the company had traditionally sold its software through
    perpetual license arrangements, with periodic upgrades. “We have seen
    that produces good results, but we found a common scenario in which,
    despite the fact that businesses were doing better, that was not
    translating into capital expenditure.” One related problem, he adds, is
    that “I.T. budgets tend to be spoken for,” and it’s often difficult to
    find dollars for new applications.

  • SaaS applications, however, are able to cut across corporate silos
    that have their own combination of procedures and applications. “Each
    one of the silos — whether it’s corporate security, loss prevention or
    facilities management — has unique things to do, and each creates
    data,” says EthicsPoint’s Childers. “We offer a common communications
    layer that turns that data into information.

    “We’re working with auditors, the AICPA and ethics officers, and we can
    take best practices and incorporate them into our model,” he adds. “We
    can put it in their own vocabulary. The adoption rate is high, which
    creates a faster ROI story… People are looking for ways to improve
    process and data consistency though a product set that is intuitive and
    scalable, and has an ROI story around it. SaaS is one of best ways to
    deliver that.”

    Transplace manages $3 billion a year in spending for customers. It does
    so by providing the tools for customers to optimize the inventory into
    shipments, determining the best modes of transport (truck, rail,
    overnight, etc.) and choosing the carriers. The company counts major
    corporations like Office Depot and U.S. Gypsum among its clients.

    Transplace, which was spawned by a Web-based collaborative set up by a
    number of carriers in 2000, can work with a host of different systems
    to take orders, says Cashman. That’s important, because it obviates the
    need to buy a specific solution. “If you buy an off-the-shelf software
    package, you can imagine — there are lots of consulting dollars
    involved, and a lot of time to market,” he adds.

    Unlike software patches, upgrades and new functionality can be tapped
    quickly by customers using SaaS. Roger Bottum, vice president of
    marketing at Axentis, another GRM application provider, says when it
    introduced new functionality earlier this year, 80 percent of its
    clients were using it within 30 days of its release.

    Many SaaS suppliers have set up regular annual or even monthly fee
    structures. Axentis has annual structure, centered on three-year
    agreements, that is also tied to the number of users at the client
    company. Procuri Inc., a supply chain management provider, typically
    has three-year commitments and an annual fee, but payment can be
    flexible within that, says senior vice president Tim Minahan. SaaS
    “aligns the providers’ goals with those of the customer,” Minahan says.
    “With the traditional software model, it’s all about getting the deal
    signed.”

    Avalara, a sales tax management provider based in Bainbridge
    Island, Wash., has set up a monthly subscription fee program that has
    several variables, including transaction volume. The base fees aren’t
    predicated on company’s size, but on the tax software it uses — Great
    Plains, Sage, QuickBooks, etc.

    One selling point noted by a number of SaaS vendors is the ability to
    offer companies a quicker response to industry shifts. Like other
    Kinaxis customers, among them Honeywell International Inc., Raytheon
    Co. and Casio Computer Co. Ltd., Lucent found the challenge of adapting
    to sudden marketplace changes and product shifts daunting, says
    Kinaxis’ Littleson.

    “Companies say that it’s extremely difficult to deal with pervasive
    change in business. Product life cycles are extremely short,” he notes.
    “The challenge is obsolete inventory — it’s hard to manage
    financially. We try to help these folks deal with change, to respond
    quickly and accurately [to the marketplace.]”

    Not surprisingly, success brings competition, and not just from other
    specialists. Software giants like Oracle Corp., SAP AG and Microsoft
    Co\rp. “are all moving [toward SaaS],” says Littleson. But he and
    others insist that threat isn’t imminent.

    While the software behemoths “have the potential to encroach” on the
    existing market, “we also know that the solutions they would push are
    architected to solve different problems,” he says. “Those problems
    aren’t easy to solve. They would have to start with new architecture,
    and that’s probably a couple of years’ proposition.”

    Minahan at Procuri agrees that while a giant provider like SAP could
    re-architect its systems, “it may take some time. The challenge for
    them may be more that they don’t understand that SaaS is a business
    philosophy, and it’s about how you deliver services,” rather than about
    systems integration.

    Whatever does happen in the greater SaaS market in the near term,
    expect to hear a lot more about it in software product marketing. “Two
    years ago, [Axentis] didn’t stress SaaS in our marketing,” says Bottum.
    “That’s a function of the maturity of the concept in the marketplace.
    Now, it’s front and center.”

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