SaaS: taking the worry out of service.

Lucent Technologies, the telecommunications equipment giant, outsources upward of 85 percent of its manufacturing to its contract manufacturers' 20-plus locations worldwide, along with its own integration centers. Needless to say, it's not easy to coordinate across different time zones and different vendors.

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So Lucent has contracted with Kinaxis, a software provider offering specialized coordination services for electronics manufacturing services (EMS), to integrate data from the manufacturing resource planning systems of those various contract manufacturers. Using Kinaxis' Rapid-Response, "Everyone can see what needs to happen and who needs to act," says Arvind Ballakur, senior manager, supply chain networks at Lucent. "The only way we can effectively manage our supply chain is through global visibility and close coordination with our partners."

Ottawa-based Kinaxis is offering its applications through a "Software as a Service" (SaaS) model, one of the hottest trends going in information technology. Customers like Lucent are no longer paying perpetual licenses, with the expectation of periodic patches and upgrades; instead, they are paying for the software usage through regular (often monthly) subscription fees, and the applications are available through the Web, not through their own IT systems.

In recent months, spurred by the widely reported success of salesforce.com's SaaS application, this new licensing model has been picking up converts like dry grass caught in a prairie fire. It's penetrated deeply in a number of niches, especially customer relationship management (CRM), human resources and logistics.

Its popularity is easy to understand. CFOs and CIOs love the idea that they don't have to deal with a major capital expenditure for a new software system, with the associated consulting and training time. Nor do they have to worry about maintenance. Instead, the software provider makes the application available around the clock and is responsible for everything related to operating it and ensuring its currency and viability.

The key characteristics of SaaS, according to analyst firm IDC, include:

* Network-based access to, and management of, commercially available software;

* Activities that are managed from central locations rather than at each customer's site, enabling customers to access applications remotely via the Web; and

* Application delivery that typically is closer to a one-to-many model (single instance, multi-tenant architecture) than to a one-to-one model, including architecture, pricing, partnering and management characteristics. With that, there is little or no opportunity for individual company customization.

SaaS is essentially an outgrowth of the application service provider (ASP) model that gained popularity a few years ago. With an ASP, a company essentially turned over its relevant function--payroll, procurement, etc.--to the software provider, which "hosted" the application on its servers and gave the company 24/7 access to the system.

SaaS represents a step up from ASPs, however, vendors say, because the relationship is no longer with one customer, but many. Roy Cashman, chief technology officer at Transplace, a logistics technology and transportation management services provider based in Plano, Texas, refers to its "multi-tenant environment." By hosting many companies, he says, Transplace gains economies of scale and the wherewithal to update its software to improve the portal and the related analytics.

EthicsPoint, a software provider in the governance and risk management (GRM) space, has been an ASP provider for years, helping companies manage whisteblower hotlines with report resolution tools. With time and advances, and with additional pieces of architecture and structure, as well as a core system and different application protocols that support SaaS, delivery and functionality are far easier, says CEO David Childers. "You have more tools and process consistency," he says.

Industry analysts say that the mystique of on-demand technology like SaaS is quickly disappearing. A recent IDC study projects worldwide spending on SaaS to jump at a 21 percent annual growth rate over the next three years, reaching $10.7 billion in 2009.

Even in its early stages, SaaS has quickly become a viable alternative for companies looking for comprehensive solutions in areas like compliance, governance and supply chain management. Beth Enslow of Aberdeen Group noted in a March 2006 research report that about half of participants in an Aberdeen survey say they now use or are considering using on-demand applications to manage select portions of their supply chains.

"Current on-demand SCM [supply chain management] users report overwhelming benefits from the on-demand model, especially in implementation speed, maintenance ease and return on investment [ROI]," Enslow wrote. "Moreover, nearly half say customer service is better from their on-demand vendors than from their traditional supply chain vendors, an outcome of the fact that on-demand vendors are on the hook every day to make sure their applications are operating well for their clients."

ROI has indeed been a huge selling point for SaaS, especially in tight spending environments. Randy Littleson, vice president of marketing at Kinaxis, says the company had traditionally sold its software through perpetual license arrangements, with periodic upgrades. "We have seen that produces good results, but we found a common scenario in which, despite the fact that businesses were doing better, that was not translating into capital expenditure." One related problem, he adds, is that "IT budgets tend to be spoken for," and it's often difficult to find dollars for new applications.

SaaS applications, however, are able to cut across corporate silos that have their own combination of procedures and applications. "Each one of the silos--whether it's corporate security, loss prevention or facilities management--has unique things to do, and each creates data," says EthicsPoint's Childers. "We offer a common communications layer that turns that data into information.

"We're working with auditors, the AICPA and ethics officers, and we can take best practices and incorporate them into our model," he adds. "We can put it in their own vocabulary. The adoption rate is high, which creates a faster ROI story ... People are looking for ways to improve process and data consistency though a product set that is intuitive and scalable, and has an ROI story around it. SaaS is one of best ways to deliver that."

Transplace manages $3 billion a year in spending for customers. It does so by providing the tools for customers to optimize the inventory into shipments, determining the best modes of transport (truck, rail, overnight, etc.) and choosing the carriers. The company counts major corporations like Office Depot and U.S. Gypsum among its clients.

Transplace, which was spawned by a Web-based collaborative set up by a number of carriers in 2000, can work with a host of different systems to take orders, says Cashman. That's important, because it obviates the need to buy a specific solution. "If you buy an off-the-shelf software package, you can imagine--there are lots of consulting dollars involved, and a lot of time to market," he adds.

Unlike software patches, upgrades and new functionality can be tapped quickly by customers using SaaS. Roger Bottum, vice president of marketing at Axentis, another GRM application provider, says when it introduced new functionality earlier this year, 80 percent of its clients were using it within 30 days of its release.

Many SaaS suppliers have set up regular annual or even monthly fee structures. Axentis has annual structure, centered on three-year agreements, that is also tied to the number of users at the client company. Procuri Inc., a supply chain management provider, typically has three-year commitments and an annual fee, but payment can be flexible within that, says senior vice president Tim Minahan. SaaS "aligns the providers' goals with those of the customer," Minahan says. "With the traditional software model, it's all about getting the deal signed."

Avalara, a sales tax management provider based in Bainbridge Island, Wash., has set up a monthly subscription fee program that has several variables, including transaction volume. The base fees aren't predicated on company's size, but on the tax software it uses--Great Plains, Sage, QuickBooks, etc.

One selling point noted by a number of SaaS vendors is the ability to offer companies a quicker response to industry shifts. Like other Kinaxis customers, among them Honeywell International Inc., Raytheon Co. and Casio Computer Co. Ltd., Lucent found the challenge of adapting to sudden marketplace changes and product shifts daunting, says Kinaxis' Littleson.

"Companies say that it's extremely difficult to deal with pervasive change in business. Product life cycles are extremely short," he notes. "The challenge is obsolete inventory--it's hard to manage financially. We try to help these folks deal with change, to respond quickly and accurately [to the marketplace.]"

Not surprisingly, success brings competition, and not just from other specialists. Software giants like Oracle Corp., SAP AG and Microsoft Corp. "are all moving [toward SaaS]," says Littleson. But he and others insist that threat isn't imminent.

While the software behemoths "have the potential to encroach" on the existing market, "we also know that the solutions they would push are architected to solve different problems," he says. "Those problems aren't easy to solve. They would have to start with new architecture, and that's probably a couple of years' proposition."

Minahan at Procuri agrees that while a giant provider like SAP could re-architect its systems, "it may take some time. The challenge for them may be more that they don't understand that SaaS is a business philosophy, and it's about how you deliver services," rather than about systems integration.

Whatever does happen in the greater SaaS market in the near term, expect to hear a lot more about it in software product marketing. "Two years ago, [Axentis] didn't stress SaaS in our marketing," says Bottum. "That's a function of the maturity of the concept in the marketplace. Now, it's front and center."

RELATED ARTICLE: IBM Views the Big Picture

As one of the world's biggest companies, it's probably not surprising that IBM Corp. takes a big-picture approach to Software as a Service (SaaS).

Steve Lukens, IBM Global Lead for inancial Management Services, said in an interview that SaaS is just one of the IT topics that CFOs should be familiar with. He calls SaaS "just one strategic arrow, like SOA [service-oriented architecture] or outsourcing" that have emerged in the past two to five years to help companies run more efficiently. A few SaaS providers are in the finance space in areas like Sarbanes-Oxley compliance or order-to-cash facilitation, he says.

Lukens notes that IBM is involved with SaaS chiefly as a host for several smaller vendors, including Intact, a provider of on-demand financial applications for more than 2,200 small and midsize businesses. But he maintains that "one reason we don't see a groundswell for SaaS financial applications" is that data stored in one niche application might not be readily available in others.

Application-specific vendors, Lukens maintains, don't have to take an overarching view of how they fit into the larger enterprise--and that could be an impediment to their growth. Solving that issue, he says, will involve SOA and an architecture that allows the client company to readily access data in various systems. And the companies that will handle this strategic architecture issue best, he suggests, will be those where the CFO and the chief information officer or chief technology officer talk regularly and understand each other's needs.

"It's important for finance executives to look at these applications both inside and outside finance to make sure they are spending the right amount of money. Finance executives need to be in a strong dialog with CIOs and the rest of their management team."

RELATED ARTICLE: Farewell, File Cabinets

LeChase Construction, a full-service construction management and general construction firm based in Rochester, N.Y., moved from the old way of handling procurement to the new order about two years ago. That's when it installed a SaaS system from Procuri Inc., a specialist in supply chain management.

Bill Schrouder, a LeChase procurement officer, says the application took the company from an antiquated paper-and-folder filing system, with reams of file cabinets, to a largely paperless environment. Construction bid packages, which used to require the services of commercial printers and mailing services, are now uploaded to the Procuri system for suppliers to review.

Schrouder touts the system's ease of use and consistent experience for the 20 or so LeChase users now on it. "The communication is very easy; it opens doors to new suppliers," he said in an interview. "It's simple to maintain multiple projects, and document control and supplier maintenance are very simple as well." Basic training on the system takes only 10-15 minutes, he adds.

Schrouder says the privately held firm, which has offices in New York State and North Carolina, has seen tremendous savings in time, labor and mailing. Formerly, the company was preparing documents averaging about 600 pages and mailing them out to potential bidders; paper alone cost 8 cents a page for a double-sided sheet. He estimates the paper savings in the past two years as high as $85,000.

Then, there is the elimination of "humungous file cabinets." Instead of wading through those, one of his staff simply needs to log onto the system and enter the appropriate job number to bring up all the project details.

RELATED ARTICLE: takeaways

* Software as a Service (SaaS) is essentially an outgrowth of the application service provider (ASP) hosted models that sprouted several years ago.

* The concept has caught fire in recent months, as both vendors and customers have realized the benefits of a model that helps each side.

* In most SaaS scenarios, companies are in a "multi-ten ant" environment in which they have 24/7 access via the Internet to the relevant application.

* CFOs and CIOs relish the idea of using an application without having to pay major upfront costs, and instead pay regular annual or even monthly subscription fees.