What's The Buzz About SaaS?

Jan. 4, 2007
Some tips to determine if SaaS applications are appropriate and if so, which ones?

Unless you have been hiding in a cave for the last year, you've seen the headlines about Software as a Service (SaaS). While the marketing hype is in full throttle, there is substance to the hype. In fact, the market for SaaS has grown significantly in the past year and according to Garter Group, by 2011, 25% of new business software will be delivered via SaaS. But amidst all the talk about silver-bullet solutions, many companies are challenged as they try to separate the facts from the hype to make sound buying decisions that will deliver long-term benefits.

Definitions of SaaS vary widely across the industry with the lines blurred between Application Service Provider (ASP), on-demand, Web 2.0 and Service Oriented Architecture (SOA). Quite simply, SaaS is a model of software delivery where the software company provides maintenance, daily technical operation and support for the software for their client. Most experts seem to agree that to be considered SaaS, the application must be delivered over the Internet and installed and managed centrally and not at the customer's site. Many industry analysts also argue that true SaaS applications must be delivered in a one-to-many model rather than a one-to-one model, although this is really an economic issue for the software vendor more than a material concern for the customer.

For most companies, determining if SaaS applications are appropriate requires that they answer two basic questions:

  • Are SaaS applications well suited to the unique needs of my company?
  • Will they support my company in a cost-effective manner over the long term?

Unfortunately, the answers to these questions are often not so simple. From past experience with on-premise applications, many buyers mistakenly use company size as the key metric. In reality, SaaS applications can be equally applicable for companies of all sizes. The relative importance and sensitivity of the applications are also commonly gauged when assessing SaaS applications. Using today's technology, SaaS applications are likely to be just as reliable and secure, and maybe even more so, compared to on-premise applications.

So, how does a company answer the questions above to determine if SaaS applications are appropriate and if so, which ones? You can do so by looking at the business objectives that the applications are intended to address and asking yourself the following:

  • With these applications in place, will my company be utilizing industry-standard best practices, or have we developed unique best practices within our company that provide a competitive advantage?
  • Will these applications directly impact the experience of our customers and other external constituents such as sales channel partners? If so, do we have unique business practices that set our company apart in the eyes of our external constituents to create a competitive advantage?
  • If our competitor can use the same application to achieve the same benefits, do we really care?

These questions are critical to determining which applications are appropriate for a SaaS approach. By definition, any SaaS application is virtually ubiquitous for every company using it. If your objective is to achieve operational or efficiency improvements that are not directly seen by your customers, SaaS may be the right approach. If however, you intend to use your software applications to directly impact the customer experience with services or offerings that make your company competitively unique, SaaS applications, that can also be used by your competitors, may not provide the competitive advantages you seek.

Let's look at Wise Foods, a leading producer of salty snack foods, as a good example of a mid-size manufacturer using a SaaS application to improve business processes, indirectly improve customer service and ultimately improve the bottom line.

Until recently, Wise relied on manual methods for planning and production scheduling. Wise has an on-premise ERP system in place, but without an automated scheduling solution designed for food processing, the company was still challenged by inventory issues affecting customer order commitments and bottom line profits. Wise decided to supplement its existing ERP system with a factory scheduler application. They chose an on-demand graphical production scheduling system that enables on-time product delivery at the lowest cost. It is delivered as a Software as a Service (SaaS) solution with a monthly subscription fee and requires no hardware, software or IT support to run -- only a standard PC and Web browser.

Wise was able to completely implement with little support from its IT department, including integration with its ERP system, in less than ten weeks. Because the application is hosted, the vendor of the application is able to provide system maintenance such as upgrades, without any additional cost or interruption to Wise.

Within the first month of using the system, Wise experienced significant results. For instance, previously creating the production schedule took 10 hours. Today, scheduling -- beginning to end -- takes about one hour and the quality of the production schedule is greatly improved. Finished goods inventory has been reduced by 40,000 cases -- from 142,000 to 102,000. All of this was achieved while maintaining a 99.6% service-to-sales level; reducing short shipments from thousands of cases per day to a mere handful; minimizing the number of stales and damages; dramatically cutting labor costs by predicting needs more than 24 hours in advance, saving $600,000 annually, and slashing changeovers by 35% across packaging and processing lines.

These impressive results will easily pay for the system many times over. Although the production scheduling system indirectly impacts customer service levels, it will never be seen by a customer. The system enables Wise to meet customer expectations by consistently meeting commitments, but the true value is derived by the efficiencies and cost savings. Wise is no longer forced to invest in excessive inventory to satisfy customer demand.

The evaluation criteria for companies that are considering using SaaS applications should include a thorough analysis of the business objectives, in addition to the traditional measures of size, reliability and security. If your objective is to achieve internal operational improvements that are not directly seen by your customers, such as those at Wise, SaaS may be the right approach. However, if you intend to directly impact the customer experience with services or offerings that make your company competitively unique, SaaS applications may not provide the competitive advantage you seek. In the final analysis, your business objectives should be used to determine the appropriate technology directions for each application.

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