In early July, general manager Nick Lindhop hopes to unveil a set of tools that will drive an era of unprecedented growth at British specialist chemicals manufacturer Pentagon Chemicals Ltd. He will introduce an entirely new online, on-demand business platform across the €55 million ($85.5 million) company.
Pentagon, which produces base chemicals for the agribusiness and pharmaceutical intermediaries at two sites in the United Kingdom, will become one of the earliest European manufacturers to go live with SAP’s new Business by Design service — delivered almost entirely over the Internet as software-as-a-service (SaaS).
“Building software platforms is not our strength,” Lindhop says. “Our strength is in chemical processes, product development, and manufacturing in a safe way, but we rapidly need a new technology platform that helps us compete with large organisations and Asian companies. We need better information, better visibility, and a better grip on our supply chain. We need it quickly.”
Pentagon is just one of many fast-growth European small and medium-sized manufacturers and established global corporations now trialling the SaaS delivery method as a fast-start option for new IT applications.
The promise of SaaS seems appealing — ready-made business applications on demand, online, with minimal up-front investment, all the hassle of security and updates taken care of by the supplier, and ready to roll in weeks rather than years. Well, that’s the theory.
It isn’t always that simple — especially when you’re trying to run your online SaaS platform across many countries.
“One tip that I would give everybody, and we found this out only in the middle of our rollout, was that the Internet infrastructure in some parts of the world is not as advanced as we thought,” says Ulla Hiekkanen-Mäkelä, assistant vice president of strategic customer management at the world’s fourth-largest lift maker, Kone, in Espoo, Finland. “We had to do a full technical evaluation of our own servers across the world,” she says, “[and] then some corrective action to solve the problem. It’s a prerequisite for this stuff.“
The €4 billion ($6.2 billion) elevator and escalator company has used SaaS-based applications from SaaS pioneer Salesforce.com to support its global CRM activities for over a year. It’s a substantial operation — supporting 2,000 users serving a global customer base with 800 service centers in 43 countries.
Hiekkanen-Mäkelä says the effort has certainly been worthwhile. “Moving from product sales to customer service management has definitely been one of the key benefits that we have seen as a manufacturing company. With the SaaS approach we were able to concentrate on the business change and the process change, rather than running this as an IT project. We could scale the system week by week on rollout, and someone else took care of all the security settings, backup, and duplications, so we were able to focus on the business implementation with only a small IT team,” she says.
Overall, Kone estimates, the move has saved the business five months of IT development and will hit ROI within three years. “SaaS is good if people have a clear process in mind and want to get a very quick start — and they don’t want to develop something from scratch,” she adds.
‘Fast start’ appeal
That fast-start, low-up-front-cost appeal of using SaaS to supplement core systems is driving adoption among European manufacturers, according to industry analysts IDC.
In a recent survey covering SaaS spending plans across 2,000 European companies in France, Germany, Italy, Spain, and the United Kingdom, more than one-third said they intend within the next 24 months to invest in SaaS for replacing or supplementing the functionality of existing ERP and CRM solutions.
Report author Bo Lykkegaard, program manager for European enterprise applications at IDC in Denmark, concludes: "We believe SaaS spending will be directed at new applications and at replacement of broken applications, rather than at ripping out and replacing working solutions. European organizations seek to leverage the SaaS delivery model to reduce risk, complexity, and up-front costs of new IT initiatives. It is much more about co-existence rather than replacement."
That is true unless you take up one in the new wave of SaaS offerings, such as SAP’s Business by Design (BBD), that promises a full online ERP platform, as Pentagon is doing.
Having launched BBD last year in a flurry of SaaS optimism, SAP has since scaled back its global rollout as real-life practicalities emerge. Currently available in only six countries, the software is taking longer to implement, costing SAP more in sales support than the company would like, and reportedly suffering a few performance problems.
“The approach is unique in the industry,” SAP co-CEO Léo Apotheker told delegates at the company’s recent Sapphire event in Berlin. “We are not just bringing one aspect, like CRM. We are bringing a full end-to-end business suite. So the challenge — and the opportunity — is larger.”
German capacitor manufacturer WIMA in Mannheim, Germany, knows all about the challenges. The company has been one of the first manufacturing test sites for BBD since July 2007. A privately owned company, WIMA produces capacitors for automotive, consumer, industrial electronics, and lighting customers, including Bosch and Siemens.
The BBD HR module has been running since September 2007, but the rest of the system — SCM, SRM, CRM, and project management — is not yet live.
“The problem in the beginning was that we had a very fragmented IT structure,” says Frank Herrmann, internal business consultant at WIMA, who has worked closely on the pilot SAP system. “Each production side had its own software for each area at three different sites. We needed to install a new network, found that some data was not digitised, had to develop new article codes, and now we are trying to adapt processes to fit the BBD system. That’s the biggest challenge for user companies — and for SAP.”
Processes need adapting
Pentagon also found that it has needed to rethink its internal structure in preparation for the move to SaaS, but company management see that as a good thing.
“The process has acted as a very good vehicle to shake our business down and help us analyse ourselves,” Lindhop says, “We have already made some significant improvements along the way. It has standardised process between the two sites, given us synergy across the group, and will give us real-time visibility about what is going on in the undergrowth.”
Managing rapid growth is fundamental to Pentagon’s SaaS choice. Three years ago, it posted a loss of €2.4 million ($3.7 million) and was close to collapse. Now it is heading for a €4.8 million ($7.5 million) profit and has just been short-listed for four U.K. Chemical Industry Association Awards.
“The legacy system we inherited has hindered our ability to produce online, real information to help us drive the business forward,” says the company’s financial director, Gill Jacks, “and we believe there will be significant savings using SaaS in the amount of effort currently involved in producing useful management information.”
“But we are not being driven by financial issues, nor looking to take out fixed costs,” Lindhop adds. “We are looking to streamline our business processes to enable further improvement and drive our growth strategy.”
So there are benefits both in practice and on the horizon for companies embarking on an SaaS journey, as long as they realise that real-life implementation can mean extensive internal preparation, possible process change and restructuring, extensive data consolidation, and probably a network refit before they can hope to make it work.
SaaS to MaaS?
What’s more, there are number of limitations now emerging for SaaS in deeper manufacturing operations. The supplementary approach, such as bolt-on CRM, or the fast upgrade replacement, as in Pentagon’s case, are both operating at a business information level. When you dig deeper into manufacturing processes themselves, SaaS is still at a very early stage. A move from software-as-a-service to manufacturing-as-a-service (MaaS) is highly unlikely for a while.
“The easiness is making us consider the SaaS model in other areas of the business, “ says Kone’s Hiekkanen-Mäkelä. “We plan to take on other applications on the Salesforce.com platform and develop a set of integrated applications. How far we go into this is difficult to say. I can see that some manufacturing solutions and ERP solutions are so stable and long-term that you really want to secure that knowledge in-house.”
“You don’t take your MRP application or your manufacturing execution application or inventory management application and say, ‘Let’s try SaaS.’ That’s not how it is adopted,“ IDC’s Lykkegaard says. “The whole SaaS delivery model is certainly spreading from area to area — into security, systems management, supply chain management — so it is moving closer and closer to the core of the manufacturing process. But when you get down to execution systems, CAD and CAM are very data-intensive, really workstation-heavy, and processor-intensive, so these might not be the best candidates for software-as-a-service running over the Internet.”
Adam Jura, the Sydney, Australia-based author of a new global report from Datamonitor, “Delivering Software as a Service to Manufacturing Companies,” stresses the need for greater vertical adaptability if SaaS is ever going to penetrate deeper into manufacturing companies.
“From a manufacturing point of view, production is the core competence and there is a general reluctance to relinquish components of that core competence to an external provider,” Jura says. “It is just not happening among internal processes much yet in a production environment.”
“That’s not to say it won’t in the future as manufacturers move away from fixed cost, legacy IT systems to subscription-based solutions. But you really do need to have, at some level, specific industry functionality and specific general functionality combined to make it work. It isn’t there yet. So ‘configuration, configuration, configuration’ should be the mantra. If you can choose a specific configuration to adapt the package to suit your manufacturing business processes, then you have an effective solution.”
“I think most European production environments will take three steps back before adopting an SaaS approach at this stage,” he concludes.