When Scott Baxter founded SA Baxter Architectural Hardware in Chester, NY, almost three years ago, he reluctantly purchased a top-of-the-line enterprise resource planning (ERP) system. Feature shortcomings weren't his concern; rather it was the up-front investment in servers and software licenses that troubled the start-up CEO. "We went kicking and screaming" when it was time to pay for the software license, Baxter says.
His company manufactures custom architectural hardware, including the ornate door knobs and hinges that now adorn a new luxury hotel in Beijing. Previous jobs in high tech and finance had introduced Baxter to software subscription models that allowed companies to pay for essential programs for a set monthly fee without installing their own hardware to run the applications. But Baxter couldn't find an acceptable ERP program that adopted this software as a service (SaaS) model until a year after his company opened for business.
Baxter calls the interim period a disaster. "I needed big-company functionality, and I'd find myself outgrowing [the purchased ERP program] on a weekly basis," he recalls. "So I would have to call my local developer to customize the program to my requirements, and I would get bills that were ridiculous."
Baxter says he relieved his angst once he found a comprehensive ERP and manufacturing application suite called GSInnovate from Glovia Services. His IT costs have shrunk by half as he taps into the ERP features he needs to support a business that will "shortly hit tens of millions" in revenue.
"As a young, high-growth business, we're the ultimate customer for SaaS," Baxter says. "It allows us to invest [in anticipation of growth] without writing the check up front. I can't understand why anybody in their right mind would buy software unless they have to."
SMB Attraction
A growing number of SaaS ERP vendors are scouring the market for companies like Baxter's. Small and mid-size discrete manufacturers with revenue of $15 million to $500 million have become the SaaS market sweet spot for Glovia, Plexus Systems, and NetSuite Inc. Even large, packaged ERP companies, such as Oracle Corp. and SAP AG, have announced plans to offer subscription-based software to small and mid-size businesses (SMBs). SAP, for example, is developing from scratch a new on-demand ERP system, dubbed A1S.
"From an ERP standpoint, SaaS is an intuitive and attractive alternative for smaller companies," says Cindy Jutras, vice president of ERP research at Aberdeen Group.
With SaaS, aka on-demand, manufacturers link into remote ERP, supply-chain management, manufacturing execution system (MES), sales force automation, and other important applications using Web browsers and Internet connections protected by the Secure Sockets Layer (SSL) Web protocol and virtual private networks (VPNs). SaaS differs from a related approach known as hosting, where a software company or third-party service provider manages hardware and software owned by the customer at a remote location.
The key difference between the two choices is SaaS' "multi-tenancy" structure, in which vendors run one version of the application and divide up the costs of software, databases, servers, and storage among all of their customers. In turn, SMBs pay subscription prices that are significantly lower than for software licenses.
But SaaS application prices can vary markedly. For example, NetSuite charges $479 per month, plus $99 per user per month, for access to its collection of CRM, ERP, and e-commerce applications. Thus, a manufacturer with 20 users would spend about $30,000 per year. "That's versus several full-time equivalents and all the IT investments," says Sean Rollings, senior director of product and industries marketing for NetSuite.
SaaS customers can also avoid pre-installation costs for consultants and training for in-house IT workers to maintain the application, says Bill Lyons, vice president of Glovia. Ongoing GSInnovate fees for 20 users are $10,000 per month, or $120,000 per year. "They don't have to do backups or be responsible for recovery, security, patches, or fixes. All those headaches go away," he says.
"Software licenses are not typically the biggest expense; consulting and training can be three to 10 times what the software costs," Lyons adds. "Our approach is there's no license agreement, and there's the opportunity to cancel on a monthly basis. We take risk out of it."
But SaaS users need to consider more than just the monthly subscription costs. Lyons estimates that manufacturers can typically launch the GSInnovate manufacturing suite in less than 90 days. During this time, companies might pay $30,000 to $60,000 in prep work, which includes converting customer data into formats compatible with the applications. Data migration costs vary for NetSuite, but start at $1,500 for up to 50 MB of QuickBooks data, Rollings says.
SaaS implementations promise first-year savings of about $180,000 for a mid-size company, compared with purchasing and launching on-site ERP, according to an ROI analysis conducted for Glovia by consultant David Caruso, a former AMR Research executive. Savings over four years for SaaS approach $600,000, the analysis found.
Because SaaS is still relatively new, long-term savings are difficult to pin down and may not be as dramatic as when companies first pull the plug on their in-house systems, says Simon Jacobson, senior research analyst at AMR Research.
But Aberdeen's Jutras adds that future economic benefits are possible. "One of the ongoing savings is realized when companies have a problem recruiting and retaining IT people," she explains. One company reported that it couldn't keep IT people for more than a year, she adds. "[The company] would just get them up to speed and they would go to greener pastures."
Another long-term attraction for SaaS is predictable expenses as technology advances. "In an on-demand model, [companies] are more likely to stay current with enhancements and innovation," Jutras says.
ProSoap Inc. has been using NetSuite's SaaS offering since 2002, primarily for its CRM capabilities. "It allows us to follow up with customers usually within a week of when they are going to run out of their supply," says company President Billy Self. "We are able to bring up a list of the 100 to 150 customers we need to follow up with daily, and sort it by region so we're not wasting time pulling up records in the wrong time zone" for a particular time of the day.
Best of all, the SaaS approach enabled the company to jettison an old, custom-built CRM application that cost $200,000 in annual maintenance fees and salary for an IT person to run it. "We wanted to get away from having servers on our site that kept crashing," Self says. "We were spending half our time managing the servers that held our customer records. Now we concentrate on selling more soap."
Results like this could spur large companies to consider SaaS. "The thinking has been that larger enterprises would always choose a conventional licensing model, but that's changing as several large organizations are becoming comfortable with SaaS because of companies like salesforce.com," Jacobson says. (Salesforce.com offers a sales force automation application.) "Larger companies may find SaaS useful for fast-track deployments, especially for their smaller, autonomous business units."
Red Flags
Despite these potential advantages, SaaS isn't for every manufacturer. "ERP [users] have been one of the last bastions to resist the software-as-a-service model," says Jutras. Stumbling blocks have included uneasiness over trusting a core business application like ERP to an off-site service provider. Security concerns about sending sensitive data over the Web also stalled acceptance, she says. However, maturing SaaS ERP applications over the past three years and successful Web-based versions of CRM and supply-chain applications have lessened these fears, she adds.
"Companies were willing early on to look at extensions to ERP that used the software-as- a-service model. The supply-chain area was one of the first [to support SaaS], as was warehouse and transportation management," she says. "These were viewed as a lower-risk way of extending ERP, and it didn't require in-house resources. The only risk was the monthly fee that they were paying. So some of the walls are breaking down."
An Aberdeen survey released earlier this year found that 10% of the manufacturing and services companies polled considered SaaS a viable answer to complicated ERP implementations. "I'm expecting this number to start to grow," Jutras says.
Manufacturers also balked at the abridged versions of ERP applications available via SaaS, as software vendors decided to offer only the modules they believed were of greatest interest to SMBs. "Glovia and Plexus are both full-function ERP, but do they have every last module and feature of an SAP? No," Jutras says. However, she says, reduced features also decrease the complexity of applications that some companies find unwieldy.
The multi-tenancy strategy may not work for every manufacturer, AMR's Jacobson warns. "You are going to get what everyone else gets. The challenge comes when the customer wants to tailor some specific workflows," he says. "How do those workflows get supported when everyone is consuming essentially the same application?"
Vendors counter that the tailoring most customers ask for doesn't impact the core applications. "Most modifications are for reporting, so we have sophisticated ad-hoc reporting tools," Lyons says.
Others argue that SaaS offers greater flexibility than packaged applications for SMBs that want to establish links to global suppliers. "We have supply chain capabilities in our product and a multi-language interface into the database, so a Chinese supplier can enter data in Chinese while an American customer is looking at the same information with an English interface," says Mark Symonds, CEO of Plexus. "All the Chinese supplier needs is a Web connection to be able to get to the application."
Manufacturers that are happy with their on-premises ERP system can extend its capabilities by adding shop-floor components and other modules using a hybrid SaaS approach, he adds. "We use XML to transfer data [between the two systems]. It's real- time, lightweight, and it's becoming the industry standard," Symonds says. Plexus can exchange data in batches at pre-set times if the legacy application doesn't support XML, he adds.
SaaS providers say that multi-tenancy can be a faster way to deliver updates and important modifications to an application than the traditional six- or 12-month version releases that come with packaged software. "The customer has to plan for the upgrade and evaluate whether the upgrade even makes sense," Symonds says. "With true on-demand, you are running the latest version all the time. Any customizations are automatically brought forward into the latest version of the software."
Security is an ongoing SaaS concern, Jacobson says. Although there haven't been reported data breaches associated with a multi-tenancy ERP application, any breakdown would grab headlines and renew security concerns, he says.
Finally, SaaS offers only limited choices for process manufacturers as service providers focus primarily on discrete manufacturing. "Not a lot of process solutions are downward-scalable to the SaaS model," Lyons reasons.
Future Security
Nevertheless, Baxter remains happy with his SaaS ERP choice. "I'm getting massively more functionality and scalability," he says.
He appreciates having an outsider handle the security and availability chores required by large applications — tasks that otherwise might not receive the full attention of his growing company. "They have a disaster recovery plan in place, and their systems are backed up on a daily basis. A company of my size could never implement true disaster recovery because it is terrifically expensive," Baxter says.
SaaS also gives SA Baxter advantages over one competitor that still manually performs production scheduling and billing, and another competitor that, though much larger, uses the small-business application QuickBooks for finances. "They do all their quotations manually and they do their shop-floor control manually. My cost of production is going to drop as a result of being able to afford and invest in technology to monitor and manage [those areas]. These guys can't do that," he says.
And what about all of those bills for custom upgrades that used to sink his IT budget? Baxter is sanguine about the future. "Even if my company doubles in size, I just make a phone call for additional resources rather than reinvesting in new systems."