In-Depth

SaaS: The Highest Hurdle

Software as a Service is gaining momentum in CRM and messaging segments. Now, partners try to leap into the ERP realm.

• By Lee Pender
• March 01, 2008

It's understandable why that's the case. Subscribing to a SaaS model can save companies lots of money and headaches compared to buying software licenses and installing applications on their own premises. And for a smaller business, SaaS can reduce or even eliminate the need for an internal IT department. In some categories, such as messaging and especially customer relationship management (CRM), the SaaS model has caught fire and seems to burn hotter all the time.

But, there's one area of enterprise technology that hasn't yet warmed to the hosted model: enterprise resource planning (ERP), that uber-category that, in the broadest sense of the phrase, includes the back-end software that runs businesses. Think accounting, human resources management, manufacturing, logistics, inventory ... and you're thinking ERP. It's big stuff -- complex, often expensive to implement and service, and absolutely business-critical.

For most companies, ERP has always been -- and still is -- too important to trust to a hosting provider. Most companies prefer to implement it on-site despite the considerable investment in money and time involved in doing so. And, until recently, the big players in the space -- especially SAP AG and Microsoft -- have offered little in the way of a hosted option for ERP.

Now that's changing. SAP recently unveiled a new hosted-ERP package, and Microsoft -- albeit rather quietly -- offers hosted versions of all of its Dynamics ERP suites through partners. Oracle Corp. has an ERP hosting strategy, too, and hosted-ERP provider NetSuite Inc. has already carved out a niche among small and midsize businesses (SMBs).

But all those vendors are taking different approaches to marrying SaaS and ERP, and partners will have significant choices to make if they want to get into the hosted-ERP game. Still, with its recurring-revenue model and relatively low maintenance costs, hosted ERP could eventually provide a profitable venture for channel players who want to get on board before their competitors do.

A Whole Different World
It's not that CRM isn't important. It's just that, for most businesses, it's not as important as ERP. If a hosted CRM application goes down, salespeople might not have access to their contacts for a few minutes or even a few hours. But if a hosted ERP application isn't available, a critical function such as manufacturing or shipping could come to a halt. CRM failures can be a real pain. ERP failures -- serious ones, anyway -- can potentially wreak havoc on financial quarterly results and drive down stock prices.

That's one of the roadblocks that hosted ERP -- and SaaS in general -- has encountered in gaining acceptance. Outsourcing ERP to a SaaS vendor can be cheaper than implementing it on-site, but many companies want control over their data, observers say.

Acceptance of SaaS "is really going to come down to how valuable and important an application is," says Virgil Bagdonas, ERP practice director at Green Beacon Solutions LLC, a Watertown, Mass.-based Gold Certified Partner that specializes in ERP, CRM and other business solutions. "The low cost of entry has to be weighed against how important it is for you to continue owning the data."

SaaS providers' system-uptime guarantees aren't always what they seem to be, either, says Joshua Greenbaum, principal at Berkeley, Calif.-based Enterprise Applications Consulting and an RCP columnist. Some SaaS vendors "guarantee a certain amount of uptime, which if you read the fine print, excludes regularly scheduled maintenance," Greenbaum says. "The uptime issue tends to be not as closely managed as it should be, particularly for these mission-critical functions." Also, he adds, some SaaS providers do all their hosting in a single data center, leaving them vulnerable if disaster strikes.

Beyond that, Greenbaum notes that hosted ERP isn't always cheaper than on-site ERP, especially in the long run. Companies with existing on-site applications would have to pay a mint to move from in-house to outsourced ERP, he says. Many companies -- along with big ERP vendors, including SAP and Microsoft -- view a SaaS ERP model as merely a steppingstone to an eventual on-premises deployment.

"Most on-demand vendors will tell you that a perpetual license may be a better long-term economic model," Greenbaum says. "The point is that the economics of on-demand for these areas where there's a reasonable on-premise solution are such that it's not a long-term cost savings to go on-demand."

Bagdonas, of Green Beacon, draws a simple comparison: "It's kind of like when you bought your first bicycle or your first car. It's a good point of entry, but at some point you matured and you needed more."

Not everybody, however, is so sure about that. Sean Rollings is vice president of product and industries marketing at NetSuite, the San Mateo, Calif.-based vendor that provides hosted ERP, CRM and e-commerce functionality to SMBs. Rollings says that big vendors are wrong to think that customers will abandon hosted ERP in favor of on-premises deployments.

"I think that's going to be part of the flaw of their strategy," Rollings says. "The assumption was that [customers] are going to use this as a stepping stone and then bring it on-premise. We're not seeing that from anybody. Some of the assumptions are not working out."

What's more, partners say that customers aren't as hesitant as they used to be about outsourcing critical functions such as ERP. The success of on-demand CRM-Salesforce.com Inc. claims more than 38,000 customers and offers applications in 15 languages -- has eased fears about security and uptime with the hosted model, as has the pervasiveness of Web-based consumer applications.

"If you go four or five years back, customers were not used to having these kinds of services outsourced," says Claus Bo Nielsen, sales director at TDC Hosting A/S, an Arhus, Denmark-based company that provides hosting services for Dynamics partners. "Today, it's not that big an issue. Everything is on some kind of Web service. You go to your banking application; you really don't mind where this bank application is as long as it works. The obstacle is not there today."

Sheldon Kralstein, CEO, of Clients First Business Solutions LLC, a Holmdel, N.J.-based Certified Partner that works with both Microsoft and SAP, agrees. "Two or three years ago, when hosting and outsourcing were getting started and everybody thought 'This is going to take off in a big way' and it never did, security was one of the main issues that people had," Kralstein says. "Today, that's less of a big deal. If you take companies like Salesforce.com and NetSuite, those have had pretty good acceptance. I think it helps. You have a lot of larger companies that are using Salesforce.com that are household names. Customers are up there; prospects are up there. [That's] pretty confidential data."

Just Getting Started
Even though NetSuite has been in business for 10 years, hosted ERP is still a largely nascent category of technology -- and one that still has limitations. For instance, Microsoft, which doesn't host ERP applications itself, counts about 100 partners worldwide among those hosting CRM and ERP applications -- in other words, some of those partners host CRM and not ERP. Microsoft announced the availability of partner-hosted ERP at its European Convergence event in Munich, Germany, in November 2006, but the model hasn't really caught on yet, says Mogens Elsberg, general manager, Microsoft Dynamics ERP.

"That's the difference between CRM and ERP. We have not seen the need to host ERP ourselves," Elsberg says. "[Hosted Dynamics] is taking off less than was expected when it was introduced some years ago. We believe that it's still some years to go before we really see demand in the market."

And, there are some functions that companies will not likely want to outsource, observers say. Chief among them is manufacturing -- specifically heavy manufacturing, including shop-floor planning and demand management. NetSuite, for instance, doesn't support traditional manufacturing, Rollings says, and partners say that manufacturing might be outside the realm of a SaaS ERP model.

"We see not so much the manufacturing side but all the other operational components -- purchasing, inventory and distribution management, all the supporting components," says David Greer, CEO of NextCorp Ltd., a Gold Certified Partner and application services provider based in Irving, Texas. "If you're looking at a company that is focused on building the widgets, if it's manufacturing the component, they will typically have a dedicated technology component of the company that's focused on building better manufacturing software. You'll see that in-house."

Kralstein notes that because so many companies outsource manufacturing overseas, there isn't much demand for ERP manufacturing functionality. "We don't find that our clients that are outsourcing manufacturing are looking to use the manufacturing elements overseas," he says. "You're looking to do forecasting, you're looking to analyze demand and know when the product is going to come in. The actual manufacturing process itself -- we're finding that we're not having to deal with that remotely."

In fact, partners cite professional services and distribution -- areas in which manufacturing doesn't really come into play -- as two of the more popular vertical industries for hosted ERP.

Different Approaches, Different Expectations
In the still-emerging world of SaaS ERP, business models for both partners and vendors vary wildly. TDC Hosting, for instance, does nothing but host applications, Nielsen says. It provides no services -- other Dynamics partners do that and use TDC's data center as a physical hosting facility. NextCorp, on the other hand, is closer to being a true SaaS provider in that it provides services and owns and manages the equipment in its data center -- although the equipment itself is housed in a facility that NextCorp "co-locates" with another company, Greer says.

Vendors are also taking various approaches to the market. Oracle officials declined to be interviewed for this story, but Greenbaum notes that the ERP giant has offered some form of hosted enterprise software since 2000. Oracle is light on services and focuses mainly on simple hosting, Greenbaum says, and its hosting business -- buoyed by the acquisitions of Siebel Systems Inc. and PeopleSoft Inc. in recent years -- is growing.

"They have had one of the more consistent approaches to hosted enterprise software of anybody," Greenbaum says. "What they don't do is spend a lot of time arguing about the fine points of the technology. They're much more of a hosting company."

The real dichotomy in hosting strategies involves ERP titan SAP, the market leader in ERP overall, and Microsoft, a relative upstart in the ERP market. SAP's best-known hosted ERP offering is Business ByDesign, a package aimed at SMBs that carries a price tag starting at $149 per user per month. Announced in September 2007, Business ByDesign remains in a roll-out stage worldwide.

What might surprise partners is that SAP wants them, with Business ByDesign, to embrace a role that many partners have been trying to escape -- that of a traditional reseller. SAP doesn't really want partners customizing Business ByDesign, company officials say. With customization comes complexity and increased cost; the whole idea of Business ByDesign is to be cheap and simple, relatively speaking. Partners, in turn, should derive revenue simply from reselling the hosted offering, not from adding to it.

"With the on-demand SaaS model, there's not as much customizing as you can do with an on-premise model," says Marty Mrugal, national vice president, Business ByDesign, SAP Americas. "The partner ecosystem is paramount to our success and rollout of Business ByDesign. This is a new model; it's not a customizing model."

For now, Mrugal says, SAP will host all of its SaaS ERP offerings itself. He adds that he's bullish on the market opportunity for hosted ERP among SMBs, and says that SAP plans to make Business ByDesign an important part of its core strategy.

"It's a long-term investment," Mrugal says. "We're committed to the SMB. Our SMB business is over a billion-dollar business. Over the next three years, there's a very aggressive business plan and it becomes a substantial part of our model."

Microsoft's approach could hardly be more different. While Redmond does provide some hosting of CRM applications, it provides none for ERP, relying completely on hosting partners to do the job. And Elsberg says that Microsoft strongly encourages partners to add services to hosted versions of Dynamics. He says that Microsoft has worked since 2006 to educate partners about Dynamics hosting opportunities.

Still, in comparison to hosted Dynamics CRM, Dynamics ERP on-demand has had little press attention, and, apparently, even less promotion from Microsoft. Elsberg says that's going to change. "Expect to see in the next 12 months that we will increase the awareness around this offering," he says. "In the [current] market as such, we may not be known as a SaaS ERP company. We will change that perception in the coming months."

Even so, if Microsoft's outlook for ERP on-demand seems more guarded than SAP's, that's because it is, Greenbaum says. "[Microsoft] is not out there spending a zillion dollars in marketing and PR trying to get to first place in the market," he says. "They're not even sure that the demand for hosted ERP is that big. No one is really sure what that demand really looks like."

Microsoft's relatively laissez-faire approach to hosted ERP might offer more customization opportunities for partners than SAP's more tightly controlled strategy, but Kralstein, of Clients First, says that Redmond's deal isn't necessarily the better one for the channel. In fact, he prefers what SAP is doing.

"Microsoft isn't doing the hosting itself," he says. "You're putting the package together yourself. With SAP, everything's in place, everything's hosted and it's easier to get started. We become more of a sales company and a company that does project management than a company that writes code. It's a recurring-revenue model to really build a business that's a much better structure than it is today."

It is, however, an unusual model, Greenbaum says, because it asks "high-touch" partners to sell at low margins -- whereas Microsoft is offering higher margins. "What SAP is doing to the partner model is something that has never been done before," Greenbaum notes. "You've got to go to the CEO and sell a very sophisticated system. It's high-touch in that sense."

The Lure of the Yearly Check
Whatever challenges hosted ERP might face -- and whatever approaches vendors might take -- partners love the idea of subscription fees rolling in every month. Just as customers can realize cost savings by signing on to ERP on-demand, partners that know how to manage their sales cycles can incur guaranteed revenue at lower cost of sales and service.

But accomplishing that goal can be tricky. Greenbaum notes that NetSuite's model of renewing contracts annually could drive sales costs through the roof for some partners because they would have to re-sell customers on their offerings every year. Rollings notes that annual renewals help stave off expectations of discounts from long-term customers, who might want price breaks if they sign multi-year deals. He also says that yearly sales visits help facilitate communication with customers.

"It's a tremendous driver of collaboration between the vendor and the customer because we have to earn their renewal," Rollings says. "We're much more conversational; we understand what the customer's needs are."

In any case, Kralstein is expecting great things from ERP on-demand. While revenue from hosted ERP represents maybe 1 percent of the company's business today, "25 or 30 percent would not surprise me come two years from now, and within five years 50 percent."

Greer, of NextCorp, also says that he'd like to see the hosting side of his ERP business grow, in part because the recurring-revenue model it offers is so reliable. "We were very concerned when the first round of renewals was coming up," says Greer, whose company signs customers to three-year contracts. "We had a 95-plus percent re-up with all of those clients. It's a very sticky business model."

How sticky the SaaS model itself will be in ERP, though, remains to be seen.