Shipper jitters lift TMS sales
Despite a lackluster economy, sales of transportation management software remain surprisingly strong. But it's not optimism that's fueling the growth; it's fear of the future.
In a sluggish economy, you might expect software sales to be languishing along with everything else. But that's not the case with transportation management software (TMS) applications. Sales of these systems, which help shippers manage their freight movements and expenditures, remain brisk and are expected to maintain their momentum throughout the year.
What's driving the growth? Fear of the future, according to one prominent supply chain software analyst. "A lot of clients recognize that right now, we're in the eye of a hurricane," says Dwight Klappich, a vice president with the Stamford, Conn.-based research firm Gartner Inc. "Most of the companies believe that the problems we had two years ago will resurface. They expect fuel costs to go up. They believe capacity constraints will be an issue again. They're laying a foundation for when things get worse."
As for what that will mean for the market, Gartner's forecast calls for TMS sales to increase 7 percent in 2010 on a year-over-year basis. The firm projects sales of the software will reach $610 million this year, up from an estimated $565 million in 2009.
Gartner's projections align nicely with those of ARC Advisory Group, a Dedham, Mass.-based research and consulting firm. ARC predicts that TMS sales will grow an average 7 percent annually over the next five years, based on estimated 2009 sales of $1.2 billion. It should be noted that ARC's TMS market projections include sales of global trade management (GTM) software along with traditional transportation management systems.
Apples to oranges
But these aggregate sales figures tell only part of the story, according to Klappich. That's because in contrast to past practice, shippers today don't necessarily buy the software they need. Instead, many opt to "rent" their transportation management software under the software-as-a-service (SaaS) or "on demand" model. Under this type of arrangement, the vendor typically hosts the application on its own servers, maintaining and updating the software as part of its service plan. The shipper then accesses the application online and pays a monthly or yearly usage fee. Among other advantages, the shipper can avoid a huge upfront capital outlay for a software license as well as the hassles of software implementation.
In fact, in recent months, shippers have shown a marked preference for the on demand TMS model because of the economics, according to Klappich. A traditional TMS software license might go for $250,000. An annual subscription for an SaaS TMS, by contrast, averages about $50,000. And the gap is likely to widen. Some on-demand vendors, such as MercuryGate, have been aggressive in cutting their prices to gain business, Klappich adds.
The shift to the on-demand model, with its lower upfront pricing, has changed the earnings picture for vendors. Compared with sales of traditional software licenses, the on-demand model is a lower-margin business. So even though unit "sales" of on-demand TMS have risen, vendors aren't earning as much profit per customer as they do selling licenses. "The number of net new customers was up in 2009 and will be up in 2010, but it does not mean that vendor revenues will be up," Klappich says.
As for where new customers will likely come from, demand for transportation management systems remains particularly strong in North America, Klappich says, and to some extent, in Europe as well. For the moment, though, overseas sales have been limited because many of the applications used in the United States can't support global transportation movements. That's left the field wide open to big players like Oracle, JDA, i2, and Manhattan Associates that can offer multimodal, multiple language, and multicurrency capabilities.
Although the subscription pricing model has been a big draw for shippers, it doesn't wholly account for the recent upswing in the use of transportation management software. Another part of the explanation lies in the software's expanded capabilities. In the past, Klappich notes, TMS applications focused mainly on shipment planning—that is, their primary selling point was their ability to identify opportunities to, say, combine several less-than-truckload (LTL) movements into a single truckload (TL) haul. For large shippers, the money saved through combining loads easily justified the program's cost. But the software held little appeal for smaller operations that didn't ship enough freight to create opportunities for consolidation.
Today's transportation management systems, however, can do much more than simply identify consolidation opportunities. For example, many applications also offer electronic load tendering capabilities, freight analytics, visibility of movements, and freight-bill audit and payment (which helps avoid duplicate payments to carriers). Klappich says in many cases, a small shipper can justify the expense of a TMS on the basis of the freight-bill audit and payment capabilities alone.
Analyst Adrian Gonzalez of ARC says the software's procurement capabilities have also proved popular with shippers. Because the software is designed to facilitate electronic communication with carriers, transportation management systems make it easy for users to gather quotes from a number of different service providers. Gonzalez reports that using a TMS to solicit bids can cut a shipper's transportation expenditures anywhere from 10 to 30 percent.
Gonzalez adds that another draw is the software's ability to optimize inbound transportation. "If a manufacturer controls inbound, it can use a TMS to optimize inbound loads and convert inbound LTL [shipments] into multi-stop truck loads," he says. The analyst says shippers also like the software's appointment scheduling functionality, which can facilitate and expedite the receiving process. "By having inbound shipments in the TMS, manufacturers have greater visibility to what parts and materials are in transit and when they'll arrive, which can help with manufacturing plans and labor planning at receiving," says Gonzalez. "Combining inbound and outbound spend gives manufacturers more leverage to negotiate lower rates with carriers."
Although he believes uncertainty about the future will continue to propel TMS sales, Klappich acknowledges that low market penetration will also play a role. He notes that TMS applications have only reached 20 percent of the potential market. (By comparison, warehouse management systems have achieved 70 percent market penetration.) "There's still a lot of opportunity for growth here because of first-time buyers," he says.
About the Author
James Cooke is a principal analyst with Nucleus Research in Boston, covering supply chain planning software. He was previously the editor of CSCMP’s Supply Chain Quarterly and a staff writer for DC Velocity.
More articles by James A. Cooke
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