The Players of Software-as-a-Service Business Models and Finding the Best Value Propositions
Written By: Predrag Jakovljevic
Published On: April 2 2005
More Examples of a Software As a Service Business Model
The growing success of Salesforce.com's on-demand service for customer relationship management (CRM) software begs the question whether the software-as-a-service model is suitable for other applications. It seems that the model is amendable to other applications that are frequently outsourced. This includes HR/payroll; financial and procurement management; and business-to-consumer (B2C) e-commerce/product catalogs including dynamic pricing models, customer loyalty groups, targeted sales promotions, and other sophisticated sales tactics. Integration with other supply chain applications that do not necessarily require a large, internal team of sales support people may also find potential. The same can be said of businesses that rely on globalization, Web-based collaboration, distributed order management (DOM), and even the politically unpopular manufacturing outsourcing. These are all realities for many growing companies that keep installed fulfillment locations near various, global located manufacturing sites. Using these centers avoids the need to send inventory to a central location and instead enables drop-shipments as needed.
Some applications simply seem to lend themselves to the hosted model, such as international trade logistics (ITL) and global trade management (GTM), which, due to their widespread nature cannot efficiently work the other way. GTM can be defined as all the activities around managing the life cycle of trade across domestic and international order, logistics, and settlement activities that improve operating efficiencies and working capital. In particular, the global import/export procure-to-pay and order-to-cash processes entails a number of activities, including source suppliers/customers; process purchase/sales order; insure goods; issue/receive letter of credit; finance trade; arrange shipping; create trade documents; customs compliance export/import; send/receive goods; send/receive invoice; reconcile; and initiate/receive payment. On a more granular level, these activities belong to the order, finance, ship, and settle sub-processes.
In any case, many of these can only be efficiently fulfilled through a Web-based hosted solution, priced per transaction. The average global trade cycle of order through to settlement is 120 days, whereas a comprehensive hosted GTM solution, like the one from the industry leader TradeBeam, might reduce this cycle by an average of 12 days improving users' cash flow by 10 percent or so. In this case, such potential is possible because of the upbeat vendor's acquisition of over twenty GTM/ITL-related applications during the last few years, which it has since been rewritten. The most recent was the acquisition of the ITL specialist Open Harbor, which, like its new parent is an ASP built for on-demand Web services developed on an n-tier architecture. For more information, see International Trade Logistics Challenge Automated Global E-Trading.
Additionally, Ultimate Software, a leading provider of Web-based payroll and workforce management solutions, offers its UltiPro Workforce Management suite through a hosting model named Intersourcing, for either a one-time license fee or for a per user, per month fee. Marketed as licensed software, it is also a co-branded offering under the "Powered by UltiPro" brand for business service providers (BSP). Hosted through Intersourcing, UltiPro gives organizations the best of both in-house and outsourced HRMS/payroll advantages. Features include complete access to critical employee data, a Web portal for managers and employees to access company-related activities, reporting, and business intelligence (BI) and analytics tools for executive decision-making and comprehensive HRMS/payroll functionality—all with no additional requirement for in-house IT support. Ultimate Software provides all the hardware and system software, hosts UltiPro at a world-class data center, and upgrades and maintains the system.
Another example of an application using the on-demand model is Arena Solutions, which has long offered the industry's only on-demand product lifecycle management (PLM) solution. Unlike client/server applications, which are costly and cumbersome to deploy, Arena PLM is delivered over the Internet as a fairly secure, rapidly deployed service, for a substantially lower total cost of ownership (TCO). Arena enables outsourcing, increases operational efficiencies, and speeds time-to-market for a number of product manufacturers that manage multiple parts and suppliers. The major attraction is the price of $1,000 (USD) per user per year, or for viewing capabilities only $200 (USD) per user, per year. For a user company with a mix of between 1015 users, the total price is about $1,000 to $1,500 (USD) per user, per month. This, plus a seemingly fast implementation, appears to compare well with conventional PLM systems. Additionally, there is the option of deploying a restricted user workgroup system at an even cheaper cost. The vendor is offering the first twelve months free of use for enabling fairly secure and easy collaboration for distributed engineering development groups and supply chains anywhere, anytime—and without the cost and complexity of conventional PLM implementations. With almost no risk, no IT assets to buy or employ, and with only some PLM consultancy required to help prospective customers get the best out of their engineering data, one may begin to understand why this "pay as you go" service has grown by a few hundred percent annually to date.
For that reason, another PLM software developer, PTC, will be tapping into an IBM computing on-demand service center in Boulder, Colorado (US). The center uses IBM Universal Management Infrastructure (UMI) technology to distribute software-asa-service, so that manufacturing small and medium businesses (SMB) can access its systems more economically, alleviating the typical, initial start-up, infrastructure, or administrative problems that accompany similar applications installed on the customer's site. Users will instead go through a shared, hosted environment to get to the Windchill product—and thus get to all the facilities for managing product information, collaborating with partners, suppliers, and customers on design, and controlling development processes. The service, which applies to all major CAD systems, will supposedly be available through PTC's resellers on a per user, subscription basis, starting at $100 (USD) per month. As with the above acquisition of Corio, IBM's entrance here should also give the on-demand approach to PLM software-as-a-service exceptional visibility and impetus.
Along similar lines, SAP recently introduced a hosted sourcing platform and associated services for the mySAP SRM (supplier relationship management) system that means prospective customers can test on-line supplier operations before committing to a solution. SAP also announced several supporting partnerships, with services to identify savings, prepare and execute on-line materials sourcing events, and implement corporate purchasing platforms. The vendor believes its hosted platform will provide quick savings and quantifiable proof of concept and value for companies considering their SRM options or for companies that are unable to implement a system right away.
In addition to the mySAP SRM example, even renting simplified materials requirement planning (MRP) systems is slowly catching on with small and medium manufacturers that have realized its potential scale of cost and time savings. To that end, the UK-based RentIT vendor cites a recent win where it lured an aerospace subcontractor away from its $250,000 (USD), 50-user conventional ERP deal with a $4,000 (USD) per month deal for the hosted 123MRP product. The attraction to this system reportedly lay, in part, in the pricing model that is made completely transparent through a cost per month estimator available on the vendor's web site. It also lies partly in the little commitment and risk for the customer and in the ease of set-up and running. Users claim virtually instant payback, since no one has yet reportedly spent more than $10,000 (USD) on the set-up and implementation. Thereafter it involves a relatively small monthly subscription fee. This too may prove the point that usability and depth of application matters more than the method of delivery or the breadth of features, which many rarely use anyway.
Although SAP has taken notice of the likes of Salesforce.com, its SAP Hosting division is still not in direct competition in this realm. The recently minted HP alliance does not provide a subscription service, but rather the option of a lower entry point for cash strapped customers who can spread out the software cost over a few years through SAP Financing programs. Moreover, SAP Hosting has been positioned to provide more complete SAP-centric solutions including operation, application, and infrastructure management. As a result, it will respond to customers who want one-stop-shopping or it will offer selective outsourcing services focused on SAP. At the same time, it will support license sales of SAP subsidiaries, reduce TCO, and strengthen operation quality. SAP claims a strong partner focus with interfaces to the partner community, a rich set of partner services, and work with partners on a project level. However, SAP, which does not yet have a subscription-based offering, may tentatively be moving into the on-demand world. Its US subsidiary recently struck a deal with Citrix Systems, whereby the two parties will work together to provide remote or Web-based access to the SAP Business One application suite.
Part Four in the Trends in Delivery and Pricing Models for Enterprise Applications series.
As issues of Internet security, privacy, and multivendor products interfaces are addressed, the number of vendors adopting the software-as-a-service business model will undoubtedly grow. Using hosted arrangements will also make sense—both as a solution and as a cost reduction exercise—for manufacturers in high-tech/electronics and in similar, complex manufacturing segments that are already outsourcing many portions of their manufacturing operations or are dispersed geographically with their own manufacturing and distribution centers.
As with any other decision of strategic importance, the choice whether to go for a hosted applications service requires due diligence. This is pertinent to both vendors and potential customers. Although the promise of reduced implementation time and risk, lower upfront costs, and so forth justify the hosting/ASP model, an entire new set of issues emerge for the mid-market organization to consider.
Some of the issues that need consideration include the technical capability of the ASP to administer the program; the ASP's industry focus; the applications' customizability; the ability of the ASP to guarantee connectivity; the pricing model chosen; and how to negotiate an SLA. These issues need to be addressed in conjunction with evaluating the capabilities of the software package, and understanding whether the ASP offering differs from the traditional licensed offering. Clients should diligently and comprehensively evaluate the benefits, as well as the potential business constraints of the hosted option, and they should make their assessments based on references.
More comprehensive guidelines for determining if you should consider the ASP model along with some thoughts on selecting an ASP can be found in The ASP Decision and Are ASP Applications Right for You?.
Generally, the following types of enterprises should consider using hosting/ASP services:
- Those with limited investment capital and those that do not have an IT department.
- Those that do not anticipate a high rate of change in the way they do business.
- Those investing in an application to streamline costs rather than to enhance revenue.
- Those that can jettison most of the organization's aged legacy infrastructure.
- Those that lack resources for the rapid implementation of a distinct project that may not require complex integration with existing applications such HR/payroll administration, e-mail, etc.
Despite bad perceptions of the largely ill-fated first generation of hosted providers, and owing to the positive news that some vendors like Oracle, Salesforce.com, ACCPAC, and NetSuite have gained from outsourcing, mid-market enterprises may benefit from objectively evaluating the value propositions represented in the next-generation ASPs. Look for the following characteristics among the hosting vendor/ASP candidate providers:
- Amenability to reasonable customization and interfacing to legacy systems
- Service-oriented architectures (SOA), Internet-based architecture, and standards-based interfaces
- Support for specific vertical industries or business processes
- Hybrid services that can coexist with on-site systems
- Sound policies for privacy and security
- A sound track record of SLA maintenance at originally quoted price levels and a quick payback
- Sound financial viability and geographic coverage
- The ability to track and provide key metrics for application and network availability.
For users, success-based pricing models offer a "pay-as-you-grow" alternative to up-front license fees. Though often touted as cheap and convenient, these models can bring unexpected IT costs down the road. As with any long-term contract, prospective clients should carefully review the fine print to understand the implications that transactional revenues will have on future expenses. A transaction may appear cheap at $10 (USD) or so, but companies need to have detailed growth projections that factor in per-transaction increases, milestone increases, as well as other contract attributes in order to understand the magnitude of future payments. Also, without a fixed upfront price, planning yearly IT budgets will become much more difficult.
This concludes Part Four of a four-part note.
Part One defined pricing options.
Part Two detailed utility computing.
Part Three covered the effect of the transition on vendors.