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SaaS-based ERP: Payback on the horizon

While interest by midmarket CIOs in SaaS-based ERP is growing, experts predict it will be about another year or so before the technology and related benefits are in place for most midmarket firms.

The rainbow is still taking shape, so the pot of gold sits well out of reach for most midmarket companies considering a move to Software as a Service (SaaS)-based ERP.

James M. Connolly
James M. Connolly

While a handful of companies are already receiving benefits from SaaS-based ERP -- and lots of others are curious about the concept -- it will probably be a year or two before the technology and related benefits are in place for most midmarket firms.

In a 2007 survey, research firm Saugatuck Technology Inc. in Westport, Conn., found that 73% of respondents said they had no plans to deploy SaaS-based ERP. Saugatuck Vice President Mark Koenig said ERP trailed all other types of applications -- less-critical applications such as customer relationship management (CRM) -- in terms of user plans for SaaS.

Moreover, a new survey of SearchCIO-Midmarket.com readers found that 22.3% of the 444 respondents intend to purchase ERP software in 2008. Of those with purchase plans, only 9% said they planned to buy a SaaS version.

Experts agree that there is user interest in SaaS-based ERP and that plenty of vendors are promoting the concept, but most user companies aren't ready to make the move. Reasons for that reluctance vary: security concerns about storing ERP data on a service-provider site where it may be co-mingled with competitors' data, a shortage of ERP offerings in specific industry segments, lack of product flexibility in terms of serving a user company's business processes and IT's fear of letting go of an application's reins.

Another speed bump for SaaS-based ERP is the natural lifecycle of an ERP implementation, particularly when compared with the lifecycle for technologies such as server hardware and desktop operating systems. Companies don't rush to swap out ERP packages. Estimates for the lifecycle of an ERP system range from five years to well beyond 10 years.

In addition, while vendors are announcing ERP services, they still have to work out kinks in their business models and sales pitches, according to Simon Jacobson, senior research analyst at AMR Research Inc. in Boston.

"They have to learn how to master the low-touch sales process," said Jacobson, noting that lower-margin SaaS-based applications sold into the midmarket dictate that vendors rely more on Web-based product demonstrations and telesales, rather than the on-site presentations commonly used for enterprise-level, on-premises software.

So, when it is time to move to SaaS-based ERP, what types of benefits can a midmarket company expect beyond the business improvements a company would recognize from any move to a new platform? Analysts and users offer their thoughts on the SaaS-related benefits:

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Rapid implementation. Doug Wiescinski has managed numerous ERP systems in the midmarket automotive sector as a partner at management consulting firm Plante & Moran PLLC in Southfield, Mich., which is an authorized implementer of Plexus Systems Inc.'s Plexus Online. Last year, he worked on a project to deploy Plexus Online for a firm with five manufacturing plants. He said it took four and a half months for a full implementation, a project that could have involved 12 to 18 months using an on-premise solution.

"Deployment is quicker because of templates and tools, and using a single version of the software. Most of the vendors in Software as a Service have employed different techniques for training, for example. They are more likely to use Web training, and use real, live simulation and data on their software," he said.

Koenig added, "Rapid implementation means rapid return on investment. So, I can look really good and point to benefits much sooner."

Stronger security. Managers looking at a SaaS solution typically cite data security and privacy as their greatest concern, Koenig noted. "But the irony is that once they do due diligence, what we hear is 'Wow, this security and data privacy is much better than we could do ourselves.'".

Wiescinski concurred. "Many of our midsized companies don't have a dedicated security resource. The fact is that their computer rooms are largely unsecured, their servers may be in unprotected areas, and they may not have proper disaster recovery planning. With a Software as a Service model, all of those things significantly improve. You're relying on a data center that has five nines type of uptime."

Better software management with lower staff costs. Ken Meyers, vice president of operations at AdvancedMD Software Inc. in Draper, Utah, uses NetSuite Inc.'s integrated CRM and ERP package to run his business. In the five years since bringing in NetSuite, AdvancedMD has grown from 20 employees to 180 with almost no staff costs.

"Until two years ago, we had nobody working full time on any kind of administration relating to NetSuite. We just had a few managers who did some configuration from time to time, tweaking it for our information architecture as we wanted to expand it," he said. That tweaking involved business users utilizing a scripting utility for tasks such as adding record sets and reports.

Today, AdvancedMD has a business analyst who adds those enhancements, which have helped the business grow and have enabled new applications such as asset tracking and change management that required a few hours' work rather than the tens of thousands of dollars it would have cost to purchase.

Jacobson said having the SaaS provider manage the software keeps user organizations from making changes that cause more problems than they solve, while still translating into savings. "The vendor controls the application management, configuration and setup of the software. Some of the midmarket folks don't have the budget to go out and hire an extra DBA or an extra ABAP programmer to do customization or modification," he said.

Wiescinski noted, "Most vendors release new versions or upgrades at least a couple times a year. Someone in IT has to apply it and test it. That effectively is eliminated with Software as a Service. It has been tested and applied by the service provider."

But the irony is that once they do due diligence, what we hear is 'Wow, this security and data privacy is much better than we could do ourselves.'
Mark Koenig
vice presidentSaugatuck Technology Inc.

Reduced capital costs. A SaaS subscription does include some portion of the vendor's hardware cost. However, users pay for basic client computing and network access rather than dedicated servers, network equipment and high-speed interoffice connections. "You can probably see a payback in your first year if you do a cost-of-ownership analysis of what the legacy system cost versus what the new system is," Jacobson said.

Wiescinski estimates that a SaaS-based ERP implementation can eliminate 20% of the application's infrastructure costs, including hardware, staff and telecommunication equipment and service expenses.

Integration. Application integration can be a double-edged sword when a company implements an ERP system, particularly a SaaS-based system. Integration is a challenge when the user company has to make the new ERP package work with a legacy application, such as a shop-floor package, and a SaaS provider may not support that legacy application, Wiescinski said.

However, Koenig highlights an example of how SaaS-based ERP can provide benefits for a midmarket company with limited resources when it must do business electronically with larger partners. "Sometimes integration ends up being the largest headache when you talk about doing business electronically. If you have a SaaS provider, the odds are that the SaaS provider has already solved that problem for another customer," he said.

Flexibility. Meyers said the SaaS model allowed AdvancedMD to "pay as we go, which was great for a company in the early stages of growth." It also allows flexibility in supporting full-time, home-based workers, and enabling off-hours system access for other employees.

James M. Connolly is a contributing writer based in Norwood, Mass. Write to him at editor@searchcio-midmarket.com.

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