Buying software services from logistics technology vendors used to be a little like letting the vendor tap right into a vein in your financial system. First you pumped out huge sums of cash for a software license. Then you allowed your balance to be periodically drained for upgrade payments. All the while, you kept your fingers crossed, hoping the vendor would stay in business.
But over the last few years, that model has drastically changed. Most logistics software companies have adapted in two different, often complementary, ways. Customers today typically have the option to pay on a transactional basis for using software, making smaller quarterly or monthly payments in lieu of an upfront fee. Alternatively, they have the choice of "renting" software that's "hosted" by the vendor, which means the actual computer servers that process customers' information reside either with the vendor or with a third-party computer server company. Often the two go together, in what's generally termed an "application service provider" (ASP) deal. Descartes started the trend of going over to a hosted model in 1998; others, like Manugistics, RedPrairie and Elogex, quickly followed suit.
Their pitch for a hosted model went something like this: Why buy and house the cow when you can get milk by the quart? Getting out of the cow-keeping business appealed to a number of clients—particularly small and medium-sized companies with little in the way of IT support—and several of them signed on. But that doesn't mean the entire industry is headed in this direction. The reality is that outsourcing software processing in this way doesn't suit everyone or every function. Talking with users, vendors and analysts, it becomes clear that there's a wide range of demands out there … and a broad spread of choices as well.
Pay as you go
Harry Drajpuch, for one, has chosen to house the cow, but pay for milk as he needs it. As executive vice president and general manager of shared warehousing and order management and delivery solutions at USCO, Drajpuch has had plenty of experience buying and using logistics management software—not all of it good.
Eight years ago, he paid a huge license fee to a vendor that "wound up not being good for us," he says. Then, more recently, he tried a software company that worked on an ASP basis and ran into problems with obtaining access to the externally held software. "Downtime was an issue. No matter how well it runs, when it goes down it seems to follow Murphy's Law," says Drajpuch. "You're really at the mercy of the provider in terms of support. We had outages that were longer than we'd like—some lasting well beyond eight hours. That's unacceptable in today's environment."
Finally, he concluded that the ASP model was not for USCO. "We like to have the hardware located on site. We feel we have better control if we have the hardware and software in-house."
Two years ago, Drajpuch tossed out the old model and adopted GC3 transportation management software from G-Log that stays inside the firewall but is paid for on a transactional basis (although there was also an upfront cost for setting the system up). "What transactional pricing does is ensure that G-Log stays in the game with us. They have a vested interest in our growth," says Drajpuch. "They will continue to keep the software fresh. So the transactional model provides for a very powerful marriage."
Love at first bite
Alan Green, on the other hand, is happy to have someone else look after the cow and get the milk delivered. Green, who is director of transportation at PGT Industries, a Nokomis, Fla., company that makes storm windows, uses an entirely hosted system of routing and scheduling software from The Descartes Systems Group to help streamline deliveries of the company's products, which top 900 a day. Since adopting Descartes' Roadshow software in 1994, Green has driven down transportation costs to 3.0 percent of sales, compared to a national average of 5.5 percent.
Green reports that he experienced the full advantage of a hosted service when he decided to change the way he communicates with his truck drivers to a wireless system. "When we decided to go wireless, we contacted Nextel (a wireless service provider) and got them together with Descartes to give us a complete package of wireless technology," says Green. "Now, Nextel provides the connectivity that goes through the Roadshow base.We decided to go this route because we wanted to have one provider. If we have a problem with something going down, we don't have to worry about who to call: the software people or the telephone people."
Green says his information technology department was initially nervous about allowing the software to go outside the company's firewall. "Once we overcame that concern, we were fine. We sat down with the Descartes people and they explained how secure their system was; after that, it was not an issue." Gaps in service like those experienced by Drajpuch have not been a problem either. "We've never had a failure in nine years," Green says. "We've had a very good experience and saved lots of money."
Great walls of fire
The shift to hosted software has not been driven by customer demand alone. John Fontanella, senior analyst at AMR Research in Boston, says software vendors, too, are eager to move over to the hosted model because they can maintain and upgrade software from a central point rather than having to send an engineer out to each customer every time there's a problem or change. It also gives the vendors a constant, reliable stream of revenue, decreasing their dependence on the less predictable license fee payments.
"From a maintenance and support point of view, it's much better for the vendor," says Fontanella, who specializes in logistics technology issues. "For the user, it depends on the application area and how critical it is to the company. For instance, I would never take finance and put it on an ASP basis. There are also a lot of planning functions that should stay behind the firewall, such as advance planning and scheduling, manufacturing and so on." Fontanella says the functions best suited to the ASP model are the ones whose success depends on communicating to the outside world. "So the greatest growth in adoption has been in transportation, as opposed to warehousing, which is more transactionally intense and doesn't have the communications requirements."
However, even with transportation management, there are still security concerns about hosted service. Fontanella compares it to the difference between running personal computers and having a mainf rame network—there are more chances that data will end up somewhere it's not supposed to be. "There's a lot of resistance from IT departments, because you're taking power out of their hands and they're worried about security," says Fontanella. "If something goes wrong—a service failure or security breach—you know it's going to end up in the IT department's lap eventually."
Fears like these have hampered adoption of ASP-based software services. Still, Michael Dominy, a logistics technology analyst with The Yankee Group in Boston, s ays the last 18 months have seen an upswing in shippers' paying for hosted software by the drink.
Dominy admits that service failures are a worry with the ASP way of doing business. "One concern for a company is if the system goes down, I can't run my business.So there is some degree of risk," Dominy says. "But the real benefit is that if you're working with a vendor on an ASP basis and it's not performing, you can easily get rid of it—you don't have the license and big cash outlay up front."
Partly in response to customer concerns, Descartes recently announced it was going to partner with Microsoft to offer a service that is essentially the same as its existing service, but the software ends up being effectively within the customer's firewall and control. Art Mesher, Descartes' executive vice president of corporate strategy, explains that the company is beta-testing a new system called the Logistics Network Operating System with a handful of customers. "We've built our new network so that the customer's data actually sits behind the firewalls," Mesher says. Descartes promises to release more details later this year.