SaaS ERP Is Getting A Closer Look
January 16, 2012 Dan Burger
What do Dog the Bounty Hunter and Nick Castellina have in common? Both make their living by tracking. DBH, the star of a reality show, tracks the scum of the Earth, and Castellina, a lead analyst at Aberdeen Group, goes after IT trends. Specifically, he hunts software as a service, which gets the shortened handle of SaaS. It’s one of the big blips on the IT radar screen and enjoys Super Bowl quality hype.
Last month, Aberdeen released its latest SaaS ERP report based on survey results collected in the second half of 2011. Castellina is the lead analyst on this report and I talked with him on the phone last week.
Castellina’s brief summary of the report is that in the five years of tracking SaaS ERP, interest is finally blossoming. Since 2007, when Aberdeen labeled ERP “the last bastion of resistance to SaaS,” the resistance is being overcome. That claim is hung on the continually rising metric of survey respondents who say they are now “willing to consider” SaaS ERP. The counterweight to SaaS, traditional on-premise ERP, also showed an increase, but it was in the “less willing to consider” category.
Here’s a quick look at the numbers from the Aberdeen report that demonstrates this trend during the years 2009 through 2011. The question being asked is “would you be willing to consider SaaS ERP?”
Measuring the willingness to consider is an indicator of sorts, but it doesn’t necessarily mean that after the first date it’s time to print the wedding invitations. Bastions of resistance don’t crumble quite that easily. Let’s take a look at implementations before our hearts begin to flutter wildly.
As you would expect, on-premise ERP remains entrenched. According to Aberdeen’s numbers, 72 percent of all companies depend on it, while 9 percent are backing SaaS ERP. The breakthrough is occurring in organizations with less than $50 million in annual revenue. In that category, you’ll find SaaS gaining ground to the tune of 17 percent. The penetration is 8 percent in midsize organizations ($50 million to $500 million in annual revenue) and only 2 percent in large enterprises. When it comes to an alternative to on-premise ERP, those large organizations are more likely to consider hosted environments. More on that a little later.
That brings us to an important distinction when talking about on-premise and off-premise ERP options. To keep us all thinking along the same lines, I consider on-premise to be either the traditional software licensing arrangement (perpetual license plus maintenance) or SaaS, which is software paid for on a subscription basis but run on machines located in the software buyer’s facilities. SaaS can also be delivered over the Internet (in “the cloud”) from an off-site data center owned by the ERP vendor or a third-party operator. Another option for off-premise is hosting (also referred to as managed services). In this case, the software (it could be licensed or subscription-based) is running on hardware located off-site. That off-site location also could be managed by the ERP vendor or a third-party vendor. Access to the software is again provided over the Internet.
“What we were seeing over the years was a slow uptake of SaaS ERP compared to other areas such as business intelligence or CRM,” Castellina, Aberdeen’s senior research associate for enterprise applications, told IT Jungle during a telephone interview last week. “But the willingness to consider SaaS jumped from 2008 to 2011. And I see the trends noted in our reports from the past several years continuing in 2012.”
It’s not exactly a raging fire, but it is a significant trend, particularly when you combine SaaS and hosted services.
The most likely companies to be using SaaS, Castellina says, are small businesses, primarily new businesses looking to lower their start-up costs. Avoiding up-front capital expenditures and having regular monthly payments without fluctuations is a big reason why. A few years ago, start-ups were plentiful. That trend has lost some of its energy during 2011.
“We are also seeing a multi-tiered ERP strategy with big organizations that are in a growth phase,” Castellina says. “They are buying or starting new subsidiaries and installing SaaS ERPs to get these units up and running quickly. These are companies that have an on-premise ERP, but are starting new subsidiaries in new geographies and using SaaS ERP to quickly get ramped up.”
In these cases, the subsidiaries can fully exchange data with the on-premise ERP in the main office, Castellina says. “They are integrated, which is a priority. Some of these organizations are using the same ERP provider and others are using different ERP providers.”
If you’re thinking like I was that these are likely to be partial ERP systems, Castellina says otherwise. The survey results indentify them as entire systems, not just certain extensions or modules like CRM, for instance.
Kevin Beasley, chief information officer at VAI, an ERP vendor closely tied to the IBM i platform, sees a bright future for both SaaS and hosted services, but those areas represent less than 10 percent of the VAI installed base at this time.
“Our existing customers are more willing to move ERP off-premise than they used to be, but they already own a license to the software, so they are not going to pay for it again in a SaaS,” Beasley says. “They are increasingly interested in what we call platform as a service–running their software in our data center on our cloud. Some companies look at the economics of owning our software for five, seven, or 10 years, and it makes sense, but they don’t want the infrastructure in place at their location. The most common reason is they don’t have the staff or they don’t want to continue paying a local person to manage it. Within our customer base, it’s the retailers who are more open to that idea.”
He contrasts what he sees in retail with VAI’s manufacturing customers.
“A shop-floor environment is different,” he says. “Access to the systems is necessary to keep production lines and product shipping moving. Some of the manufacturers, and to some degree the distributors, are less willing to move to a hosted environment because of that. The SaaS and hosted services movement has been a slow uptake that is continuing to happen. But by 2015 it’s going to be a much bigger number. We are figuring approximately one-third of our customers will move ERP off-premise by 2015.”
Overall, there’s a pretty close alignment of VAI’s IBM i-based customers with the survey numbers that Aberdeen has assembled. By the analysts’ calculations, 48 percent of those in manufacturing are now willing to consider SaaS, while 50 percent of those in retail are so inclined. That’s not much of a difference, but consider the flip side of that coin. According to Aberdeen, 69 percent of manufacturers say they are more likely to consider on-premise ERP, while only 56 percent of retailers vote that way.
By the way, the Aberdeen report notes the least likely industry to be interested in SaaS is the financial services segment. Only 22 percent of that business is interested in considering a SaaS ERP system. There are governance, compliance, and security issues that they have to deal with that other industries do not.
And when it comes to the size of the company doing the considering, VAI’s customers, for the most part, reside in the mid-market with annual revenues between $50 million and $500 million. They are primarily in the retail, manufacturing, and distribution businesses.
Commenting on the trend analysis, Beasley also noted that when the economy is spinning its wheels it creates a lot of start up companies that, in recent times, have had a positive impact on SaaS ERP. People with venture capital money like SaaS because of the way it goes on the books, he says. Now that the economy has rebounded, that driver of SaaS ERP is tapering off.
Many factors go into the decision whether SaaS ERP or a hosted system is the right choice. Considering SaaS is not automatically making a decision to go in the SaaS direction. Not everyone likes the SaaS numbers when compared to buying licenses and hardware.
For one thing, there’s frequently a misconception that network infrastructure can be forgotten when moving to any off-premise solution. It’s commonly thought that the cloud reduces network costs. It may, but there’s no guarantee. Companies still have to deal with compliance and security issues. Whether network costs are reduced has a lot to do with existing network infrastructure and whether networking requirements can be handled by existing staff or whether it has to be handled by contractors.
“It also depends where the companies are located,” Beasley points out. “Not every business has access to high capacity, highly reliable Internet. Companies without access to major urban communication networks have to determine what it costs to get the bandwidth needed for SaaS and when the lines go down, how long will it take to get them fixed?”
As Castellina noted, a lot of the ERP vendors are in the early stages of offering software as a service, but the trends he sees and has written about in his report indicate to him that it will soon become a significant factor in their product offerings. At this point, it is in the single-digit range, probably around the 5 percent mark, for generating overall revenue for most ERP vendors.
Access to the Aberdeen SaaS and Cloud ERP Trends, Observations and Performance report is available here.