The world's biggest ERP vendor is betting that there is a customer base for Software as a Service (SaaS), especially among CIOs at midmarket companies. Last fall, SAP Chairman and CEO Henning Kagermann predicted that 10,000 customers would sign up for the software giant's new SaaS solution, Business ByDesign, within two years.
"The most important announcement I have made in my career," he called it.
While vendors have had some success with hosted ERP -- such as Microsoft, which offers to manage the infrastructure for its Dynamics AX ERP platform through some of its reseller partners -- the market for an on-demand, or SaaS, version of ERP hasn't materialized so far. Customer relationship management and human resources have grained some traction as on-demand services, but complicated transactional apps such as ERP are proving a more difficult sell.
"There's a lot of hype for Software as a Service, but we haven't seen anyone be wildly successful yet," said Yvonne Genovese, an analyst at Stamford, Conn.-based Gartner Inc. "The users would like to have someone else to manage the technology infrastructure, but they don't want to give away the business processes and the protection and security of the data. Those things are so tied together that it's hard to have that world everyone would like to live in. There's really not been a success story where a complicated business app has been deployed as a Software as a Service model."
Too soon to take the leap
Ease of deployment, management and cost-effectiveness are the key selling points, but midmarket CIOs aren't exactly falling over one another to try the model.
Tom Cullen, CIO at Peet's Coffee & Tea Inc. in Emeryville, Calif., recently completed a lengthy review of the company's options to deploy a new ERP solution to replace its legacy system.
"First we did an assessment on [the] current technology platform and where our business needed to go," he says. "We had a lot of older, aging systems that needed to be replaced. It was a business-first approach. What's necessary and what will give us a competitive advantage?"
After coming up with a list of requirements, Cullen considered an on-demand solution.
"It came up," he said. "I asked, 'Is it a possibility?' No. Software as a Service works well if you have very standard functionality. If you have an area that has a complex functionality like manufacturing, you really won't find anything that works out of the box. We're roast-to-order business. It needs to be very flexible and dynamic. Once you get into customized requirements it breaks the model."
After rejecting the SaaS model, Peet's narrowed down the competitors to three vendors, which presented demos. Peet's eventually picked Microsoft's Dynamics AX, opting to deploy the ERP platform in its own data center rather than go with a hosted version.
"If the hosted services focused on generic functionality that most companies need it would work," Cullen said. "It's not the size of the company, it's the complexity of the process. Is the company willing to standardize its processes? Then it becomes a great option. But if people feel they have to have it their way, the hosted model won't work."
Joshua Dees, the vice president of MIS at climbing gear maker Black Diamond Equipment Ltd. in Salt Lake City, came to a similar conclusion.
"We're neck deep in ERP right now, but I'm just not comfortable with hosted apps," he said. "Some fit my level of comfort, but not ERP. The barrier is the fear of not controlling our own information. I have a bang-up group of folks, and I'm more comfortable knowing they're taking care of it. The infrastructure in the city also has some issues. There's been whole days when things are down, and I can't imagine having our ERP down for that much time."
Dees said lack of flexibility is a key barrier.It's not the
size of the company, it's the complexity of the process.
CIOPeet's Coffee & Tea Inc.
"We like the ability to modify the ERP enough to suit our business practices," he said. "I haven't become super comfortable with a hosted solution doing that. The way I'd want to treat my ERP system in my solution-oriented architecture is that other transactional systems would makes calls across to it. I'm sure hosted solutions will get there someday, but I don't think they're there now."
Black Diamond is currently running three different versions of Microsoft's Navision (now called Dynamics NAV) at its offices in the U.S., Europe and Asia, each of which has been customized for local needs.
"We've begun a full requirements analysis, appointing teams of IS and non-IS guys to evaluate processes," Dees said. "One year from now we want to move into a homogenous platform of Microsoft. Our target platform is NAV 5.0 right now."
Gartner's Genovese said SAP's new offering seeks to solve a real problem, but she's not convinced that on-demand apps are the right answer.
"There are thousands of CIOs who wake up every day and say, 'These apps are costing me a lot to manage. How do I make these things less expensive to manage and create more flexibility?'" she said. "That doesn't necessarily lead to Software as a Service."
Michael Ybarra is a monthly columnist for SearchCIO-Midmarket.com and a former senior writer at CIO Decisions magazine. He is also the author of Washington Gone Crazy. Write to him at firstname.lastname@example.org.