Accelerating Value with On-Demand: An Aberdeen Perspective

May 16th, 2007 at 09:05am Michael Lamoureux

As you well-know, On-Demand is a favorite topic of mine and of e-Sourcing Forum, so it should be understandable that Aberdeen’s recent report on B2B Collaboration: How On-Demand Platforms Accelerate Value and Impact TCO caught my eye.

According to the report, On-demand technology platforms (also called “software as a service”) are playing an increasingly important role in enabling electronic communication and process collaboration. Companies seeking to improve their collaboration capabilities should take a strong look at on-demand solutions. On-demand solution providers tend to have greater resources and experience in on-boarding trading partners onto the collaboration platform than a company has in-house. Many on-demand providers also come to the table with networks of pre-connected suppliers and carriers, further reducing rollout times and increasing trading partner acceptance. Considering that most on-demand supply chain solutions are operational in less than three months and have an ROI period of less than a year and that best-in-class companies are more than twice as likely to be using on-demand supply chain applications, on-demand should be in your sights if it is not already.

The report also notes the following benefits achieved by market leaders:

• administrative cost savings
• shorter planning and execution cycles
• reduced out-of-stocks at retail locations
• increased percentage of perfect orders
• reduced inventory holding costs
• shorter cash-to-cash cycles
• increased customer satisfaction
• revenue growth

According to the report, which notes on-demand solution providers often have much greater resources and experience in on-boarding trading partners onto the collaboration platform and that many on-demand providers also come to the table with networks of pre-connected suppliers and carriers the two main process areas for collaboration are the order-to-cash process (customer collaboration) and the purchase-to-pay-process (supplier collaboration). On the P2P side, the touch-points identified for collaboration are product design, forecasting, VMI, capacity and material planning, transportation management, and order fulfillment. On the order-to-cash side, forecasting, order management, trade promotions and marketing, invoice reconciliation, inventory management, and transportation management are the main touch-points.

Fortunately, on-demand SCM solutions are well-suited to address two critical requirements of effective collaboration and synchronization:

• the need for rapid electronic partner enablement
• the requirement of process flexibility

The report also provides a value framework for assessing B2B collaboration options to help a company decide whether an on-demand solution is right for its B2B collaboration needs. The framework consists of four dimensions: TCO, business value gained, speed and project risk and is meant to look at the costs and benefits from all relevant angles.

Dimension 1: Estimating the Total Cost of Ownership

The total cost of ownership is dictated by start-up costs, recurring costs, and business partner on-boarding costs. These costs are defined as follows:

Start-up Costs

• Cost of software
• Cost of pre-requisite software
• Upfront hardware costs
• Software implementation costs
• Initial software training costs

Recurring Costs

• Software maintenance fee
• Customization costs
• Monitoring and on-going maintenance of hardware and pre-requisitie software
• Data storage and continuity
• Business continuity
• Internal training costs for users and system administrators
• Help Desk costs
• Internal IT staff maintenance and support
• Upgrading software

Business Partner On-Boarding Costs

• On-boarding business partners
• Maintaining and trouble-shooting trading partner connections
• Total costs borne by business partners

Dimension 2: Estimating Business Value

The business value is primarily determined by the corresponding reduction in operating costs, increase in revenue, supply chain metric improvements, and community benefits.

Reduction in Operating Costs

• Reduced labor costs
• FTEs avoided during business expansion
• Reduced transaction costs
• Reduced inventory costs
• Reduced logistics costs
• Reduced managed services costs

Increase in Revenue

• increase in sales due to new customer acquisition
• increase in new product sales
• decrease in sales due to old customer defections

Supply Chain Metrics Improvements

• supply chain costs as a % of revenue
• increased # of partners participating in collaboration initiatives
• demand management-specific metrics
• supply management-specific metrics
• logistics management-specific metrics
• cash-to-cash cycles

Community Benefits

• hard and soft benefits of community development

Dimension 3: Estimating Speed

Speed is estimated along the following dimensions

• Initial implementation time
• Time to on-board trading partner
• Rollout to new locations/business units
• New process deployment
• Time to reconfigure existing processes
• Upgrade speed

Dimension 4: Estimating Project Risk

Project Risk is estimated along the following dimensions

• Year 1 exit costs
• Risk of project failure
• Risk of software disuse
• Risk of implementation cost overruns
• Risk of data security
• Risk of system downtime

Once a company has completed this analysis, according to Aberdeen, they can determine if they are in the sweet-spot for on-demand / Software-as-a-Service solutions and use the framework to consider the advantages and disadvantages to using on-demand versus more traditional approaches. It’s a good framework, and I believe it nicely complements the weekend series I authored last summer on On-Demand (The Good, The Not-So-Bad, And The Coming Pretty, And the Story Continues).

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Entry Filed under: Analysts/Research, General, Technology / SaaS, e-Sourcing Marketplace