Vinnie Mirchandani, Joshua Greenbaum, Bob Warfield respond.
I certainly agree with Mr. Debes that we have been here before. Technology analysts grab hold of the next great thing and see how far it will bend before it breaks. SaaS is a collection of ideas exemplified by Salesforce. Each idea could be implemented by traditional software vendors. We want to understand what makes Salesforce successful, but we must recognize the difference between Salesforce and an ERP system. Sales pipelines can be abstracted from the daily operations of a business. Salesforce does not need to understand backflushing with 3-level bills of material with multiple currencies and the impact on materials planning in a cellular manufactring environment. Thankfully.
Mr. Mirchandani says the problem is that enterprise software vendors are not listening to their customers who are asking for Salesforce features and a Salesforce pricing model. Perhaps for some that makes sense, but what makes Salesforce and other SaaS companies successful is the tight scope of their product. Enterprise software has a huge scope and it must be completely customized in certain areas. Areas that are different for every type of business.
7 responses so far ↓
1 vinnie mirchandani // Sep 2, 2008 at 4:30 am
and how many of Lawson’s customers can do “backflushing with 3-level bills of material with multiple currencies and the impact on materials planning in a cellular manufactring environment”. And if you remove Intentia (which it merged with) how many even fewer?
Indeed how many of SAPs and Oracle’s? The reality is the majority of customers use their products for core financials, some inventory management capabilities, not complex supply chain areas. Indeed if you leave manufacturing see how few banks, utilities, retailers, government clients use them for their vertical capabilities.
and besides much of that “backflushing” and other functionality was designed/developed years ago…how many more years do they need to deliver economies of scale and repetition both in sw and their partner implementations
But my comments had little to do complexity functionality - it had to do with economics. Cost of technology has dropped everywhere - in hosting, in storage, in offshore development, in testing automation, in open source - but customers are not seeing in in their ERP spend.
SaaS vendors are passing it along, most on-premise vendors are using it to increase margins. That’s why Harry does not like it, and customers do…
2 JJ // Sep 2, 2008 at 7:23 am
We might expect the costs of implementation to fall because the foundational technologies of a SaaS ERP cost less, but you don’t pay for foundations. You pay for the cherries on top. You pay for customization up front. You pay to implement that new customer discounting logic that the sales team came up with. You pay to have emergency help. You pay to integrate with systems services throughout the life of the ERP. None of those costs go away because you changed the foundational technology. Once you account for these things, Mr. Debes assertion that SaaS is the same as buying a traditional system and paying on credit is a fair comparison.
Every business will have a quirk that makes an out-of-the-box ERP system fail. Some areas can be “good enough” but there’s always at least one area that needs to fit like a glove. If it doesn’t fit right, the business will needlessly waste money and the “solution” is doomed from the start.
Does the warehouse only do pick-and-pack or do we need to support cross-docking? What about integrating with pick-to-light systems, pick optimization and the timing of restocks by shifts?
Account by LIFO, FIFO, averaged cost or another method? When to account for foreign currencies and what rate to use? Yes, accounting has standards, principles and guidelines but not every company needs to follow them all, or any of them. And sometimes you have to run two parallel accounting practices to deal with reporting in two parts of the world.
What about tracking labor by product, or process or pick ticket? What if I don’t have inventory and instead I run processes?
It’s impossible for any offering to suit all industries. Salesforce can be successful because, as I said in my prior post, sales pipelines can be easily separated from all other areas of an ERP. For a SaaS offering to stand a chance at fitting like a glove, it will need to be focused on a vertical. The developer may be the highest-quality niche player but, at that point, the economies of scale are no longer available, more risk is on the developer and the pressure to go with traditional pricing structure.
For what it’s worth, I don’t think the problem isn’t how much ERP systems cost. The problem is that companies and ERP vendors do a terrible job of making them work for the business. SaaS won’t do anything to change that.
3 vinnie mirchandani // Sep 2, 2008 at 3:10 pm
why are you leaving out the foundational cost?…if a SaaS vendor can use cheaper cloud hosting, use open source software, shared DBAs and network administrators, the cost of the foundation goes down dramatically compared to on-premise…that is where quite a bit of relative SaaS savings come from…
on the functional areas you are talking about you really should be comparing to SaaS vendors like NetSuite which has a broader footprint than just CRM…
I agree with you companies and ERP vendors could do better making things work..my question is after 15+ years and 100,000 + implementations should not the on-premise vendors be held to a higher standard?
4 JJ // Sep 2, 2008 at 4:56 pm
NetSuite is actually a good example of how bad any vendor can be. It’s a SaaS offering from a company that is near the bottom of ERP vendor experiences. It’s Oracle’s disreputable bastard child.
For example:
“I don’t believe this is a single instance of a nightmare with NetSuite… As a small business we too are experiencing many of the same problems after a few years on the product. NetSuite has a technically beautiful product, but if you’d rather run your business than be impressed with screens exhibiting the latest technologies, and if you want to work with a vendor who understands business as well as technology, then you may want to avoid NetSuite. Don’t be too impressed and don’t even consider NetSuite without an independent business consultant involved. Furthermore any price quotes you get from NetSuite beware of their use of heavy discounts off the list pricing; they may begin to remove those discounts over time.”
I’m not leaving out the foundational cost. That may not have been clear. What I’m saying is that those costs are eclipsed by customization and configuration. Foundation (or platform) costs are fixed, meaning that prices would come down around 10%. What Salesforce did is bring prices down 80% for small shops and 30% for large ones. (I’m making those numbers up but I think they’re conservative.) But that only works with economies of scale that are not available to vertical-focused SaaS ERP vendors.
5 vinnie mirchandani // Sep 2, 2008 at 7:52 pm
I have not seen a single instance where 5 year TCO of on-premise is not at least 3X and often 10X SaaS costs - and that includes customizations, upgrades etc…between my time at Gartner and since as an adviser to a number of CIOs, I have probably seen 200 such business cases and TCO spreadsheets…
of course, there is vertical and country specific functionality you just cannot find in SaaS world, but where you can get reasonably apple to apple in functionality…
6 JJ // Sep 2, 2008 at 8:52 pm
I’m definitely going to be watching this space closely. I certainly would like to see ERP democratized and see costs drop.
Maybe our discussion comes down to perspective. Mine is with companies that are in tight verticals. My most recent ERP work (I’m in the BI field currently) was for an aerospace processor. I’ve done work for a bread baker, a shoe maker, a plastics manufacturer, a debt finance firm, a book publisher, and on and on. They never fit into any general-purpose software. Everything had to be customized. The companies that were the most adaptable to process change had completely custom ERPs. Every company that bought a major ERP system (Intentia, J.D. Edwards, etc) was struggling with it because after the initial customization they wanted to “save” money by not continuing to make it fit the business process.
So this issue of customization that I keep harping on exists anywhere. Maybe there are companies that don’t need the ERP to fit like a glove, but I haven’t seen one yet. And there’s nothing about SaaS that alleviates the pain of customization.
7 Cloud Feed » Blog Archive » Daily Cloud Feed - Sep 2, 2008 // Sep 2, 2008 at 10:48 pm
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