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DISTRIBUTORS MAY NOT NEED COMPUTERS ANYMORE

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 distributorsí 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 distributors could not afford to buy hardware and then create their own software. But they could get 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 which "key punched" cards, which were then loaded into a room-size computer for processing; reports were printed and mailed to subscribers. A subscriber paid a small fixed monthly fee, and paid for the "resources" used Ė number of transactions processed, amount of data stored, number of pages printed, etc. When low-speed data communications became possible in the Ď70s, subscribers bought terminals and printers, did their own data entry and printed their documents and reports (overnight). 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.

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. And 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?

A - Like the on-line service bureaus of old; like the on-line payroll service described above. Technically, each subscriber logs into the SaaS providerís Web Site. The SaaS providers that are 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. And the charge to subscribers is usually a small set up fee, and then $X per month per user, for a set of business functions (e.g., order entry, inventory management, etc.), regardless of the amount of 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, who find the initial and on-going costs of having their own systems to be prohibitively expensive. Initial costs include one or more computer servers, a software license, training and education, and conversion of data from any old system. On-going 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 usersí 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 that many distributors will share the same computer and software, and subscribe for many years. This sharing enables a provider to spread its cost over a larger, longer-term base and so lower the charges to subscribers. Even the down payment, 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, 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 distributorís business would be totally dependent on that 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 Ė or worse, damaging it? Passwords arenít effective in small distributorships Ė 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 to be used by multiple subscribers. But some companies that offer SaaS use software that was written to be used by only one company; it was 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 isnít, 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 the features and functions that distributors need. But providers of SaaS for distributors usually require that all user companies use the software as is; they wonít make true modifications. And subscribers can't make modifications because they don't possess the software and canít 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 didnít 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.

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Dick Friedman, the author, is a recognized expert on ERP systems for distributors. He is an unbiased Certified Management Consultant and does NOT SELL systems. Dick applies more than 30 years of experience to objectively help distributors make strategic decisions such as whether to get a new ERP system or the new SaaS computing service; or instead, enhance the current system. Call 847 256-1410 for a FREE consultation, or visit www.GenBusCon.com for more information or to send e-mail.