The cold spray flew up and atomized in the chilly air from the bow of the 25-foot boat as it rode the swell and chop of Lake Michigan on a clear and bracing fall evening. Our boat bounced over whitecaps toward the sunset mural of orange and purple sky on the western horizon. Not bad for a business trip. At the helm was a member of the executive team of a small software company, Company A.
Company A sold a transportation management system (TMS) that determines optimal routing, carrier selection and truck utilization. The unique aspect of Company A’s TMS was that firms did not have to purchase and install the software. Instead, customers accessed the system from a web portal, and paid for the system on a monthly fee basis.
I was with Company G, and we had spent half the day and an evening with the company’s entrepreneurial team, having just contracted with the company to use their application.
The decision to select Company A was the result of a typical cost-benefit analysis among several alternatives. The main alternative was to stay on the TMS Company G had at the time, a packaged application the company had acquired several years ago. But a decision had to be made because the support contract on the existing TMS application was due to expire, and the only way to extend the contract was to upgrade to the next version. The version upgrade would require a capital investment plus the normal annual maintenance fee of 20-25% of the initial license cost. Included in the capital expense would be the license, implementation consulting fees, and an operating system (OS) upgrade on Company G’s server. Company G would continue to host the application in its data center and staff people who could address server and software issues.
The costs for Company A’s Software-as-a-Service TMS were a small implementation fee covering the cost of one of their technicians for several weeks, and a flat fee per month, plus costs of building interfaces to SAP. So in simple terms the options looked like this: Option 1 was a significant capital investment plus annual maintenance fees plus server maintenance and application support. Option 2 was a small upfront fee plus a monthly fee.
It looked like Company G could save on yearly costs by staying with its current TMS and upgrading, except that it would take 10 years for the annual savings to pay back the initial capital investment. And during that time, Company G was likely to invest in at least one if not two more upgrades, which would only extend the payback.
So Company G signed a contract with Company A. The implementation was completed within three months, with no disruption to daily shipping activity. The company quickly expanded the number of users who could have access to the TMS, because the license was an enterprise license with no limits on number of users, and because the shipment data in Company A’s TMS was up-to-the minute and valuable to a large number of people, including Company G’s third-party distribution centers, manufacturing plants and customer service team.
The company was aware of new applications available on the market. Company G’s transportation team, led by its manager, had already investigated different application options because some members of the team participated regularly in industry share groups, where participants could share best practices and experiences.
The Software-as-a-Service option was a clear winner on paper — and it turns out, in actual results — in terms of costs and functionality. The traditional payback assessment had revealed a lifecycle cost of the SaaS option that was less than the typical client-server on-premises application. Any benefits from improved functions and features – and there were many – came on top of the overall favorable life-cycle costs.
The SaaS application could be used by anyone in the enterprise – not just transportation planners. An entire network of people working within the supply chain suddenly had access to important information that affected their daily objectives. Distribution centers, for example, could see the status of trucks heading inbound to their facilities. Company G also had a pressing need for additional reports, a way to electronically capture shipping discrepancies, and the ability to create upload files from data in the TMS application. All of these were provided by Company A at relatively low cost.
The software vendor’s revenue model was in harmony with the company’s financial goals. The savings in ongoing support and development costs have been tremendous. Company G has been able to avoid capital expenditures. The expense of the software is directly related to the function that uses it. Upgrades to the TMS are all managed behind the scenes by Company A.
This case study is an illustration of how good a SaaS application can be. And if there is one good SaaS TMS, there must be other good SaaS applications in other functional areas and industries, which is a way of telling you that the game has changed and you don’t have to live with traditional client-server applications that you own and maintain. More on this later in the book.