June 11, 2007
BrainTrust Query: Is Software-as-a-Service the next step for the intelligent enterprise?
By Gregory M. Belkin, Product Marketing Manager, SeaTab Software Inc.
Lets face it: retailing is a tough business. The multi-channel world has provided customers with more shopping flexibility than ever before – not only with alternate ways to make a purchase, but high levels of product and price information for comparison shopping.
As a result, the customer has been put in charge of his or her own destiny, and no longer must accept shortcomings that result from retailers’ internal struggles. These challenges, such as multi-channel inconsistencies, inadequate customer service levels, and out-of-stocks are closely scrutinized – and poor performance brings the immediate punishment of lost sales. Retailers of any size must now reconcile a dilemma: better customer service and cross-channel consistency, versus the pressures from top management and Wall Street to keep prices down and improve store execution.
Small- to mid-size retailers, due to a lack of IT resources, have a particular challenge in this area. But, according to industry research, these retailers may be taking to heart the concept that maximizing the customer experience does not have to come at a high cost to the enterprise.
One possible answer that’s emerging is on-demand, Software-as-a-Service (SaaS) IT processes. According to research group IDC, key characteristics of the SaaS architecture include:
- Network-based access to, and management of, commercially available software
(i.e., not custom) - Activities that are managed from central locations rather
than at each customer’s site, enabling customers to access applications
remotely via the web - 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
Traditionally, IT management has been plagued with difficult to understand IT software, and a hard-to-quantify return on investment. This has lead many IT managers to half-jokingly proclaim their desire for an “on-staff PhD” to make heads or tails of existing processes. The SaaS model, however, seeks to change this paradigm. Gone would be the days of “power users” charged with helping the organization digest new software processes. The SaaS model delivers an on-demand, web based atmosphere accessible to all parts of the enterprise. This allows for the management of a single set of data, customized at the user-level.
Software-as-a-Service can be employed in many places throughout the enterprise. One of the most effective places for on-demand solutions, however, is within business intelligence processes. Industry research has shown that only 20 percent of small- to mid-size retailers have any sort of business intelligence processes at all. This is attributable to the fact that business intelligence solutions require lengthy deployments, and a complicated, multi-tiered architecture. As a result, retailers, consumer packaged goods manufacturers, and others are struggling to centralize data analysis solutions within their organization, extend analysis functionality to all ends of the enterprises, and allow users the flexibility to customize their own reports.
There is no clear, end-all solution to solving the traditional retail conundrum of high touch versus high efficiency. What there may be, however, is a way to think differently about how IT operates within an enterprise. Does IT drive business processes, or do business processes drive IT management? If the answer for an organization is the latter, then IT must respond to the needs of the customer. Software-as-a-Service may be just the tool retailers need to manage this response, while still preserving crucial company resources.
Discussion Questions: What does the future hold for on-demand, Software-as-a-Service IT? Is this technology likely to take off, or is it just another IT fad? Does your organization currently use on-demand technology, and how has your experience been with the technology?
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SeaTab’s white paper says that Software-as-a-Service would cost $200,000 a year versus a $500,000 to $3 million initiation for conventional Business Intelligence. Hosted solutions are also attractive because annual upgrades are done by the service provider, not the IT folks at dozens of companies. Clearly the world is moving towards hosted solutions networked via the internet, instead of company-by-company installations.
Having come up IS organizations with The Service Bureau Corporation (which many of you may never have known), it is easy for me to recognize the value of SaaS. I have been an advocate of outsourcing non-core-competencies, of ASPs, of on-demand applications, you name it, for many years now.
The applications available on these architectures are getting better and better. The retailers don’t need to divert their focus from their true business (buy low, sell higher, sell more, thank the customer, good night) to run maintain, and back-up sophisticated applications.
If it is not a true differentiator to your business, buy it from somebody else. I don’t do my own plumbing, I call a plumber. The challenge to most retailers is to make better use of the data that they can get out of the systems than their competition can. That is where the better operators gain market share. There, and in execution.
I am waiting for the day when companies only have desktops (and they’ll probably be very dumb desktops) running all kinds of applications somewhere in the world, and nobody will care where.
These applications are going to improve the marketplace for the consumer because it will enable the smaller retailer (any company) with a better idea, to compete with established, dumber companies, from day one, at a cost they can afford.
It’s a beautiful thing….
The Software-as-a-Service model delivers well-known benefits of lower costs, reduced risk, and fewer headaches, and retailers large and small have become much more accepting of the SaaS model. However there are additional, less frequently discussed benefits of the SaaS model that have no less of a profound effect on how retailers manage and extract value from their IT, such as the frequency by which the software (or service, as it were) is enhanced and upgraded.
Traditional, one-to-one, behind-the-retailer’s-firewall deployments are not only costly to maintain, they are troublesome to enhance and upgrade. New version rollouts are complex, multi-year initiatives for the software vendor and customers alike. Ultimately, the customer sees new functionality on an annual basis at best.
However, SaaS models allow the deployment of new functionality as fast as the vendor can develop, test, and release it. New releases every 6-12 weeks are common. This means that retailers are consistently adding new, easily digestible capabilities to their business intelligence and processes instead of via a massive, big-bang approach which fails in most areas of life, software included.
And, recent advances in web technologies such as AJAX, SOA, and Web Services have dramatically enhanced SaaS vendors’ abilities to provide rich, configured user interfaces over the web and efficiently integrate with retailer and vendor legacy systems.
The only reason why the giants of the software industry aren’t making even more noise about SaaS themselves is that most of their business is stuck in the old model and they “can’t get there from here.” In the meantime, it is nearly impossible to gain venture funding for a new software company today unless it is based on SaaS, and there is a tremendous amount of SaaS-related innovation in areas such as business intelligence, price and promotion optimization, demand management and replenishment, and many others.
As with so many “technology answers,” the technology is not the challenge, it is the users of the technology. The best analogy I can come up with for software as a service is the automobile engine. The reason there are so many third party parts suppliers is because the market is huge, the requirements are well defined and agreed upon, and the technology is well understood.
Internet technology is no longer a mystery and everyone can build their own website on FaceBook or MySpace. The market for retail solutions is huge…how many retail companies and independent operators are there out there? So the limiting factor becomes the requirements definition and a consensus amongst businesses. Suppliers, manufacturers, and retailers all have to agree on the requirements for getting goods to the consumer, then they all have to agree on who is going to do what in order to meet those requirements. This leads to the definition of business processes and only then can technologists begin to offer solutions.
Software as a service, service oriented architecture, or network based computing–whatever you want to call it–has huge potential. Industry groups should focus on organizing their membership so that they can define their business practices with SOA in mind. By clearly defining roles and responsibilities within an industry they will make it possible for the technology to actually provide solutions.
Certainly there is a major place for SAAS among the arsenal of IT approaches. And certainly there is an urgent need for BI in mid-sized companies.
But it doesn’t necessarily follow that BI and SAAS are a good combo. Any hosted service is going to struggle with three fundamental issues that are critical factors in the success of any BI implementation.
1. Cost. It is critical that every informed user has access to several years of performance information in the data warehouse. This usually numbers several hundred users, including store managers, key vendors, all the buyers, planners, and inventory specialists, and management. At the scale, SAAS pricing models usually becoming prohitiably expensive comparied to in-house.
2. Security. No retailer wants this critical information outside safe-haven. Sure, providers contracts deal with data security. But why risk malfeasance or incompetence that could result in vital information falling into competitor’s hands?
3. Integration. The central idea of BI is to drive business processes. When stockouts occur, it should be a seamless step to solve the problem in the users’ ERP system or accounting system. Same with overstocks, mix problems, and the need resolve countless day to day issues. SAAS architectures are very cumbersome in developing integrated playbooks for these purposes.
The future is here! It is important that we do not confine ourselves to limiting this scope to just traditional software, but that we also include any data that is downloaded from a service model, or that is offered on a “click to pay” type basis. This would already include the largely successful iTunes application, as well as the ever increasing availability of TV data through the web or through a cable driven service like “On Demand.” All of these are excellent services that deliver software/data through a virtual portal which does not require the traditional retail bricks and mortar presence or the physical “hard copy” of a CD or DVD. We can now deliver programming, music, games, and data which are all linked through “SaaS.”
Successfully running a MC retail operation is not getting easier–it’s getting harder, as the customer, merchant and supply retail expect flawless execution everywhere 24×7!
…IF you are a merchant. That means ramping up IT teams and expenses, to be successful. Can you afford it? Probably not. Well, SaaS to the rescue. Now you can rent and not buy…renting advantages also include being able to more easily swap out disappointing components. SaaS to the rescue.
(From the shameless plug department; my firm loyaltylab.com is a 100% SAAS CRM and loyalty shop and I can’t imagine going any other way!)
It seems we are talking about a number of different issues here that are often entangled: customer service vs. cost savings, effective IT management, and effective use of data within the enterprise. Each of these has different critical factors and levers. Let’s look at each separately.
Our data shows that good customer service is not more expensive than poor customer service. We believe this is a smokescreen, an excuse, that low-service organizations use to justify their performance. We have confirmed that findings of dozens of others, that poor service is overall much more costly to the organization. Our unique finding, though, is that the biggest reason customer service is poor in so many organizations (96% of all business organizations have a customer service level of 70% or worse — we have data for this) is that management is controlled by a System that blocks knowing the actual service level they have, its costs, how to change it, etc. Management is not in control and has poor information, and doesn’t know it.
Information technology and its management still appears to be taking place in a box, where IT is fascinating to its administrators and technicians, and frustrating to users and the organization at large. We believe this is a cultural problem within the IT world, because it seems extremely difficult to convince IT champions that their organizations do not believe in their technology to the extent they think. I again point to our data, which shows that all users in all types of organizations (B2B, B2C, government, nonprofit, etc.) report their satisfaction with all IT at a 2 out of 5. On the contrary, IT professionals and champions report that the IT they manage works at a 4 out of 5. Quite a disconnect.
As much as we would like to think otherwise, management does not basically control the organization; there are many examples of this (interested readers can please email me). Everything the organization does is made of, based on, and produced by information, and the System that controls all this information controls the organization. This occurs at a much deeper level and with far more kinds of information than is processed by IT systems. Interestingly, this System controls also the data that flows within IT systems. We might like to think that IT is so powerful and “pure-data based” that it is sovereign. It isn’t. It is controlled, just as everything else is. This is why data that flows in IT so often has so little impact on the organization’s critical issues.
This all converges here: inter- and intra-organizational IT systems cannot have the impact we think, because they are part of organizational error systems. These error systems have the greater impact, partly because we don’t know they exist and therefore don’t monitor or correct them. We might want the data flows of IT to be able to override these error systems, but our studies show the opposite. When we have IT systems that can take this into account, we will really be getting somewhere. Even better, though, are organizations that have learned about their own error systems and know how to monitor and dismantle them. In these extraordinarily rare organizations, IT has a different function, and works at a different level of effectiveness.
It’s a great opportunity and SaaS is going to be a huge reality. In my view, this is evidenced by the trend in SaaS is moving from a high margin-low volume model to a high volume-low margin model. However, in order to take advantage of the benefits of SaaS, a company must relinquish some control over its own data, and trust the SaaS vendor to keep it safe and private. This is where the industry will look for greater development so that the trust factor is put in place so that the perceived risks are reduced.
The idea of hosted software is twenty years old at least, and many of us can remember early iterations from at least a decade ago. The main impediment to its growth was privacy issues – subscribers not wanting their precious data in anyone’s hands but their own, along with perceived control issues. Retailers are hard-headed, and they typically can only learn from their mistakes – after repeating them a few times. It’s like one definition of insanity: Doing things the same way but expecting a different outcome. And so, after spending millions of dollars to collect data and then sitting on it in the forlorn hope that it’ll someday hatch into business blessing, some now realize that renting (as Mark Goldstein termed it) is better than buying.
So now hosted software has a shiny new name, “Software-as-a-Service,” to go along with the shiny new repositioning that providers are polishing. I can imagine the retail IT head standing before the company president and explaining his recommendation to adopt SaaS while flushing millions of dollars invested in a failed, proprietary internal system. “Didn’t we reject this type of solution when we decided to create our own system?,” asks the president. “Oh, that was hosted software,” explains the IT head, “and this is Software-as-a-Service.” Hopefully the prez will buy this convoluted reasoning. Or, like the Save Mart conversions of Albertsons stores here in NorCal, they’ll just cancel the whole thing. Ugh! Fire too hot! Must retreat!!
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SeaTab’s white paper says that Software-as-a-Service would cost $200,000 a year versus a $500,000 to $3 million initiation for conventional Business Intelligence. Hosted solutions are also attractive because annual upgrades are done by the service provider, not the IT folks at dozens of companies. Clearly the world is moving towards hosted solutions networked via the internet, instead of company-by-company installations.
Having come up IS organizations with The Service Bureau Corporation (which many of you may never have known), it is easy for me to recognize the value of SaaS. I have been an advocate of outsourcing non-core-competencies, of ASPs, of on-demand applications, you name it, for many years now.
The applications available on these architectures are getting better and better. The retailers don’t need to divert their focus from their true business (buy low, sell higher, sell more, thank the customer, good night) to run maintain, and back-up sophisticated applications.
If it is not a true differentiator to your business, buy it from somebody else. I don’t do my own plumbing, I call a plumber. The challenge to most retailers is to make better use of the data that they can get out of the systems than their competition can. That is where the better operators gain market share. There, and in execution.
I am waiting for the day when companies only have desktops (and they’ll probably be very dumb desktops) running all kinds of applications somewhere in the world, and nobody will care where.
These applications are going to improve the marketplace for the consumer because it will enable the smaller retailer (any company) with a better idea, to compete with established, dumber companies, from day one, at a cost they can afford.
It’s a beautiful thing….
The Software-as-a-Service model delivers well-known benefits of lower costs, reduced risk, and fewer headaches, and retailers large and small have become much more accepting of the SaaS model. However there are additional, less frequently discussed benefits of the SaaS model that have no less of a profound effect on how retailers manage and extract value from their IT, such as the frequency by which the software (or service, as it were) is enhanced and upgraded.
Traditional, one-to-one, behind-the-retailer’s-firewall deployments are not only costly to maintain, they are troublesome to enhance and upgrade. New version rollouts are complex, multi-year initiatives for the software vendor and customers alike. Ultimately, the customer sees new functionality on an annual basis at best.
However, SaaS models allow the deployment of new functionality as fast as the vendor can develop, test, and release it. New releases every 6-12 weeks are common. This means that retailers are consistently adding new, easily digestible capabilities to their business intelligence and processes instead of via a massive, big-bang approach which fails in most areas of life, software included.
And, recent advances in web technologies such as AJAX, SOA, and Web Services have dramatically enhanced SaaS vendors’ abilities to provide rich, configured user interfaces over the web and efficiently integrate with retailer and vendor legacy systems.
The only reason why the giants of the software industry aren’t making even more noise about SaaS themselves is that most of their business is stuck in the old model and they “can’t get there from here.” In the meantime, it is nearly impossible to gain venture funding for a new software company today unless it is based on SaaS, and there is a tremendous amount of SaaS-related innovation in areas such as business intelligence, price and promotion optimization, demand management and replenishment, and many others.
As with so many “technology answers,” the technology is not the challenge, it is the users of the technology. The best analogy I can come up with for software as a service is the automobile engine. The reason there are so many third party parts suppliers is because the market is huge, the requirements are well defined and agreed upon, and the technology is well understood.
Internet technology is no longer a mystery and everyone can build their own website on FaceBook or MySpace. The market for retail solutions is huge…how many retail companies and independent operators are there out there? So the limiting factor becomes the requirements definition and a consensus amongst businesses. Suppliers, manufacturers, and retailers all have to agree on the requirements for getting goods to the consumer, then they all have to agree on who is going to do what in order to meet those requirements. This leads to the definition of business processes and only then can technologists begin to offer solutions.
Software as a service, service oriented architecture, or network based computing–whatever you want to call it–has huge potential. Industry groups should focus on organizing their membership so that they can define their business practices with SOA in mind. By clearly defining roles and responsibilities within an industry they will make it possible for the technology to actually provide solutions.
Certainly there is a major place for SAAS among the arsenal of IT approaches. And certainly there is an urgent need for BI in mid-sized companies.
But it doesn’t necessarily follow that BI and SAAS are a good combo. Any hosted service is going to struggle with three fundamental issues that are critical factors in the success of any BI implementation.
1. Cost. It is critical that every informed user has access to several years of performance information in the data warehouse. This usually numbers several hundred users, including store managers, key vendors, all the buyers, planners, and inventory specialists, and management. At the scale, SAAS pricing models usually becoming prohitiably expensive comparied to in-house.
2. Security. No retailer wants this critical information outside safe-haven. Sure, providers contracts deal with data security. But why risk malfeasance or incompetence that could result in vital information falling into competitor’s hands?
3. Integration. The central idea of BI is to drive business processes. When stockouts occur, it should be a seamless step to solve the problem in the users’ ERP system or accounting system. Same with overstocks, mix problems, and the need resolve countless day to day issues. SAAS architectures are very cumbersome in developing integrated playbooks for these purposes.
The future is here! It is important that we do not confine ourselves to limiting this scope to just traditional software, but that we also include any data that is downloaded from a service model, or that is offered on a “click to pay” type basis. This would already include the largely successful iTunes application, as well as the ever increasing availability of TV data through the web or through a cable driven service like “On Demand.” All of these are excellent services that deliver software/data through a virtual portal which does not require the traditional retail bricks and mortar presence or the physical “hard copy” of a CD or DVD. We can now deliver programming, music, games, and data which are all linked through “SaaS.”
Successfully running a MC retail operation is not getting easier–it’s getting harder, as the customer, merchant and supply retail expect flawless execution everywhere 24×7!
…IF you are a merchant. That means ramping up IT teams and expenses, to be successful. Can you afford it? Probably not. Well, SaaS to the rescue. Now you can rent and not buy…renting advantages also include being able to more easily swap out disappointing components. SaaS to the rescue.
(From the shameless plug department; my firm loyaltylab.com is a 100% SAAS CRM and loyalty shop and I can’t imagine going any other way!)
It seems we are talking about a number of different issues here that are often entangled: customer service vs. cost savings, effective IT management, and effective use of data within the enterprise. Each of these has different critical factors and levers. Let’s look at each separately.
Our data shows that good customer service is not more expensive than poor customer service. We believe this is a smokescreen, an excuse, that low-service organizations use to justify their performance. We have confirmed that findings of dozens of others, that poor service is overall much more costly to the organization. Our unique finding, though, is that the biggest reason customer service is poor in so many organizations (96% of all business organizations have a customer service level of 70% or worse — we have data for this) is that management is controlled by a System that blocks knowing the actual service level they have, its costs, how to change it, etc. Management is not in control and has poor information, and doesn’t know it.
Information technology and its management still appears to be taking place in a box, where IT is fascinating to its administrators and technicians, and frustrating to users and the organization at large. We believe this is a cultural problem within the IT world, because it seems extremely difficult to convince IT champions that their organizations do not believe in their technology to the extent they think. I again point to our data, which shows that all users in all types of organizations (B2B, B2C, government, nonprofit, etc.) report their satisfaction with all IT at a 2 out of 5. On the contrary, IT professionals and champions report that the IT they manage works at a 4 out of 5. Quite a disconnect.
As much as we would like to think otherwise, management does not basically control the organization; there are many examples of this (interested readers can please email me). Everything the organization does is made of, based on, and produced by information, and the System that controls all this information controls the organization. This occurs at a much deeper level and with far more kinds of information than is processed by IT systems. Interestingly, this System controls also the data that flows within IT systems. We might like to think that IT is so powerful and “pure-data based” that it is sovereign. It isn’t. It is controlled, just as everything else is. This is why data that flows in IT so often has so little impact on the organization’s critical issues.
This all converges here: inter- and intra-organizational IT systems cannot have the impact we think, because they are part of organizational error systems. These error systems have the greater impact, partly because we don’t know they exist and therefore don’t monitor or correct them. We might want the data flows of IT to be able to override these error systems, but our studies show the opposite. When we have IT systems that can take this into account, we will really be getting somewhere. Even better, though, are organizations that have learned about their own error systems and know how to monitor and dismantle them. In these extraordinarily rare organizations, IT has a different function, and works at a different level of effectiveness.
It’s a great opportunity and SaaS is going to be a huge reality. In my view, this is evidenced by the trend in SaaS is moving from a high margin-low volume model to a high volume-low margin model. However, in order to take advantage of the benefits of SaaS, a company must relinquish some control over its own data, and trust the SaaS vendor to keep it safe and private. This is where the industry will look for greater development so that the trust factor is put in place so that the perceived risks are reduced.
The idea of hosted software is twenty years old at least, and many of us can remember early iterations from at least a decade ago. The main impediment to its growth was privacy issues – subscribers not wanting their precious data in anyone’s hands but their own, along with perceived control issues. Retailers are hard-headed, and they typically can only learn from their mistakes – after repeating them a few times. It’s like one definition of insanity: Doing things the same way but expecting a different outcome. And so, after spending millions of dollars to collect data and then sitting on it in the forlorn hope that it’ll someday hatch into business blessing, some now realize that renting (as Mark Goldstein termed it) is better than buying.
So now hosted software has a shiny new name, “Software-as-a-Service,” to go along with the shiny new repositioning that providers are polishing. I can imagine the retail IT head standing before the company president and explaining his recommendation to adopt SaaS while flushing millions of dollars invested in a failed, proprietary internal system. “Didn’t we reject this type of solution when we decided to create our own system?,” asks the president. “Oh, that was hosted software,” explains the IT head, “and this is Software-as-a-Service.” Hopefully the prez will buy this convoluted reasoning. Or, like the Save Mart conversions of Albertsons stores here in NorCal, they’ll just cancel the whole thing. Ugh! Fire too hot! Must retreat!!