State of the Distribution Software Industry, Part 2: Software as a Service Gains Ground

This is part of a series looking at the distribution software industry. This article examines the pros and cons of Software as a Service, a model of software deployment where the distributor, for a monthly fee, accesses a business application over the Internet.
 
In an industry where margins are tight, upgrading technology is often put off until absolutely necessary. High upfront costs and licensing fees for new products deter many businesses from making an investment. But a recent trend -Software as a Service -may be opening doors for even the smallest of distributors to buy into new technology.
 
Not everybody believes that Software as a Service, or SaaS -a model of software deployment where an application is hosted as a service and accessed by the customer over the Internet for a monthly fee -is the end-all and be-all. Still, most believe SaaS is and will continue to be a critical force in the distribution software market.
 
The concept of SaaS is not new, says Tim Reynolds, president of Tribute Inc., a niche software provider to fluid power and hose distributors. SaaS in some ways is really quite old,"he says. "One of the original ERP companies provided a hosted service and mailed distributors paper reports."
 
SaaS in its modern form -accessed over the Internet -is starting to catch on in the industry as an alternative to client-server ERP and niche applications. With SaaS, distributors do not need to buy and install applications on their own computers -a key selling point on the cost front. While updates to client-server applications can be costly, both in manpower and in dollars, SaaS providers say all subscribers benefit from updates to their software without the on-site work needed in client-server applications.
 
Though only a smattering of providers focus exclusively on the SaaS model, including NetSuite and salesforce.com, more of the on-site software providers such as SAP, Infor Global Solutions and Activant Solutions are looking into or have already developed a product that either is pure SaaS or a hybrid of their current ERP applications and on-demand software.
 
In a recent survey of MDM readers, just about 40 percent of respondents have either looked into SaaS or currently use a SaaS application. On the other end of the spectrum, 38.4 percent say they believe SaaS does not fit their needs, and 22.2 percent say they are not familiar with SaaS applications or the companies that offer it.
 
Some distributors are taking a wait-and-see attitude -they want to see SaaS work for other distributors of similar size and scope before jumping in.
 
Market Trends
If the recent Aberdeen survey of manufacturers is any indication, SaaS ERP installations are a small percentage of the overall ERP market. Most SaaS applications are still focused on specific business needs, such as CRM, e-procurement and transportation management. But the Aberdeen survey detected a shift: More companies in the survey said they would consider a SaaS application for ERP than two years ago.
 
A different Aberdeen report found that the closer an application comes to the core planning and transactional elements of ERP, the lower the adoption of SaaS models. That sentiment was reflected in the MDM survey. Some respondents said they would not consider SaaS for ERP but would for other types of software.
 
"I'd like to say that I'm a big proponent of SaaS in the distribution context,"says Ross Elliott, chief technology officer for supply chain execution software provider Accellos. "But no one has yet proven that a distributor or any other business person is willing to give up total control of their financial information.
 
"The success stories in the SaaS world are those applications that are non-mission critical and require minimum setup and customization."
 
Because SaaS is still a little-known model of

software delivery for distributors, companies may look at implementing a SaaS option for niche services such as routing before considering it for their entire systems, says Chris Jones, executive vice president of solutions and services at Descartes, a software provider focused on transportation logistics.
 
"With traditional software, if it doesn't work, you're stuck with it," Jones says. "In the on-demand world, you can try it out."
 
SaaS-based ERP providers say they recognize that education on the potential benefits of SaaS in ERP applications is needed. "We spend a lot of time on the first and second calls with potential clients going through what SaaS is all about and the total cost of ownership with SaaS,"says Richard Sides, senior vice president for Ramco Systems Corp.'s ERP OnDemand North America. Ramco first developed an on-premise application, and then built its SaaS model for the small and medium-sized business market based on that product. It has recently begun targeting U.S. distributors with its OnDemand ERP.
 
Security Concerns
Distributor response to SaaS seems mixed in the recent MDM survey. Many said they want to retain control in-house, while others see benefits in having their applications and data hosted off-site, as they would with SaaS. Security and down-time are both concerns.
 
Don Waltzer, president of distributor H&C Tool Supply and Hewes Fastener Division, Rochester, NY, questioned the reliability of SaaS. "If we had a problem once a week with our ERP system I would have a protest march going on,"Waltzer says. "To bank the whole enterprise on the SaaS model is really risky in my opinion."
 
But Luke Bucklin, president of Sierra Bravo Corp., says technology is growing more reliable, citing the fact that we can now watch TV online. "The way we access computers today has evolved significantly,"he says. "Bandwidth has exploded over the past five years. A lot of the challenges SaaS presented us five years ago have been overcome."
 
The Aberdeen report addressed security concerns, saying on-premise operations may not be as secure as businesses think they are, and that as with any system, companies must conduct appropriate due diligence.
 
Steve Epner, founder of Brown Smith Wallace Consulting Group, says concerns about security may be misplaced when it comes to SaaS. "People are still afraid of the idea of somebody else holding onto their data," he says. "And yet, from a technology standpoint, it's not a big deal. You can secure it. You can encrypt it. The technology is there to protect you. People have to be careful that they're not worried about the wrong thing.
 
"In looking at Software as a Service, I would be less concerned with the security aspect, as long as I knew I was dealing with a quality vendor, and I would be more concerned with how does this fit into the processes within my organization?"BSW Consulting works with distributors in making decisions about technology. The firm publishes an annual Distribution Software Guide.
 
Total Cost of Ownership
SaaS is often touted as a solution for small distributors, though some SaaS-based providers have targeted the middle market.
 
Reynolds argues SaaS may not make economic sense for a small distributor. "In my niche it's not very workable," he says. About 80 percent of Reynolds'distributor customers have sales under $10 million. "SaaS has only become economical in much larger companies.
 
"The fact is it's not that hard to have a server in a closet someplace and enough cables around to have a network. It used to be a big problem. In a 10-person distributor, a guy who is a pretty good with computers is good enough. And if you have a good software company that can back him up, it works pretty well."
 
SaaS-based ERP provider NetSuite CEO Zach Nelson says that those who say that using an on-premise

application is, over time, the same price as an ongoing subscription to a SaaS product are discounting what it takes to manage an on-premise solution.
 
"You have to install it, you have to upgrade it, and you have hire people to keep it alive,"he says. "I think they are also discounting the notion of anytime-anywhere access. Those applications that are on-premise are notoriously difficult to access from outside the firewall."
 
At the end of the day, Nelson says, "If the guy that writes the software is responsible for running it, you're going to have much better software. It's going to be more efficient, and much cheaper."The company formally created a distribution-specific version of its suite of applications in 2004. Distributors make up about 25 percent of its customer base.
 
The Question of Customization
H&C Tool Supply's Waltzer wonders whether SaaS removes some of a distributor's ability to differentiate. "Every other distributor using that capability will have the exact same service offering. A critical component of marketing is differentiation, and systems allow us to differentiate by how we do things,"he says.
 
He's not alone. A distributor in the MDM survey said it expects SaaS "would probably be too canned,"as the distributor has "too many custom features."Another distributor echoed this: "We have too much that is designed or modified to our specific needs and wants."
 
With any SaaS model, a distributor can customize reporting. But opinions vary as to the extent to which a SaaS application can be a tailored to a distributor's needs.
 
Descartes'Jones says the customization concern should not keep companies from exploring SaaS for non-core business functions. "Businesses should focus their internal IT on the things that make them different as a company, especially for smaller to mid-size distributors,"Jones says.
 
"We have a product roadmap,"Ramco's Sides says. "We're constantly taking input from the market in terms of what we should adopt."But Ramco "resists"a lot of custom tailoring to its SaaS application, he says. "If we get clients that really require a lot of custom tailoring on the application then we introduce our standard on-premise application."
 
Elliott says the SaaS model does hold promise: "Give us 10 years, and I think things will change. Customers want the kind of autonomy to make the changes or to have the provider make the changes for them."
 
Bucklin also sees potential in SaaS -even for customization. "From a technical standpoint, there are no limitations to customization with SaaS. It's just a matter of how you configure it,"he says. "There's a movement called version control that manages software change. It has evolved over the past five years in levels we would not have dreamed of five years ago. The technology for software management will start solving problems with customization. SaaS clients will be allowed to have customized versions of the software that, with minor effort, can take advantage of feature upgrades to the core package."
 
New Market Entrants
SAP, Activant and other in-house software providers are starting to integrate Web-enabled, on-demand versions of their products into their offerings. SaaS requires a change in how traditional providers approach product development, according to some in the industry. Some of what they are offering is not pure SaaS but a hosted or hybrid solution that can provide some of the same benefits for smaller distributors.
 
Both Activant and Infor have shown interest and have developed models for smaller customers. "I think solutions need to become more turnkey in certain respects,"says Russ Mellott, vice president and general manager for Activant. "Distributors will need to be as efficient as they can be, with IT expenditures as razor-thin as possible while still driving the business."
 
"It is an area we are very much interested in."says Gary Rippen, Infor's director of distribution industry marketing.
 
NetSuite's Nelson believes that it will be difficult for traditional software providers to adapt their current offerings to a pure SaaS model. NetSuite has built its entire business on SaaS. "You never want to say that there is no competition,"he says. "But I believe we are in a very good position to meet the needs of distributors in the future."
 
Rod Winger, Epicor's director of product marketing, says Epicor is well-positioned to compete in the SaaS market. "Our Epicor 9 product is completely designed for a SaaS deployment while still having an in-house option,"Winger says. The SaaS option will be available in the first quarter 2009.
 
Karen Lynch, SAP's vice president of global wholesale distribution, says SAP is taking a different approach. "I don't think the industry in totality will shift to SaaS. I think there will be more of a balance, maybe a 50-50 mix between SaaS and in-house applications,"she says.
 
Lynch says SAP is working to develop a "master distributor"model -a hosted solution as opposed to SaaS. The "parent"company would host the SAP package for branches or partners to access.
 
Sage Software is approaching SaaS more cautiously. "We do have plans to pursue a SaaS offering but it could also backfire on everyone,"says Scott Pugmire, senior vertical industry manager for Sage. "We're not just assuming it's going to be the model in 10 years. We've started in that direction but we haven't put 100 percent of our resources into it yet."
 
Niche Services
Some companies like Descartes have developed Web-enabled options for distributors to fill specific needs, including routing, billing and sales force automation.
 
BillTrust -a company that provides billing and invoicing services -doesn't see itself as a software company, according to Mitchell Rose, vice president of marketing. Instead, it sees itself as a services company. "It's not like software where the customer has to install anything on their end. Almost all our tools are Web-based, and we're managing it on our end,"Rose says.
 
BillTrust's online archive and retrieval system allows customer service representatives at any site in an organization to access any invoice that has been sent to customers.
 
"Almost half of all the customer service calls received are related to billing,'"Rose says. "We developed this product to make it even easier for reps to answer those questions."
 
Improved communication was also the driving force behind the development of Tour de Force, a customer relationship management and sales force automation software package that operates within Microsoft Outlook.
 
Matt Hartman, president and CEO of MRH Technologies, developed Tour de Force to fix the "disconnect"he saw between the operational side of selling and the transactional side of selling.
"If an outside salesperson generates a quote for a customer and that customer then calls an inside salesperson to ask questions or place an order based on that quote, the inside salesperson doesn't have to hunt down the outside salesperson to get the information,"Hartman said. "There's more rapid access to customer communication."
 
Making the Decision
Technology is constantly changing, and one of the challenges distributors and software providers face is to balance the present with the future.
 
Industry experts say that whether an application is SaaS-based or hosted on a distributor's server in-house, distributors should look at whether that application fits with their overall goals.
 
Many distributors buy technology and view it as a cost of doing business rather than a strategic tool to facilitate their business model, according to Elliott. Elliott offered up this analogy: "If I'm out in the rain and looking for shelter, a tent looks good until the rain stops. When the rain stops, I see the house that I could have had.
 
"Think about where you want to be five years from now, and have a trusted advisor help you map that out. Make sure that technology you invest in is consistent with your corporate strategy."