Pay as You Go ERP for Small and Midsize Enterprises

Feature Article | February 20, 2008 by admin

Why should small and midsize enterprises be looking at on-demand ERP solutions?

Palmquist: Since the idea of software as a service started circulating in 2000 and 2001, the market’s interest has grown steadily. Over time, as companies introduced point products such as customer relationship management the concept evolved into a mainstream strategy. And the success of CRM, merchant services, online conferencing, and other on-demand applications paved the way for the delivery of more complex business management software. Several vendors, including SAP, offer on-demand ERP today.

There are some potent motivators for SMEs to be looking at on-demand ERP solutions. Among other things, the software as a service model, or SaaS, as it’s known, promises low cost of ownership, quick time to deployment, ease of maintenance, technology flexibility, and the freedom from worry about upgrades.

What specifically would SMEs find appealing?

Palmquist: Let’s face it. IT is not a core competency for most companies. Imagine being able to run your business with the full functionality of a comprehensive ERP solution without having to buy, upgrade or maintain the hardware and software to run it on. Instead you would just pay to use it – with minimal cost of ownership. You would be free to focus your attention on developing new business and new products, improving quality and customer service, expanding into new markets, and fine tuning business processes.

Every situation is different, of course, but I’ve seen estimates that companies may save 25 to 50 percent using an on-demand ERP application over an on premises solution.

So are you saying that SMEs can potentially see ERP as a utility?

Palmquist: Yes. The idea with software as a service is that you use it, but you don’t have to own it or maintain it. You don’t have to own the staff, the tools, and the IT infrastructure any more than you have to have a plumber on staff to ensure that you have running water in your building or an electrician to keep the electricity on.

What sorts of companies are best suited to the on-demand ERP solution?

Palmquist: A quick answer is small and midsized enterprises that want a full-function ERP solution delivered in a way that simplifies IT and has built-in service and support. And a terrific advantage is the ability to try a personalized online test before you commit.

What companies are not good candidates?

Palmquist: At this point, companies in areas that don’t have reliable access to the Internet are not good candidates. Also, not well suited are companies that require a high degree of customization of their ERP environment. This is because the service provider’s application code base stays the same across all customers. I believe that in the future more customization will be possible, but for now, if you absolutely must have a highly customized environment, an on-demand solution is not for you.

Also, if you have extremely high requirements for availability, say 99.999 percent uptime, this strategy is probably not for you. Such levels of uptime are possible, but you’d want to evaluate the cost of your service level agreement with the service provider. If you can’t tolerate an hour of downtime a year, you’re better off having your operating environment in house. However, I would also argue that uptime is much more predictable at a hosting center than trying to manage it in house.

In addition, do a reality check. Are you typically an early adopter of technology? For instance, it’s easy to see a hydrogen fuel car and say, “Wow, I’d like to own one of those,” but would you actually buy one?

What are analysts saying about SaaS growth?

Palmquist: I’ve been watching the SaaS industry for about six years and have noticed that overall they’ve taken a wait and see attitude. It’s their job to be skeptical and suspicious. The big question has been “will vendors be able to deliver?”

Recently, however, the analyst community has been somewhat more optimistic. They are positioning SaaS as an option to consider. For instance, in August 2007 Gartner forecasted that software as a service for the enterprise application market will grow at 22.1 percent until 2011, which is more than double the nine percent growth rate expected in the market as a whole.

I actually saved something that Sharon Mertz, research director at Gartner said in the report. She said. “Ease of use, rapid deployment, limited upfront investment in capital and staffing, plus a reduction in software management responsibility all make SaaS a desirable alternative to many on-premises solutions, and they will continue to act as drivers of growth.”

Is this an evolution or a breakthrough?

Palmquist: You could describe SaaS as an evolutionary approach since it’s simply part of the growing spectrum of options from which companies can choose. On the other hand, from the standpoint of software delivery it is a totally different business model.

The current “pay me now” or perpetual model asks customers to make a significant up-front investment for an on-premises solution and perhaps a maintenance contract. The hosted subscription service model is a “pay me later, slowly over time,” long-term recurring revenue model. This represents a big transition for ISVs and resellers. Of course an advantage to keep in mind is that while the up-front revenue is low in the on-demand model, the vendors get to keep the customer and build an ongoing relationship.

Say a little more about that. How does the market’s move toward SaaS impact ISVs and resellers’ ability to deliver applications?

Palmquist: I suspect that resellers may try to resist moving in the SaaS direction as long as they can because it’s a new commercial model and it’s disruptive to how they do business. ISVs must develop hostable online solutions that don’t require on-premises staff. Both resellers and ISVs will be challenged to build a client base. The reality is that they must be able to invest for a few years in new business development and they’ll need capital to carry them over to the point at which they’ll have a sustainable new revenue stream – because in the beginning the cost of sales will greatly exceed one-year revenue.

Because of the potential pain involved, there may be a backlash of software vendors and authors to slow down or prevent the move to SaaS. Will they win or will the market win? My belief is that the market always wins. Market demand and market momentum are the defining factors.

Actually the size of the investment and commitment to hosting centers is a major reason that the SaaS model hasn’t expanded more quickly. But now there’s momentum gathering. Vendors that can’t or won’t make the change will be left behind. The market won’t wait for them to catch up.

What are some of the things you’d recommend that companies consider as they’re evaluating a SaaS ERP solution?

Palmquist: There are several major considerations in addition to the overall “rent versus buy” evaluation. You’re going to want to be sure that the solution can integrate with the software you plan to keep in house. Also, take a look into the future. What happens if you outgrow the solution? Is there a growth path? Another thing to consider: does the vendor have a healthy ecosystem of VAR’s and ISVs on board and coming on board? This is a big indicator of the market’s confidence in the platform. And, if you need to bring your ERP environment in house, can the vendor support you in doing so?

If you need help, get it. It’s vitally important to ask the hard questions.

What is your personal opinion of SaaS?

Palmquist: It’s definitely an idea whose time has come. The SaaS model allows people a new option that may fit their way of doing business. SaaS is not going away. Companies will do well to evaluate how it can benefit them. And they can be sure that their competitors will be moving to on-demand ERP platforms.

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