Software as a Service (SaaS) has taken on mythical proportions in the software industry. Technology vendors and their investors view it as the next big thing in enterprise computing. It's easy to see why when one considers the success companies like Salesforce.com and NetSuite have had delivering sophisticated applications over the Internet to end users. Often overlooked, though, is that much of the pioneering work done to develop the SaaS model as we know it today occurred in the supply chain. From their early beginnings as transportation and procurement marketplaces, and visibility and event management services, these technologies have blossomed into offerings that are transforming how we deploy technology and manage our supply chains.

SaaS is the polar opposite of the traditional license-based sales and deployment model typically found in the enterprise software industry. With software licensing, a company purchasing application software also assumes the responsibility to install, run, and maintain the technology on its own computer hardware, managing it with its own staff or by a third party. The net effect is that the customer absorbs the entire expense of supporting and maintaining the software application.

License fees are almost always due to the vendor before the software is put into a production state. As part of the purchase, buyers of software generally sign a maintenance agreement that provides for ongoing technical support and regularly scheduled updates to the software. For the technology vendor, this is a gift that keeps on giving, with annual fees for maintenance agreements generally running from 15 percent to 20 percent of the original license fee. Large sums of money change hands before the software yields a dollar of value.

The SaaS model represents an entirely different way to price and deploy enterprise software. In its purest form, SaaS is a single software application and data base (often called an instance) that is used by many different customers simultaneously. The application itself is operated and maintained by the service provider on its own hardware, and the support costs borne by a single company in the traditional model are now shared by the entire customer base. No large upfront capital investment by the buyer is required at the time of implementation. Instead, payments for services are made on a regular and periodic basis. SaaS providers are creative in their pricing strategies. Charges can be calculated using fixed or variable methodologies such as number of users or the volume of transactions processed over a set period. Because users pay for only those services used, though, SaaS is often heralded as a much more economical way to adopt technology over the traditional software license model. (Exhibit 1 depicts the differences between SaaS and the traditional approach to software deployment.)

The innovative way in which SaaS deploys and prices services draws most of the interest from the IT community, press, and financial and industry analysts. However, don't just think of it as a way to access software at a lower price point. The strategic supply chain implications of multiple companies using the same set of software stretches far beyond the cost of ownership equation.

Integration of data has always been the Achilles heel of supply chain management. Companies are hard pressed, even today, to adequately integrate the information flows within their own organizations—never mind those of a loosely federated trading community.

The de facto networks that the SaaS model creates largely eliminate the obstacles blocking the way to broader electronic communication. How so? Think of how telecommunication networks deliver value. Connecting one phone to the network yields absolutely no value at all. Adding another increases the value of the network marginally, but in no way offsets the cost of implementing and operating it. Value grows exponentially, though, when a thousand, ten thousand, or a million phones are connected to the network simultaneously.

An AMR Research client in the consumer goods industry provides a more concrete example. He estimated that it would cost his company $1,100 each to integrate to its 300 transportation carriers. That cost estimate dropped to nearly zero when the company decided to leverage the integration work already done by a SaaS provider of Transportation Management Services (TMS), who already had most of the same carriers connected into its network. The lesson learned: as critical mass within a network grows, the benefits of joining that network increase quickly with it, while the cost per member stabilizes or shrinks. SaaS providers can and do deliver the critical mass necessary to integrate with partners economically and on a much broader scale.

SaaS is not simply interacting with an application over the Internet. In fact, taking a design approach guided by the principals of Service Oriented Architecture (SOA), applications as we know them today will be unbundled into services, accessible to virtually anyone inside or out of the enterprise. This isn't some future vision. It is happening now and SaaS providers are leading the way in providing demand-driven information and transaction processing for the supply chain.

The challenge of managing the content necessary to meet governmental compliance requirements when shipping cross border is a tough one. How thorough and efficient is your company in determining if a customer is on a denied parties list, or whether the product being ordered requires a license for export? SaaS providers now offer services to allow virtually any order management system to query their content to determine what requirements must be met.

The SaaS model is not suited to every type of enterprise application. NetSuite, a SaaS provider delivering ERP services, has demonstrated that there is an active market within small and medium sized companies for a comprehensive set of services. Larger companies, though, will be much more selective in SaaS adoption.

Functions with a technology user base that is largely within the enterprise will more than likely opt for licensed software installed on premise. Concerns over security and system and network capacity, as well as the desire to use technology to significantly differentiate a company in the marketplace, all argue in favor for a company to own and maintain application software. Also, in fairness to those software vendors that sell through a licensed model, SaaS is not always the least cost alternative. For these reasons, attempts to establish SaaS offerings in areas such as finance, warehouse management, and demand planning and forecasting have failed to reach any level of critical mass, particularly in larger corporations. For those areas, a hosted software deployment will likely come in the form of a managed service—rather than a pure SaaS setup—where vendors use a combination of hosted applications and professional services to satisfy a client's functional need.

SaaS will be—and in fact already is being—broadly adopted in those functions that by their very nature must interact with partners both inside and outside of the enterprise to operate effectively. In application areas such as these, recent AMR Research surveys show that at least half of the respondents view SaaS as a viable alternative to more traditional forms of application software deployment. Because of this, SaaS opens up for supply chain managers the opportunity to scale collaborative practices, more effectively manage network operations, and raise the level of consistent and predictable performance.