From SCDigest's On-Target E-Magazine
Feb. 24, 2011
Supply Chain Software Market will Really Turn to On-Demand when Large Vendors push On-Demand First
Now Often a Fallback; Transition for the Business and Sales Reps is not Easy
SCDigest Editorial Staff
There has been a sea change of interest in "on-demand" or "Software-as-a-Service" (SaaS) supply chain software solutions over the past few years.
This has been especially true in certain application areas, such as Transportation Management Systems (TMS) and global trade management applications. But interest is building in advanced planning, warehouse management, manufacturing execution, and more software sectors. Often, this is the result of new providers entering the market with an on-demand model from the start, a potentially disruptive force to traditional supply chain software vendors.
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| For many supply chain software vendors, this is a seismic change to how they have normally operated their businesses, especially if they are public companies. |
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In the past couple of years, for example, the market has seen a number of on-demand providers emerge in the WMS space, which for a variety of reasons has been among the slowest to see on-demand software adoption.
While a number of factors are turning the market towards on-demand supply chain software, the tide will really turn when the major traditional software providers start to “lead” with the on-demand solution, versus today, when the traditional model is usually the first approach that is pushed, with on-demand available as a fall back.
For software companies that started with an on-demand model, this is just the way they have done business. For software companies that are looking to transition from the traditional model, the path is a challenging one.
Those companies have financial and business models that have been based on large upfront license payments that go away with the on-demand strategy. Just as importantly, their sales personnel also make their living with this model, where a large commission can be made from selling the upfront license.
"Never underestimate the impact of the software sales person's own economic interests during the course of a sales cycle," says SCDigest Editor Dan Gilmore. "Supply chain software sales reps have been accustomed to receiving in some cases very large commissions checks after closing a deal. The idea of that going away and moving to some model where they receive a small amount of commission each month as the subscriptions fees are paid is clearly scary for them."
There is also an impact on the cash flow and finances of the software company itself. It also has to change its model to adjust to a decline in large upfront license payments towards subscription/transaction pricing, as well as potentially seeing a decline in dollars coming from implementation services associated with traditional model.
For many companies, this is a seismic change to how they have normally operated their businesses, especially if they are public companies, where a drop in revenue and earnings as the transition is made could punish the stock price. At the quarterly earnings calls, CEOs and CFOs of publicly traded software companies are regularly asked by analysts about how many "million dollar deals" or some other threshold metric were achieved in the quarter - a concept that largely goes away in the on-demand world.
It's therefore not surprising that many of the traditional software companies are very uncertain about how to make that transition effectively - even if they know if the end it may be a better model for them. This is in part because total revenue and profitability could be higher with a subscription type model over time.
(Supply Chain Trends Story Continues Below)
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There are other benefits to software companies in an on-demand model. Consider the recent recession, for example. For many traditional companies, new license sales really dropped off for much of 2009, as capital budgets and growth prospects in their customers were severely constrained.
