Many have their heads in the cloud today. This goes for both individuals, as well as companies. The interest in Software as a Service (SaaS) has been steadily increasing over the past several years, led by enterprise applications such as Customer Relationship Management (CRM) and elements of Human Capital Management (HCM) such as recruitment, talent management and benefits administration. Yet broader applications such as Enterprise Resource Planning (ERP), which provide the transactional system of record on which a business is based, have been slower to warm to the idea. Today that is changing and as many weigh the pros and cons of SaaS ERP, the advantages appear to be winning.
On March 6, 2012, SAP announced that SAP Business One, characterized as its ‘most affordable ERP solution for small and growing businesses’, is now available “on-demand.” Previously only available as a licensed on-premise or hosted solution, this added deployment option launches Business One as a multi-tenant SaaS solution. The On-Demand version is available now in 18 countries (more to be added later) through selected partners. Subscriptions are competitively priced and offered on a monthly, named-user basis.
Responding to Market Opportunity
The fact that ERP has lagged behind other enterprise software with respect to SaaS deployment has led to conjecture. Has lack of acceptance of SaaS ERP resulted from few options being available? Or were few options made available because of lack of interest? While that may have been a valid debate in years gone by, the resistance to SaaS ERP appears to be breaking down while interest in traditional on-premise solutions seems to be waning.
The Mint Jutras 2011 ERP Solution Study, with over 900 qualified responses, found SaaS deployment is now more likely to be considered than traditional hosting options. Yet even more stunning is the decline in the willingness to consider on-premise deployments. A few years back the percentage willing to consider traditional deployments would have been in the 90’s while recent research pegs it at 56%. And the comparison is even more dramatic when we compare “World Class” ERP implementations where we see SaaS heavily favored over licensed options:
- SaaS/On-Demand: 62%
- Hosted by ERP vendor: 44%
- Hosted by an independent 3rd party: 35%
- Traditional licensed on-premise: 38%
Mint Jutras defines “World Class” ERP implementations as the top 15% in terms of results measured, progress achieved against company-specific goals and current performance. These are the implementations that have delivered the most business benefit to the enterprise, whether it is large or small. Installing ERP is a means to an end, and not the end itself.
So demand is definitely on the rise, and so is supply. With the launch of SAP Business One On-Demand, SAP is now one of several major ERP vendors taking to the cloud applications that are already well established as on-premise solutions. However, in evaluating these transitions, it is important to understand all the options as well as the limitations.
Often these transformations resemble hosted solutions more closely than they do software as a service. Some industry observers insist that a cloud offering be multi-tenant (along with other qualifications) before they will regard it as “true SaaS” and even go so far as to accuse vendors who offer single-tenant solutions (also known as multi-instance) of “cloud washing.” With its multi-tenancy for Business One, SAP avoids this label. But not all companies seeking a cloud-based solution want the same thing. It is important to look beyond these labels, understand your requirements and make sure they are met.
Not SAP’s Only Cloud Story
Often meeting customer requirements takes experience and practice. Note that this is not SAP’s first or only foray into the cloud. In fact, its cloud heritage dates back to 2007 when it officially launched its first SaaS solution, SAP Business ByDesign. Like Business One, ByDesign is part of SAP’s small to midsize enterprise (SME) product portfolio. Unlike SAP Business One, ByDesign is and has always been a SaaS only solution. Originally SAP segmented its SME portfolio only by company size, either by annual revenues or by number of employees. Today SAP uses a slightly different positioning scheme. Business One is still viewed as the most affordable and recommended for small and growing businesses whether these companies are seeking an on-premise or on-demand solution. Business ByDesign, offered exclusively in a SaaS environment, is positioned as the best solution for mid-size companies looking for SaaS ERP. SAP Business All-in-One, which shares the same ERP as the Business Suite, is a scalable solution for mid-size companies looking to stay on premise. However, the earlier positioning by company size, combined with the assumption that SaaS was largely for small companies, often led to speculation by industry observers that ByDesign would cannibalize sales of Business One.
This never proved to be the case, in part because ByDesign was still a very “young” product and in part because SAP delayed unleashing its considerable selling and marketing engines to power sales. You see, unlike SAP Business One On-Demand, ByDesign was not originally released as a multi-tenant solution. While this did not adversely affect the value proposition, it did negatively impact the economics for SAP. It was not until Feature Pack 2.5 was released in mid-2010 that multi-tenancy was introduced, allowing SAP to reduce its internal cost by a factor of 20.
In the meantime, SAP had also announced other “on-demand” offerings, including what it refers to as “Line of Business” applications, as well as Business Intelligence (BI) On-Demand. While not originally the case, through evolution and performance improvements, ByDesign was announced as “the” platform of development for these on-demand solutions as well. SAP was getting more and more serious about its cloud offerings.
In December 2011, SAP went one step further and announced its acquisition of SuccessFactors, a SaaS-only HCM solution. However, it was quite clear, even at the outset, that this announcement was more about cloud than it was about HCM. Amid the hoopla of the $3.4 billion acquisition, there was also speculation that ByDesign was dead. That prediction appears to be far from true. No, the latest cloud offering, Business One On-Demand, does not use the ByDesign platform but given the breadth of the entire SAP product portfolio, there appears to be room for multiple offerings and more than one platform.
So what does all this history have to do with Business One On-Demand? It’s really about the culture. Amidst all the merger and acquisition fanfare, there has been repeated reference to the ‘cloud DNA’ of SuccessFactors and the appointment of its CEO Lars Dalgaard, to take responsibility for all SAP cloud offerings. When an enterprise application has traditionally only been sold with an up-front license, like Business One has, shifting to a subscription based selling is a tough transition for the sales team (and sometimes Wall Street) to make. SAP management appears to “get this” and is proactively taking steps to address this. The first step last year was a conscious shift to sell all SME business through channels. The acquisition of SuccessFactors and the appointment of Mr. Dalgaard to oversee cloud offerings is a second and important one.
Proposed Value Proposition
So what is the value proposition offered by SAP Business One On-Demand? In many respects, it is the same value proposition of any SaaS ERP offering. Survey participants in the Mint Jutras ERP Solution Study cited a wide variety of benefits to SaaS deployment, but three primary themes emerged: lower costs, more upgrades and the ability to support remote employees and locations.
Survey respondents anticipate lower total cost of ownership (TCO), smaller start-up costs and fewer Information Technology (IT) resources required in a SaaS environment. In order to deliver these benefits, SAP simply needs to price Business One On-Demand competitively. While SAP is not announcing the price publicly, (remember it intends to sell through its channel so prices are suggested) targets shared privately appear to be competitively priced and will necessarily fluctuate somewhat depending on geography.
There are still some that feel the cost of SaaS ERP is really not that much more inexpensive than on-premise, particularly over the longer term. Of course, this does not take into consideration avoiding the cost of hardware or internal IT resources to manage the installation. But even if you ignore the hardware factor, there is one advantage of purchasing SaaS ERP from a vendor that offers both SaaS and on-premise. That solution provider should be able to draw an apples-to-apples price comparison between the two deployment options.
SAP and its partners should be able to assist in helping the prospective customer in determining the break-even point purely from a software, services and maintenance stand-point. But don’t forget hardware, infrastructure costs and remember, often the larger costs from a TCO perspective are the soft costs of internal resources.
One cost concern expressed by 47% of survey respondents was that of escalating costs. What’s to prevent a software company from exorbitantly raising prices at the end of the term of the initial contract? Because SAP does not sell Business One On-Demand directly, it cannot guarantee, with absolute certainty that the price will not increase beyond reasonable expectations, but is relying on the competitive nature of its channel to keep escalating costs in check.
While lower TCO was the most frequently cited benefit of SaaS ERP, a close second was the reduced cost and effort of upgrades (48% of survey respondents). The availability of more leading edge technology through more frequent updates was also a significant factor for 39%. The frequency and method of upgrades do vary from vendor to vendor. Those with SaaS-only solutions, developed exclusively for an on-demand environment might have a bit of an advantage here in that they are not tied to a prescribed release cycle. Those which offer the same solution on-premise and on-demand may not be as fluid in the delivery of innovation. Existing customers of on-premise solutions often prefer a longer release cycle since the upgrade process can be disruptive. This disruption is minimized in a SaaS environment because much of the burden of the upgrade process is assumed by the SaaS solution provider.
SAP does not expect to accelerate the upgrade release cycle of Business One simply to compete on this front, but also points to the maturity of the product relative to newer products developed for SaaS only. With over 34,000 installations, the product is indeed mature. However, even mature products must continue to evolve to meet new business challenges, so SAP isn’t entirely off the hook for keeping pace with innovation. SAP intends to continue to deliver upcoming innovations including enhanced support and application management via its Remote Support Platform (RSP), enhanced mobile integration and complete partner initiated lifecycle management.
Indeed SAP is beginning to see the convergence of the three pillars of innovation it has been touting for the past two years: cloud, mobility and in-memory. Many of the new mobile apps developed both by SAP and its partners, now (or soon to be) available through an “apps store” will have as much relevance for SMEs as for large enterprises. And in February 2012 SAP announced through “new analytics powered by SAP HANA for the SAP® Business One application and SAP HANA, Edge edition, SMEs will be able to leverage powerful in-memory technology from SAP.” The goal is to enable decision-making, dramatically increasing the speed of existing processes and speeding up access to potentially large amounts of data.
And finally, the third overall theme in terms of the appeal of SaaS ERP is in the support of distributed environments. There are several factors at play here. First of all, operating from multiple locations is no longer an issue only for large enterprises. The Mint Jutras ERP Solution Study found the average number of operating locations supported by ERP in small companies (annual revenues less than $25 million) was 2.5. This average grew to 5.5 as annual revenues grew to the $25 to $250 million range.
Secondly, large enterprises are often comprised of a network of small to mid-size divisions or subsidiaries. SAP has long referred to this scenario as an integrated business network. A very common scenario is to have a two-tier ERP strategy where one ERP is used at corporate (often called administrative ERP) and a second standard (often referred to as operating ERP) is used for units/divisions/locations. Because of its dominance in large enterprises, SAP is often the administrative ERP. While many other ERP vendors will make a concerted effort to interface to SAP at this level, nobody is better positioned to do this than SAP itself with one of its SME products.
Ninety percent (90%) of companies surveyed (and 97% of World Class ERP implementations) have defined standards for ERP implementations. What better way to control the standardization of solutions and processes than through SaaS deployment? In fact 36% of survey respondents cited the ease of remote access for a distributed workforce as a key advantage of SaaS and 27% noted the ease of bringing up remote sites.
Handling the Perception of a Down-Side
While SaaS ERP is gaining in acceptance, there is still a significant segment of the population who will not consider this deployment option and even those that will consider it still have some lingering concerns. Only 10% of the Mint Jutras ERP Solution Study indicated they had no concerns whatsoever in considering SaaS ERP.
In addition to the concern over the possibility of escalating costs, 46% expressed fear of down-time risk and unpredictable performance. Although a viable concern, due diligence can significantly reduce risk here. Prospective customers should ask for historical performance and they should also ask for guarantees of up-time, although appropriate caveats for natural or even man-made disasters may be negotiated in. Glenn Rhodes, IT Manager, DRIFIRE, a manufacturer of flame resistant clothing stated, ““Before we moved Business One into the cloud, I was concerned about performance impact but the impact has been minimal. Often you don’t see a difference at all.”
But the top concern, even with so much business being transacted over the World Wide Web, is still one of security, with 58% of survey participants expressing this concern. Mint Jutras would agree everyone should be concerned over security. But you should be concerned regardless of deployment option. And if you are a small company, without a dedicated IT security expert on board, chances are you assume more risk than you would in a SaaS environment, particularly one that has successfully completed an annual SAS 70 Type II audit. The SAS 70 certification was developed by the American Institute of Certified Public Accountants (AICPA) to annually audit the effectiveness of operations, controls and safeguards to host and process data. Indeed another 29% of respondents admitted that part of the appeal of SaaS was the comfort of leaving security and other IT issues to the experts.
Which brings us to the final and very important factor in considering consuming Business One as a service: Who is the partner that will actually be delivering the service? What is the partner’s track record? Fully assess its ability to deliver services.
A New Kind of Partner
With the introduction of Business One On-Demand, SAP is also introducing a new kind of partner. In the past, a typical Business One partner would be an ERP specialist, a company engaged in selling and servicing an ERP solution. Some also might have provided a hosting option. This is the type of partner that will be most likely to see an opportunity to expand their offerings into the cloud. Some (not all) existing partners may seek certification by SAP to deliver the cloud option. Often these partners specialize in extending the Business One solution. In these cases, SAP will insure that existing on-premise add-ons will run in the cloud without disruption.
In addition to these existing partners, new strategic partners will include telecom service providers. These types of companies are experts in hosting, cloud infrastructure, billing and support. Generally speaking they are not experts in ERP. Some may decide to invest in building an ERP practice, others may not. Those that do not will most likely be partnering with one or more of the existing Business One partners who are experts in ERP and Business One, but have no experience or desire to provide this cloud infrastructure and support.
SAP sees the introduction of SAP Business One On-Demand more as a bid for new-named business, although it will be possible for existing Business One customers to make the transition to the cloud. SAP’s Business One business has been steadily growing and the market for ERP in small companies is far from saturated.
On balance the advantages of a SaaS environment for ERP seem to outweigh the disadvantages. Cost savings, including TCO, startup costs and cost of IT staff can be substantial. Even if the subscription cost equals the cost of software and maintenance over time, there are still the savings achieved by eliminating the purchase or continued maintenance of hardware. If you have no IT staff today, there is no need to hire any. If you have good IT staff on board, let them engage in more strategic, value-add activities than routine maintenance without sacrificing the ability to take advantage of upgrades and innovation.
If you operate in a distributed environment, the advantages of a SaaS environment can be considerable in bringing standardization across the enterprise, providing access to remote employees and in bringing remote sites up quickly.
As with any selection of ERP, fit and functionality should be foremost in the decision-making process, along with ease of use and TCO which will directly impact the return on investment (ROI). So it is still important to put Business One and the partners selling it through their paces during the evaluation process. Make a careful choice that is right for your business.