Sizing up SaaS

Feb 01, 2007 10:30 PM  By

Software as a service, or SaaS, is arguably the most talked-about trend in IT. Bill McNee, CEO of Westport, CT-based research firm Saugatuck Technology, says that 55% of small and midsize companies currently have at least one SaaS application running, and recent studies reveal that 61% of North American companies with revenue of more than $1 billion plan to adopt one or more SaaS applications in the next year. Several industry experts estimate that, by 2010, 30% of new software will be delivered via an SaaS model. And virtually all new software venture money is flowing to SaaS startups these days, rather than to traditional enterprise software companies. While such indicators are impressive, the question remains: How does a multichannel merchant know whether SaaS is the right choice for order and warehouse management?

What’s all the fuss about? In SaaS, an application is provided by a remote host and accessed via a Web browser, thus freeing the user company from the need for on-site servers, installation, maintenance, or support. But there’s much more to it than that. After all, that same description could apply to an application service provider (ASP).

But while ASPs are simply third parties that host applications for another company’s use, SaaS providers develop their own software and make it available, through the Internet, to multiple user companies. And while the applications that ASPs provide are often standard client-server programs adapted for a hosted environment, SaaS applications are new programs or versions developed specifically to be browser-based, making them more responsive and flexible.

When Jason Jacobs launched CORESense, a Saratoga Springs, NY-based SaaS provider of multichannel management software, in 2000, “there was no such thing as SaaS.” He explains that in an ASP scenario, a provider would go out and buy an application, then “sell it by the drink” — which often did not provide enough revenue to sustain the provider. “But we wrote our software,” says Jacobs, “and we own the intellectual property — we’re not paying to license somebody else’s. The application is built to run this way; it doesn’t need to be adapted, so you’re controlling costs.”

When is SaaS better than inhouse?

The cost controls inherent in the SaaS provider model, along with SaaS providers’ being invested in the applications they provide, make SaaS an attractive, affordable option for clients. “Configurability of the look and feel is something SaaS providers are much better at than on-premise providers,” says Nikki Baird, principal analyst for b-to-c supply chain research with Cambridge, MA-based Forrester Research.

SaaS may also be a better option if the application you want doesn’t quite fit with what you’ve got. “Some select SaaS on technology grounds — when an application, if licensed, may only be available on a platform inconsistent with the direction of your company,” says Jeff Woods, research vice president for business applications and processes at Stamford, CT-based analyst firm Gartner. “For instance, if you’re Microsoft-based and the application you need is Java-based, you may decide to get it on SaaS. There are lots of considerations that may not fit with your architecture.” And of course, adds Woods, SaaS does not require inhouse tech support. “A fair number of companies say, My IT staff is overburdened, we can’t take on another app,” he observes.

Opting for an SaaS solution “is even more sensible when pursuing ‘services-oriented architecture’ as part of an overall enterprise systems plan,” says Ernie Schell, principal of Marketing Systems Analysis, a business and systems consultancy to direct marketers based in Ventnor, NJ. Services-oriented architecture, he explains, relies on loosely coupled and typically Web-based software services to enhance and support business processes.

Does size matter?

Andrew Constantinou, chairman/CEO of Houston-based distribution management company Direct Resources, maintains that SaaS makes sense for both smaller companies, where it reduces the size of and need for IT staff, and larger companies, where the need for maintenance and support is reduced. He also points out that SaaS features and upgrades allow larger clients to react more quickly. Of course, he’s hardly impartial: A spin-off company of Direct Resources, Direct EDJE, offers its Direct Response inventory management tool as an SaaS application.

CORESense’s Jacobs — not surprisingly — agrees that SaaS architecture makes operations more efficient. “Our transaction management system eliminates a lot of redundancy found in on-premise systems,” says Jacobs. And while Jacobs says the majority of CORESense customers have sales in the $2 million-$20 million range, its applications also work for bigger companies; one customer, for instance, is chocolatier Ghirardelli.

When deciding whether SaaS is a viable option for your order management system (OMS) or warehouse management system (WMS), “size is not the overriding factor,” says Vince Fabrizzi, chief sales and marketing officer for Clearwater, FL-based software provider Jagged Peak. “Obviously if companies need a solution deployed quickly, they have a good reason to go with SaaS. And companies with lean internal IT resources — no matter what their size — will be attracted to SaaS.” Fabrizzi points to AIG SunAmerica, a financial services provider with more than 4 million customers, as one company that has deployed Jagged Peak’s flagship SaaS product, EDGE, to handle all order management and document collateral distribution.

Manhattan Fruitier, a seller of corporate gift baskets based in New York, is appreciably smaller than AIG. Nonetheless, “we’re dealing with issues faced by much larger companies,” says its owner, Jehv Gold. “We literally did everything by pen and paper for two years, then switched to computers in ’89.”

Though Manhattan Fruitier has a solid Web presence, about 70% of its volume comes via the phone. “I’m afraid that our niche is the hand-holding relationship,” says Gold. “People look to us for that, and especially in December, when we do about 45% of our volume, it’s easier for them to talk to someone; customers don’t want to be stuck inputting huge corporate gift lists.”

After a frustrating experience with installed software, Gold decided to try SaaS. For the past three years, he has used a customized order and fulfillment system provided by NetDotSolutions (NDS) of Newport Beach, CA. The system is built on an Oracle base.

“As a small business we get the kind of data, support, and integrity we wouldn’t be able to afford otherwise,” says Gold. “I didn’t want to maintain three servers here; I didn’t want the expense, and we don’t have the tech expertise. All of our shipping and all of our paperwork is generated through the system. Without it, everything would grind to a halt.”

Is it safe?

Given how much Manhattan Fruitier depends on its SaaS system, Gold is understandably nervous about dependability. “The thing that I lose about two nights a week of sleep over is connectivity,” admits Gold. “We have two separate DSL connections from different providers connecting to NDS’s servers in Texas. If we go offline with them it would be kind of catastrophic.”

Part of Gold’s concern is based on his location in Manhattan: “The only issue is if someone outside hits our DSL line. We actually had a fire in a manhole on our block last summer, and power went out for two days.” Gold says he felt more comfortable when he had his own servers, even though he recognizes that they were not as secure and that it would have taken at least a day for him to reconstitute the data in the case of the power outage. And in fact, NDS has been accommodating, he says, even relocating backup servers from California to Texas because of Gold’s concerns about earthquakes.

Schell of Marketing Systems Analysis says the security issue is a “red herring.” Most providers host their applications at server farms. “These are secure locations with backup that is seamless. In theory, the hosted solution should provide better security than you could have inhouse. When you look at all your costs — servers, telecom, firewalls, etc. — just that issue alone is worth a considerable amount.”

Even so, Schell acknowledges that “people get paranoid. They have a proprietary sense toward their customer databases and are afraid to lose control — even though the biggest threat to security is from an inside job.”

How challenging is integration?

Forrester’s Baird notes that because warehouse management systems have traditionally been stand-alone applications that needed to be integrated with a multichannel merchant’s other systems, “if you were looking at using only warehouse management as SaaS, the integrations are pretty mature.”

Even so, Schell says introducing an SaaS warehouse system to your existing operations isn’t simply inserting a few plugs and flipping a switch. “While vendors like to make a big deal about [your] not needing a big IT department to maintain your system, in practical reality if you’re doing any kind of significant volume, it is going to be integrated with a number of other systems in your shop,” he says. “It certainly is very doable and no huge challenge, but some of these other systems are not as friendly to a remotely managed system as you’d like, and if you’re managing your other systems but not order management, that could be a problem.”

But CORESense’s Jacobs says that if a company wanted to connect an on-premise warehouse system to its vendors, for instance, it would need to hire somebody to install some kind of software that maps to the suppliers. “A supplier would have to integrate with all retailers but would mostly [accommodate] large ones,” he says. “In an SaaS application, you tell me who your supplier is, and I can make one map, then anybody who uses my system gets that as a freebie, so suddenly this component that used to be a source of income for system integrators becomes a standard feature.”

Another reason to consider SaaS, says Gartner’s Woods, is that certain types of innovation are short lived, and it’s easier to implement them into your operations on a service basis — though, he acknowledges, “this doesn’t happen in the WMS or order management space that often.”

What about costs?

“Cost is the biggest issue,” says Schell. “If you look at the Websites of the two top [SaaS] vendors’ — OrderMotion and ProfitCenter — most of the information is about ROI. There is a fairly high degree of resistance in the marketplace, particularly among companies that grew up before the Web came along; they’re very reluctant to get on board what they see as a runaway train of cost.”

Since the early 1990s, Schell explains, service providers have moved away from charging on a per-seat basis, because with the Web, seat numbers haven’t increased but orders have. Vendors began charging a mix of per-seat charge with a volume-based surcharge to acknowledge Web order volume. “But the ASP model has been all done on volume, and that’s where people feel they’re becoming awash in a sea of charges. They see it as the more successful they are, the more they have to pay the vendor,” Schell says.

For his part, Jagged Peak’s Fabrizzi says, “SaaS is typically provided in a transaction-based model, but more and more we’re providing everything on a flat monthly fee — it gets you all the transactions and bandwidth. The cost is typically 10% of the monthly cost of a licensed solution.”

Jamie Christiano, the principal owner of NDS, says that charges can vary widely, depending on the size and complexity of the project. NDS charges a fee for installation; once the application is hosted, it charges what is in effect a monthly rental fee.

Woods sees financing as a key differentiator: “SaaS is often pay as you go, so you avoid capital expenditure and capital outlay. That doesn’t mean it’s cheaper; it just means a different method of accounting.” Different companies have different preferences, he notes, “ and if your company has a freeze on capital spending, you have no choice. In some other companies, the CFO and CIO have put together sophisticated models over which is cheaper; it’s kind of a lease vs. buy decision.”


Formerly a contributing editor with Operations + Fulfillment, Jeff Morris is a freelance writer based in South Salem, NY.

Selecting an SaaS provider

If you’re shopping around for a provider of software as a service (SaaS), Nikki Baird, principal analyst for b-to-c supply chain research with Forrester Research, reccommends focusing on configurability. After all, she notes, “this is your customer interface!”

You should also try before you buy, as a demo is not sufficient for key business processes. And check for frequency of updates, Baird says: You don’t want the application changing dramatically each quarter, “but you also don’t want to have to wait six months to a year” for a critical upgrade.

Ernie Schell, principal of systems consultancy Marketing Systems Analysis, suggests asking prospective providers if clients always have to be on the latest version, or if they can skip upgrades should they find the added features unnecessary.

Also, you want to know if you, rather than the provider, can control exactly when upgrades are implemented. What if they occur during your peak season? What if you don’t have a slow season?

You also have to find out how many versions the provider can run simultaneously and, if you run multiple Websites, how the provider regards them: Do they run on different systems or the same system? What are the associated costs? — JM

A sampling of SaaS vendors

CORESense

www.coresense.com866-229-2804

125 High Rock Ave., Saratoga Springs, NY 12866

Provides an end-to-end solution for small and midsize retail enterprises with multichannel sales strategies. Centralized retail software system, built from the ground up to be delivered over the Web, includes multichannel management, order fulfillment, inventory and supplier management, and customer relationship management.

Direct EDJE

www.directedje.com800-604-0004

1515 S. Capital of Texas Hwy., Suite 101, Austin, TX 78746

Flagship product Direct Response is an Internet-based fulfillment software that includes both the front-end ordering and the back-end fulfillment center management systems. The company also develops custom-implemented, corporate-branded Websites that tie directly to the back end to order, track, and notify of activity within inventory.

Jagged Peak

www.jaggedpeak.com800-430-1312

13577 Feather Sound Dr., Suite 330, Clearwater, FL 33762

Flagship application EDGE (Enterprise Dynamic Global Engine) is a Web-based app uniting software, hardware, and broadband connectivity. It integrates with essential legacy, enterprise resource planning, supply chain management, inventory management, warehouse management, and customer relationship management systems, aggregating orders from all sales channels and consolidating and funneling data back out to specific user groups through customizable Web portals.

NetDotSolutions (NDS)

www.netdotsolutions.com949-660-0532

4695 MacArthur Court, Suite 420,Newport Beach, CA 92660

Custom software development company that uses a reliable and scalable combination of technologies to deliver enterprise-level software solutions for companies that previously couldn’t afford it. Unlike many other custom software companies, NDS builds the application on its platform of prewritten code and adds only what the client needs, helping to contain costs.

OrderMotion

www.ordermotion.com212-279-6500

251 W. 30th St., New York, NY 10001

Web-accessible order management and fulfillment management system, including order capture, inventory management, payment processing, database management, and reports generation. Integrates mail, phone, fax, Internet, or any combination of channels, capturing data and reporting on them in real time.

ProfitCenter Software

www.profitcenter.com888-446-6240

50 Charles Lindbergh Blvd., Uniondale, NY 11553

Web-based, on-demand application designed specifically for multichannel direct marketing companies. Automates and manages products and the entire customer lifecycle across multiple sales channels (Web, e-commerce, catalog, contact center, retail, outside sales). Concentrates on challenge of dealing with thousands of product variations, styles, and personalizations.