Software as a Service in Today s Supply Chain: The Business Case for EDI and Global Data Synchronization. September 2007

Transcription

1 September 2007

2 I. What Is Software as a Service? II. The 5 Ways SaaS Creates Value for Suppliers III. Evaluating Total Cost of Ownership a. Comparison of SaaS vs On-Premise Solutions for EDI and Global Data Synchronization in Supply Chain b. RedTail Solutions, Inc. Model IV. Total Cost of Ownership Estimator ( Microsoft Excel Model) I. What is Software as a Service? It is difficult to come across trade publications and articles in the IT world today that do not include references to Software as a Service (SaaS). It is also sometimes referred to as on demand because of the pay as you go price model. Albeit, less and less frequently, sometimes it is confused with the all but extinct ASP ( Application Service Provider) model of software delivery. Technically speaking, SaaS is software that has been designed and developed as a web-native application to be delivered as a service over the internet. Customers do not purchase and implement this software, but pay to use all or some subset of its functionality. Without any large initial investment and the complexity of maintaining it, a user can experience the same or even greater benefits as with licensed software that is operated on premise. The precursor of SaaS was the ASP, application service provider, who simply hosted a traditional client-server application on behalf of the customer. Every customer ran their own instance of the software on the Provider s server, just as if they had deployed it internally, amounting mostly to hardware and some support savings. The verdict on ASP is that it offers marginal benefits and cannot be easily scaled by vendors. Many software providers believe that simply porting their applications to a hosted version constitutes software as a service, but there is very little difference with the old ASP model. In contrast, SaaS applications are developed to leverage web services. They are built on multi-tenancy architecture meaning that many customers can run the same instance of the software, but with their own data. Unlike the ASP model, SaaS lends itself to commercial scaling since upgrades can be made to one code base and are available to all customers at once. They deliver deep functionality with very little maintenance.

3 Page 3 II. The Five Ways SaaS Creates Value for Suppliers The most value can be derived from using SaaS in areas that are mission critical, but not really strategic to a business. Typically these are areas where best practices have already been put in place and where new functionality may be needed such as ERP ( back office functions), messaging and CRM. Salesforce.com, the poster child not only for CRM but all of SaaS, is a good example of this and has invigorated the entire discipline. SaaS solutions are also emerging in supply chain space where a recent Aberdeen report 1 discusses benefits of SaaS that are similar to those found for CRM and these other areas. When compared to an on-premise system, SaaS can not only lower the total cost of ownership (TCO), but can also strengthen performance and competitive advantage: 1. Faster implementation can accelerate the recognition of ROI by 2-4X For many organizations initial cost is not so much a deterrent as having the right resources available for a new implementation when there are competing initiatives. Generally SaaS applications are easily configured to user requirements and can deliver as much or as little functionality as the user requires. This can be a huge advantage for young, fast growing companies whose speed to market advantage would be lost if all of their systems must be built from scratch. The same argument can be made for the large enterprise who needs to add new functionality to an existing system, or fill in gaps in an existing in-house application. 2. Fewer IT resources are needed to implement, operate and maintain Today hardware and software are no longer considered strategic assets and have become commodities that are targets for cost reduction. In terms of hard costs, there are no initial licensing fees for SaaS so the entry cost is low. There are recurring revenue fees that are based on number of user seats, subscription or transactions. SaaS applications use parameters specific to a business layered on a common platform enabling them to be implemented rapidly. Companies can create logic that supports their specific business processes. SaaS providers can maintain and update their network- based, standardized applications efficiently which in turn reduces the requirements of internal IT staff. 3. Can support unique business processes or compliance for selective product categories or channels. It is business processes and data from which workflows and customer information are derived, that have become critically important. SaaS providers have deep domain expertise in the serviced-based applications they develop and provide. They are designed to integrate with and support key business processes. A supplier s key customers ( trading partners) will dictate the business rules of a relationship, and it is up to the supplier to put the underlying business process and

4 Page 4 any required infrastructure in place to support it. For example one large customer may want to order by its own sku, another may use a UPC code for products. One may want to use a VAN for communication and the next will use AS2 connectivity. A trading partner may require that its supplier send products ordered at its web site directly to the end user, while stocking orders sent to stores follow a different process. SaaS applications can support these multiple business processes, eliminate the need for extra infrastructure and provide a supplier with a one to many business process that meets the requirements of all of its trading partners. 4. Flexibility to increase/decrease capacity quickly or facilitate migration to new systems Of course one of the major features of SaaS is pay only for what you use. In accounting terms this allows organizations to convert fixed costs to variable expenses. For growing businesses SaaS provides virtual unlimited capacity enabling them to react quickly to market opportunities. SaaS can keep mission critical functions going without interruption during major system upgrades or new implementations of core systems; and it can serve as an interim solution as legacy systems or business acquisitions are integrated. Finally using SaaS can provide insight into functional requirements necessary for on-premise solutions, reducing the risk associated with bad design or poor implementation. 5. Promotes better trading partner relationships SaaS applications are the ideal solution to support B2B collaboration between suppliers and key customers. Fast implementation, the ability to support multiple business processes of trading partners that change over time, strong vertical functionality with the incorporation of best practices, all serve to enhance business process integration between trading partners, and reduce costs for the supplier. III. Evaluating Total Cost of Ownership for Traditional Software Applications Vs Software as a Service The Software and Information Industry Association estimates that the annual cost to own and manage software applications can be up to 4 X the initial cost. 2 Industry analysts like Gartner and IDC have published research that shows 70-75% of annual IT budgets are allocated to the maintenance of existing systems. The different pricing models for on-premise versus software as a service solutions make apples to apples comparisons difficult at best. The basic characteristics for each model are summarized in Table 1.

5 Page 5 Table 1 Traditional, On-Premise Software Up-front licensing/evergreen support (own/maintain); often priced by seats Hardware ( Server types, number of CPUs, back-up, etc.) Metrics are not associated with usage or demand All on-going maintenance Logical and physical security End-user training and support Single-tenant architecture Software as a Service Costs directly aligned with usage: number users, transactions, etc. No hardware requirements Configurable with APIs, but not completely customizable Customer Support is included in fees Virtual unlimited capacity Multi-tenant architecture In their most recent benchmark report, Aberdeen group surveyed 455 suppliers whose top reason for adopting software as a service was the reduced total cost of ownership. 2 The three major cost centers of any IT budget are hardware, software and professional services. Tangible costs associated with hardware and software are straightforward, but professional services/people resources are often underestimated or even omitted. The support staff needed to deploy and maintain a solution, as well as the development staff or consultants required to design and build a custom solution or integration are all part of professional services. Saas Lowers and Re-distributes Costs In general the IT budget for traditional. in-house applications is equally divided among hardware, software and professional services. In SaaS the costs associated with hardware and professional services are minimized, so most of a budget would be allocated to software This is not simply a redistribution of costs, as industry studies have shown that SaaS can reduce overall costs by at least 30% On-Premise SaaS Professional Services Software Hardware

6 Page 6 One way to evaluate and compare total cost of ownership is to examine resource requirements for infrastructure and professional services for both the start-up/deployment phase and the on-going requirements. On- Premise Implementation Deployment Start-up Professional Infrastructure Services Hardware Software Security Network 5-25% Monitoring/Managem ent tools Facilities Design 5-15% Configure Integrate Test and Tune Launch IT Staff Training End-user training Infrastructure 5-15% Hardware Repair/replace Network Security Bandwidth Software Maintenance Redundancy Capacity Added Functionality Help Desk On-Going Professional Services 50-85% Scheduled Maintenance Un-scheduled Maintenance System Monitoring End-user Support IT Staff training Admin reporting/cost allocation Planning, engineering, testing Deploy upgrades Security Marketing awareness and adoption SaaS Set-up fees 2-5% 3-5% App testing in desktop environment 80-90% SaaS service fee (includes all of above) 5-10% End-user management; API configuration Launch Usage analysis and cost allocation; End-user Awareness Vendor Interface

7 Page 7 IV. Evaluating Total Cost of Ownership a. Comparison of SaaS vs On-Premise Solutions for EDI and Global Data Synchronization in Supply Chain It can be a great challenge to compare total cost of ownership for SaaS vs. an onpremise solutions because there are not strict counterparts for all of the elements of cost to achieve the same functionality with each approach. This can be especially difficult when trying to assess costs for EDI and data synchronization, as they involve a combination of business processes and solutions, with varying degrees of integration, that are needed to support the order to cash life cycle. The basic constituents of cost in an EDI ecosystem are the same as for any other application: labor/professional services, computing and communication infrastructure, and software. Capacity requirements are driven by the number of trading relationships, transaction volumes and product sku s. Once all of the elements of cost are identified, they should be evaluated in the implementation or start-up phase, and then as on-going costs over the lifetime of the project. The following is a description of these costs as they apply in the on-premise EDI environment. In an SaaS environment, many of these costs are eliminated, or greatly reduced. Labor/Professional Services EDI is a business process that resides at the intersection of procurement, order entry, and IT and requires involvement from these departments. Implementation EDI/ Supply Chain Personnel At the implementation stage the EDI and data synchronization experts must understand how to align business processes that govern transaction exchange between trading partners. They must map transactions according to strict industry and trading partner requirements using X12, xml and GDS standards. Some vendors provide templates to map data between systems. Often additional expertise is needed to map business rules specific to a trading relationship. If an advanced ship notice ( ASN/856) is required, a corresponding UCC 128 bar code label must also be created. Completed maps and bar code labels must be tested with the trading partner before they can be put into production. SaaS providers can eliminate all of this work through a combination of software and managed services.

8 Page 8 IT Personnel The IT department, including systems integrators and network specialists have a large role to play during the implementation of an EDI operation. They are needed to set up and install software, including EDI translators or other data transformation tools, as well as various applications that may be needed for communication with trading partners. The latter may include configuration of VAN set-ups, AS2 installation and testing, FTP depending upon a trading partner s specific requirements. All of these must be made compatible with network security to allow exchange of data from behind the firewall. In addition to installation of EDI translation applications and establishing connectivity with trading partners, systems integrators must link translated transaction data to business processes supported within the ERP and warehouse management systems. The volume of EDI business, and the degree of automation desired, determine the level and complexity of integration required. This also includes development of reports needed by EDI personnel or further processing of data needed by specific business processes. Because SaaS providers can offer deep functionality and vertical specialization, some business processes can be streamlined or even eliminated. But depending upon the degree of integration required, there may still be some level of expense associated with systems integration. On-going EDI/ Supply Chain Personnel Setting up new trading relationships can constitute a large part of start-up time and expense when suppliers choose to migrate to a new EDI translator, global data synchronization solution, or ERP system with integration to these processes. As most suppliers win new business, setting up new trading relationships also accounts for some part of on-going expenses. Post implementation, the EDI technical specialists continue to be responsible for operating EDI or other data transformation software, dealing with transaction errors, trading partner mediation, reporting, charge-back reconciliation and other aspects of day to day operations. IT Personnel While a great deal of work is needed up front from the IT department, a certain amount of it must be repeated on an on-going basis. Most of the same tasks are needed as software applications and ERP systems are upgraded, or as

9 Page 9 new trading partners are added. They must also maintain and trouble-shoot the basic network environment that supports and secures these operations. Software Start-up software required to support an EDI function consists of data transformation tools, communications and messaging applications, and label creation applications. EDI Translators at the enterprise level can encompass all of this functionality and are accompanied by high licensing fees, and re-occurring annual maintenance fees that range from 15-20% of the purchase price. If global data synchronization is required, product information management tools that run behind the firewall can range from $50,000 to $1M depending upon the breadth of functionality. Desktop EDI translation applications cost less, but need to be cobbled together with label production and communications applications (e.g. AS2, FTP) to achieve comparable functionality with the enterprise versions. SaaS solutions bundle all of this functionality and eliminate the need for up-front licensing and annual maintenance costs. Instead a subscriber can pay a fee per transaction that incorporates all of the elements of cost, converting fixed costs to variable expenses. Hardware Start-up hardware to support a B2B environment consists of servers, workstations and other network infrastructure. On an on-going basis assumptions must be made for the rate at which new hardware must be added and/or replaced to support growth of the business. Annual service agreements should also be considered in the on-going costs. In a SaaS setting, the requirements for hardware, network maintenance can usually be reduced to a workstation. As with software, much of the infrastructure required to support an EDI environment can be eliminated, and the vendor incorporates this into the cost per transaction. b. RedTail Solutions, Inc. Software as a Service for EDI and Global Data Synchronization RedTail Solutions, who provides B2B collaboration in supply chain space, represents an excellent model of Software as a Service. The hallmark of its hosted service for EDI and global data synchronization is out of the box integration for a number of ERP systems used by manufacturers and distributors. The combination of a true service architecture, high degree of software standardization and strong vertical specialization allows suppliers to implement full transaction support with their trading partners in a matter of a few weeks versus the usual 6-9 months it takes to implement on on-premise system with the same level of functionality.

10 Page 10 Initially the customer pays a modest configuration fee and then pays only for the transactions processed- an on-demand, variable expense. One of the most important benefits of SaaS is the rapid implementation times and the resulting acceleration of ROI for the customer. Along with the use of the RedTail Transaction Manger, a smart client and the Business Process Integrator, service oriented architecture resident on RedTail servers, RedTail is able to provide complete, EDI and data synchronization capability to suppliers who process a few hundred to tens of thousands of transactions every month. All of the following are included in the fee for transaction pricing: o Implementation Software client installation and configuration EDI Relationship Set-up with Each Trading Partner Data synchronization Transaction Mapping for each Trading Partner Bi-directional Transaction Validation Bi-directional Transaction Testing Out-of-the-box data integration with Accounting/ERP System/WMS Label Testing and Validation End-User Training o On-going EDI Standards Upgrades Transaction Set Upgrades I.T. Infrastructure Maintenance Software Maintenance and Upgrades Implementation of Additional Transaction Sets Communications Management (VAN, AS2, FTP) Throughout the Supply Chain Upgrades to Accounting/Business System Creation of ASN s and UCC-128 Labels Label Printer Communications Label Requirement Changes from Trading Partners Error Checking and Correction Live Support Available to Trading Partners/Supplier Back-up and History/Audit Trail in Two Distinct and Separate Locations

11 Page 11 References 1. B2B Collaboration: How On-Demand Platforms Accelerate Value and Impact TCO, Aberdeen Group, February On-Demand Applications in Supply Chain: Enable Flexible Business Processes, Aberdeen Group, August Software as a Service; A Comprehensive Look at the Total Cost of Ownership of Software Applications; Prepared by the Software-as-a-Service Executive Council, September Industry Pundits: Move to SaaS is Permanent, by Peter Galli, eweek, April 30, Software as A Service: An Enterprise Perspective ; Gianpaolo Carraro, Fred Chong; Microsoft Corporation, October Shimmin on Software: It s Go Time for SOA + SaaS ; Brad Shimmin, Information Week May 4, SaaS Survey Shows New Model Becoming Mainstream Executive Update, Vol.6, No. 22; Jeffrey Kaplan; Cutter Consortium, Software as a Service Is Gaining Ground, P.J. Jakovljevic, Technology Evaluation Center White Papers, March 17, Software as a Service,( Selective hosting can boost flexibility and speed.) Computerworld Executive Briefings, Software 2006: Unifying the Ecosystem, Software 2006 Industry Report, McKinsey & Company. About RedTail Solutions, Inc RedTail Solutions, Inc. is a privately held company that was formed in 2000 and is located in Westborough, MA, just outside of Boston. RedTail enables suppliers to compete at the highest level in today s supply chain by providing a Software as a Service (SaaS) platform for b2b collaboration. This advanced platform provides a suite of hosted services via the Internet that can integrate seamlessly with back office systems like Microsoft Great Plains to enterprise systems such as SAP. Through this hosted and integrated platform, suppliers connect and trade through a single solution with their key customers as well as third-party logistics providers in warehousing and transportation. Redtail offers services focused on the management and support of Industry defined standards for EDI (electronic data interchange), GDS (global data synchronization) and RFID (radio-frequency identification). It handles the data synchronization of hundreds of attributes for thousands of items, as well as the EDI mapping and exchange of thousands of purchase orders, invoices, and shipping transactions every month between suppliers and their large customers in retail, grocery and industrial segments. RedTail s simple-to-use, cost-effective solution enables manufacturers and distributors to fully participate in the global electronic supply chain.