Software as a Service Offers Broadening Appeal for Small and Medium-Sized Discrete Manufacturers

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1 Software as a Service Offers Broadening Appeal for Small and Medium-Sized Discrete Manufacturers WHITE PAPER Sponsored by: SAP Simon Ellis November 2010 IDC MANUFACTURING INSIGHTS OPINION Software as a service (SaaS), sometimes referred to as "software on demand," is becoming an increasingly effective and popular way to implement various manufacturing business applications for small and medium-sized discrete manufacturers. In many cases, the appeal is driven by the positive aspects of total cost of ownership (TCO) for a SaaS implementation versus an on-premise installation, but there is also a growing recognition of the agility SaaS provides in terms of either the speed of an initial implementation or the ability to quickly consume upgrades and functional enhancements. There is little question that SaaS is becoming well established as a way to deliver business applications. According to IDC Manufacturing Insights research: Over 50% of all manufacturing companies are currently using some form of hosted application. When manufacturing companies are considering a new IT application, a hosted application is evaluated as an option more than 75% of the time. TCO remains the most visible benefit, with speed of initial implementation and the ease of adopting subsequent functionality enhancement adding to the appeal of SaaS. Adoption of enterprise-level tools is increasing, especially among small and midsize manufacturing companies, with growing interest from divisions or subsidiaries of large enterprises and even companywide. Enterprise-level applications delivered as a service appeal to many small and midsize manufacturing companies, where limited IT resources, outsourcing, or employees with multiple functional roles can make on-premise applications less appealing. November 2010, IDC Manufacturing Insights #MI225768

2 Current IDC projections are for an annual SaaS growth rate of 7% in the period 2010 through 2013 versus 4.8% for the three-year period prior to the global recession. This white paper looks at the growing applicability of SaaS for a broad range of manufacturing business applications and the benefits that can accrue to small and medium-sized manufacturers. Furthermore, our manufacturing clients that have deployed SaaS can demonstrate that a hosted option can drive significant cost savings, reduce initial implementation times, and bring new functionality with relative ease and convenience. SITUATION OVERVIEW Challenges Facing Small and Medium-Sized Manufacturers Although large manufacturing companies have done a generally good job of adopting enterprise IT tools, their small and medium-sized counterparts are a step behind, resulting in capability gaps and a high level of manual processes or spreadsheet use. On the heels of the global recession of the past two years, IDC Manufacturing Insights sees even less of an appetite and budget among small and mediumsized business (SMB) IT leaders for major systems implementations. In this context, SaaS alternatives are growing in appeal. IDC Manufacturing Insights sees even less of an appetite and budget among SMB IT leaders for major systems implementations. In this context, SaaS alternatives are growing in appeal. SMB manufacturing organizations face a number of pain points in terms of their current IT application implementations. Based on our conversations with both IT and line-of-business executives, we have identified the following issues: 1. Cost is a huge issue for SMB IT organizations. Reduced or even eliminated IT budgets, along with climbing maintenance costs for traditional IT implementations, are causing companies to look for alternatives. In addition to these "obvious" costs are the less obvious ones like the cost of the staff necessary to manage information systems and datacenters, the energy and space required for a modern datacenter, and the capital investment in physical hardware and communications equipment. 2. The lack of visibility or access to critical business information is another issue. Due to the high level of manual processes or spreadsheet use, SMB manufacturers struggle with having timely, accurate information available to make critical business decisions. 3. In many cases, SMB companies may not have the IT infrastructure necessary to support on-premise applications, necessitating the use of hosted capabilities: The choice becomes SaaS or nothing. Page 2 #MI IDC Manufacturing Insights

3 4. The speed of both the initial implementation and subsequent functionality enhancements is critical not just for cost and resource limitations but also for the ability to adapt rapidly to changing business conditions. 5. Accessibility and visibility to company's data is another issue that SMB IT organizations struggle with, particularly with the increase of outsourcing, virtual workplaces, and remote employees. 6. Although the ease of use of IT tools is important for all manufacturing organizations, it is particularly critical for SMB manufacturers that have very limited training budgets and often employees with multiple roles. The Maturing of SaaS: Providing More Options to Manufacturers In a typical "on-premise" software implementation, the software vendor sells a packaged license that the manufacturer installs and maintains on servers within an owned datacenter. The manufacturing company then owns the following responsibilities: Paying the initial license fee, some level of installation/integration cost, and an annual maintenance fee Maintaining regular cycles of buy and replace for hardware, along with the software infrastructure (e.g., DBMS and OS) and personnel costs in the datacenter There may be variations of this basic model in which the software vendor (or third-party service provider) runs/hosts the application on its own servers within its datacenter and provides access via a secure subscription process. The SaaS model lessens the responsibilities placed on the manufacturer, allowing it to focus on the core competencies of its manufacturing company. But first we should clearly define some of the terms required to understand the options in as-a-service offerings (see Table 1). We should also recognize that as SaaS matures in the marketplace, so do the definitions. The SaaS model lessens the responsibilities placed on the manufacturer, allowing it to focus on the core competencies of its manufacturing company IDC Manufacturing Insights #MI Page 3

4 TABLE 1 As-a-Service Definitions Hosted Software as a service Cloud computing An application that sits on an external server, in a single-tenant environment An application that is hosted, but in a multitenant environment Delivery of infrastructure or IT platform Source: IDC Manufacturing Insights, 2010 The delivery of either hosted or SaaS applications may use the cloud, but these applications are not, in and of themselves, the cloud. It is also important to point out that as-a-service offerings exist in two distinct forms: single-tenant and multitenant. There is little question that SaaS is well established as a way to deliver business applications. Based on our research, over 50% of manufacturing companies, regardless of size, are using hosted applications, with another 35% now considering it. Current IDC projections are for an annual SaaS growth rate of 7% in the period 2010 through 2013 versus 4.8% for the three-year period prior to the global recession. As SaaS adoption increases, the tools and applications available are also maturing. The depth and breadth of functionality available through SaaS is increasingly competitive with that of traditional applications. Indeed, SMB IT leaders are recognizing that SaaS applications can be just as robust, and secure, as traditional vendor offerings. Based on our research, over 50% of manufacturing companies, regardless of size, are using hosted applications, with another 35% now considering it. A SaaS alternative also fits nicely within the changing view among manufacturing supply chain organizations of moving toward a variable cost structure rather than a fixed cost structure as a way to respond to market and sales uncertainty where capabilities can be easily scaled (both expansion and contraction) based on unanticipated business changes. This notion of market uncertainty creating the need to have flexibility at a design level in terms of both physical supply chain capabilities (outsourced versus owned manufacturing facilities) and IT capabilities (on-premise versus hosted) makes SaaS a very compelling option for SMB manufacturers. Benefits of SaaS to Small and Medium- Sized Manufacturers As SaaS applications mature in the marketplace, the benefits and trade-offs have become clearer. Yet a number of misconceptions and "half-truths" persist in the marketplace and bias the ultimate decision to purchase an IT application potentially to the detriment of that decision. Page 4 #MI IDC Manufacturing Insights

5 SaaS Is More than Just Implementing Cost Savings Although the cost of an application implementation is not, and should not, be the sole consideration, it is often the starting point and the place where a conversation can come to a quick end. The full cost advantage must consider more than obvious cost savings related to onpremise license fees for the application and upgrades as well as maintenance costs. The financial analyses should also account for many of the "hidden" costs, such as: The cost of additional hardware required to run the application along with the personnel required to maintain the equipment and the application Implementation costs (on top of third-party systems integration) accounting for the contributions of (and opportunity costs of) key internal personnel The cost of security, backups, and disaster recovery IT staff and infrastructure Particularly in the current economic climate, where business conditions for SMB manufacturers are unparalleled in their unpredictability, SaaS can offer a level of speed and adaptability that is enormously helpful to manufacturers that are growing and need a business solution that can quickly adapt as the company grows. Upgrades and functionality enhancements are also issues that SaaS can ease. There is little question that SMB companies are delaying the refresh rates of IT systems, both to postpone capital expenditures from up-front licensing fees and replatforming and to avoid the inevitable business interruptions and risk due to long implementation timelines. A similar dynamic occurs on a smaller scale with version upgrades. There is an opportunity cost associated with extending refresh cycles, and while it can be difficult to quantify, it may manifest in terms of lagging capabilities, poor agility, and inability to react quickly to changing business conditions. SaaS can offer a level of speed and adaptability that is enormously helpful to manufacturers that are growing and need a business solution that can quickly adapt as the company grows. The last point we would like to discuss is the notion of accessibility or "ease of use." As SMB manufacturing companies outsource operations and move to supply networks that are increasingly distributed, the challenges of system access for remote or virtual office employees become more acute. While to date these issues have been at the forefront for sales, marketing, and supplier system tools, the problem also looms for enterprise-level tools such as planning, MRP, and logistics. The need for easier access to key applications along with reduced training requirements, built-in education capabilities, and reduced support times can be a fundamental advantage for SaaS delivery IDC Manufacturing Insights #MI Page 5

6 Evaluating the ROI: Making Robust and Feature-Rich Applications Affordable Given the benefits of IT applications delivered via a SaaS model, how should SMB manufacturers proceed? Certainly we have seen adoption of SaaS applications driven by company size and IT sophistication. SMB companies have been the most enthusiastic consumers of SaaS applications to date. In the past, these companies had to overextend their budgets with a big capital investment in on-premise software, or they would buy an inexpensive, no-frills solution that allowed them to get by. The SaaS delivery model is a new alternative that is making robust and feature-rich applications affordable to these companies. Indeed, based on IDC spending data, we see opportunities for ERP via SaaS across a broad range of company sizes and IT sophistication. Companies at the lower end of the scale (with less than $100 million in revenue) are often living without capabilities like disaster recovery or adequate security measures. For these companies, IT application delivery via SaaS can offer both a reduced total cost of ownership versus on-premise and valuable additional capabilities. Midmarket companies (with $100 million to $999 million in revenue), while likely to have more extensive internal IT resources, may still be operating without some of the capabilities that larger companies have and, given their business complexities, are still ideal candidates for IT applications delivered via SaaS. At some point, the size of a company may tip the TCO (variable versus fixed costs) balance back in favor of an on-premise implementation, as we illustrate conceptually in Figure 1. FIGURE 1 Conceptual SaaS Savings as a Function of Company Size 30 Point of Diminishing Returns SaaS Savings 0 10M 250M 1B 20B Company Size ($) Source: IDC Manufacturing Insights, 2010 Page 6 #MI IDC Manufacturing Insights

7 However, given the potential benefits to a SaaS deployment in both cost and capability, we believe the accruing benefits are usually understated. Our discussions with manufacturing CIOs often reveal that ROI or net present value calculations use less mature and incomplete economic cost models, loosely based on the following: (# of users * subscription fee) >=< (annualized cost of license fees + maintenance) The other important note is that this less mature view of economics is based on a prerecession paradigm. IDC Manufacturing Insights expects that as SaaS matures, the benefits will become clearer and more comprehensive, and the adoption of variable cost structures will also drive higher adoption levels of SaaS. Consequently, we may well see the curve in Figure 1 broaden to include a larger range of company sizes. The final point about cost relates to the value of speed. The current SMB marketplace, particularly in manufacturing, is experiencing levels of volatility unparalleled in most of our working lifetimes. For these companies, protracted IT implementations are no longer acceptable either because they cannot afford to dedicate resources to the project for long periods of time or because market changes will require more adaptable tools. It is difficult to quantify these benefits in terms of pure cost, but they must be considered as part of the overall business decision. FUTURE OUTLOOK Clearly, SaaS applications are maturing. Manufacturers that either are using SaaS applications or plan to use SaaS applications in the next year have grown considerably over the past few years, suggesting that the barriers to adoption either real or perceived are being overcome. Although at IDC Manufacturing Insights we see a bright future for SaaS across a broad range of application areas and company sizes, SaaS is particularly appealing for SMB companies. The adoption of applications delivered via SaaS is replacing either tools that are not purpose-built or nothing at all. Based on client interactions, IDC Manufacturing Insights estimates the mix illustrated in Table IDC Manufacturing Insights #MI Page 7

8 TABLE 2 SMB Companies Moving to SaaS Percentage Replacement of 35% Spreadsheets or manual applications 30% Homegrown applications 20% NetSuite, Microsoft, etc. 10% On-premise applications 5% Other Source: IDC Manufacturing Insights Client Discussions, 2010 SaaS vendors come in all shapes and sizes today, including small to medium-sized software vendors as well as large industry players. But not all SaaS vendors are created equal. Factors to consider when evaluating vendors include: The ability to scale to demand without interruptions in service An implementation that can deliver the expected savings and the required business capabilities A clear plan to manage risk in terms of both disaster recovery and security breaches for business continuity Completeness of the solution to meet all your business requirements These factors become increasingly important as companies rely on a SaaS delivery model for enterprisewide applications. Companies must conduct an appropriate level of due diligence to ensure the vendor meets all of their business needs, from functionality to service levels and security. Leading SaaS vendors will be able to provide examples of how they can address these requirements, and their ability to do so is why adoption continues to grow. Pay close attention and make sure the SaaS vendor has the infrastructure and business practices in place to ensure your business systems are in reliable hands. Our research shows that manufacturing companies are much more open now to considering SaaS as a delivery option, viewing it as an increasingly competitive and viable option. Table 3 illustrates the changing perceptions of manufacturers of all types and sizes and their willingness to consider SaaS. When considering SMB manufacturers only, we expect as many as 90% are seriously reviewing SaaS in Total cost of ownership is driving many of these perceptions. As we have outlined, in the right circumstances, SaaS can drive significant savings. When considering SMB manufacturers only, we expect as many as 90% are seriously reviewing SaaS in Page 8 #MI IDC Manufacturing Insights

9 TABLE 3 Technology Buyers Consider SaaS Alternative SaaS as an Option On-Premise Only % 25% % 55% % 85% Source: IDC Manufacturing Insights Client Discussions, ESSENTIAL GUIDANCE Application delivery via SaaS is now a well-established alternative for delivering business applications and IT tools, particularly for small and medium-sized manufacturers that are increasingly using enterpriselevel applications via SaaS. For many of these smaller manufacturers, SaaS offers the only practical option for the implementation of enterprise tools. Based on our conversations with SMB companies, economic results are positive. While we caution SMB users to look broadly at benefits, the cost associated with SaaS is generally very positive, and most companies report either meeting or even exceeding expected savings. SaaS is particularly compelling where: Company growth requires a solution that will grow and adapt with company needs An on-premise implementation is not feasible Business or transaction volume is either variable or unpredictable Speed of deployment is critical The ROI of an application implementation may be difficult to calculate Capital expenditure budgets are constrained In-house IT staff/skills are either limited or required for alternate tasks 2010 IDC Manufacturing Insights #MI Page 9

10 There is a need to support rapid growth and/or a flexible supply chain. As SMB technology buyers investigate SaaS options versus onpremise installations, IDC Manufacturing Insights recommends keeping six key points in mind: Clarity around key functionality. Don't expect less from a SaaS offering. Ensure that the selected application is adequately robust and scalable and satisfies your business needs. Understand the economics. Understand how usage fees are generated and the contract length. Know if you can easily scale usage up and down without any assessment of penalty fees or compromises in performance. Implementation timeline. Be specific on the duration of the initial implementation process and the internal resources required and for how long. Ease of use. Know how easy the tool is to learn and use and whether it has embedded educational/tutorial functionality. How secure is my data? Do the due diligence necessary to ensure the robustness of the security provisions and disaster recovery capabilities. New product capabilities. Determine how new functionality is added and if it will be available to the business when you need it. Lastly, and in many ways most importantly, remember that not all SaaS vendors are created equal. As we have pointed out, SaaS is a maturing capability. Make sure to select a vendor that brings experience, manufacturing best practices, and a good reputation for working effectively with manufacturing companies to ensure business benefits, scalable growth, and business continuity. Copyright Notice Copyright 2010 IDC Manufacturing Insights. Reproduction without written permission is completely forbidden. External Publication of IDC Manufacturing Insights Information and Data: Any IDC Manufacturing Insights information that is to be used in advertising, press releases, or promotional materials requires prior written approval from the appropriate IDC Manufacturing Insights Vice President. A draft of the proposed document should accompany any such request. IDC Manufacturing Insights reserves the right to deny approval of external usage for any reason. This document has been reprinted by SAP with permission from IDC Manufacturing Insights. Page 10 #MI IDC Manufacturing Insights

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