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Ditch your PC

With Software as a Service (SaaS), distributors may not need computers anymore

by Dick Friedman

Dick Friedman

The next “new” thing in information technology for distributors is 50 years old. Its called Software as a Service (SaaS), and its providers claim it lowers distributors’ IT costs by replacing distributors’ computers, IT staff and software with on-line, off-site data processing; only PC terminals and printers would be on-site. But is this reincarnation of an old form of “outsourcing,” sometimes called “utility computing,” really worth pursuing? What are the pros and cons?

Before mini-computers and software packages came on the scene in the late 1970s – well before PCs – most industrial distributors could not afford to buy hardware and then create their own software. They got the benefits of data processing by subscribing to “service bureaus.“ Until the 1960s, this arrangement involved mailing copies of documents (e.g. invoices) to a company that “key punched” cards, which were then loaded into a room-sized computer for processing; reports were printed and mailed to subscribers. A subscriber paid a small fixed monthly fee and paid for the “resources” used – number of transactions processed, amount of data stored, number of pages printed, etc. When low-speed data communications became possible in the ’70s, subscribers bought terminals and printers, did their own data entry and printed their documents and reports (overnight) in their offices. When data communications became much faster, subscribers were able to do instant on-line inquiries into such data as stock status, A/R, etc.

Low-cost mini-computers and packaged software drove data processing service bureaus out of business, because it became more cost-effective for distributors to have their own systems. In-house systems also overcame the primitive slowness of pre-optical fiber data communications circuits. Plus, having one’s own system provided bragging rights.

Back to the future
The Internet and advances in computing power have brought a form of service bureau back. Today, the world is wired together by seemingly unlimited amounts of fiber optic cable, which has enabled almost all distributors to access Web sites anywhere, and instantly transact business. Computer speed and storage capacity are thousands of times faster and larger than in the days of mini-computers. A very fast and large computer can be located anywhere in the world, and be used by many distributors. On-line payroll services are an example of SaaS; the provider has the computer and software in its data center, and subscribers have terminals and printers.

How does SaaS work?
SaaS works like the on-line service bureaus of old and the on-line payroll service described above. Technically, each subscriber logs into the SaaS provider’s Web site. SaaS providers most relevant to distributors are not providers of niche functions such as payroll. They are those with modern ERP software that handles most business functions of distributors. They usually charge subscribers a small set up fee, then $X per month per user, for a set of business functions (order entry, inventory management), regardless of the resources used (to some limits).

System costs
Although the SaaS concept is applicable to all sizes of distributor, most SaaS providers aim at small to medium size distributors, that find the initial and ongoing costs of having their own systems to be prohibitively expensive. Those initial costs include one or more computer server, a software license, training and education, and conversion of data from any old system. Ongoing costs include a maintenance contract for the server(s), a contract for vendor-provided software support and updates, one or more in-house people to answer users’ questions, perhaps annual software license payments and data communications circuits for branches. Leases are available, sometimes including software and installation costs, but leases require a down payment, and increase the life-cycle cost by adding interest to the cost of the system.

SaaS costs
The cost of using an SaaS can be less than owning or leasing because the SaaS business model assumes many distributors will share the same computer and software, and subscribe for many years. Sharing enables a provider to spread its cost over a larger, longer-term base and so lower the charges to subscribers. Even the downpayment, if any, to a provider is usually much less than that needed for leasing or financing. As SaaS like to brag, they provide subscribers with more resources than any distributor but the very largest could afford, at PC prices.

Some concerns
Although the savings from using an SaaS can be quite substantial, this is a new concept for distributors, so there are some things to be aware of before signing up with an SaaS provider.

If an SaaS does all of a distributor’s data processing, that distributor’s business would be totally dependent on that SaaS provider. If that provider suddenly went out of business, how would the subscribing distributor do business? How would the distributor get its data back? And how secure from hackers is that data? Even with exotic data encryption, hackers figure out how to read secured data. What stops an unauthorized user from logging into the service like a legitimate user, and viewing data – or worse, damaging it? Passwords aren’t effective in small distributorships – all the users exchange them so no one is ever unable to log into the system.

Monthly fees can increase quickly if users are added. Fees also increase when a subscriber starts using a module (e.g., activity based costing) that was not included at the start of the arrangement.

Some providers do not own the software they use, but license it from the software’s author. That license can be terminated by the author under certain circumstances, which would leave subscribers with zilch. Short of termination, the contract between an SaaS provider and the author of the software it uses could allow the author to make such changes as increasing the licensing fees and/or limiting a subscriber’s use of the software.

True SaaS software was written specifically for use by multiple subscribers. Some companies offer software written for use by only one company, modified to support multiple companies. That latter kind of software can lead to unexpected bugs that don’t occur when the software is used by only one company. The author of the latter kind of software may or may not be the SaaS provider, and if it isn’t, the author may not be obligated to fix bugs, and SaaS personnel may not know how to do so.

Because SaaS is relatively new, some systems may not contain all features and functions distributors need. Providers of SaaS for distributors usually require companies to use the software as is; they won’t make true modifications. Subscribers can’t make modifications because they don’t possess the software and can’t get at the “source code” (which is required for changing software).

Part of the cost reduction claimed by SaaS advertising is achieved by replacing expensive leased data communication circuits with the use of the Internet.

Use of the Net is cheap, but the Net is not totally reliable. If access to the Net becomes temporarily unavailable, how would a subscriber run its business?

The support people at an SaaS that didn’t create its own software may not know the software as well as the author. When subscriber personnel call with questions, SaaS personnel may have to call support people at the author company, thereby delaying a response.

Dick Friedman has 25-plus years of experience helping distributors determine which system/service to get. His firm does NOT SELL systems or software, or provide computing services. It makes unbiased recommendations about replacing a system with an SaaS, or using an SaaS as the first form of data processing; or replacing one system with another. Dick is a certified management consultant. Call (847) 256-3260 for a FREE consultation, or visit to send e-mail.

This article originally appeared in the March/April 2010 edition of Industrial Supply magazine. Copyright 2010, Direct Business Media, LLC.


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