Wednesday, October 13, 2010

Key success factor for SaaS suites: functional parity

As we all know, software-as-a-service (SaaS) has been one of the bright spots in the enterprise systems marketplace these days. The advantages are becoming more widely recognized: lower total cost, faster time-to-benefit, little to no capital expenditure, and less pain in system upgrades.

In fact, in some segments of the enterprise market, SaaS is already where most of the action is. For example, in CRM system selection it is difficult not to consider one of the leading SaaS solutions, such as, Oracle's CRM On-Demand, and others. For HR management systems (HRMS), likewise, we see SaaS providers such as Workday, Taleo, and Success Factors gaining significant market share for net-new deals.

Reaching for full maturity
So, why haven't SaaS solutions completely taken over the enterprise software market, especially for full-suite ERP? Because there is one area where SaaS providers still lag behind: functional parity. For full-suite ERP, there are still precious few SaaS providers. And those that do attempt "full suite replacement" still have major gaps in their functional footprint.

However, the landscape is changing quickly. For example, until recently, we have been reluctant to short-list SaaS providers as full-suite options for manufacturing firms. Those that had ambitions to be full-suite providers simply lacked basic functionality needed for manufacturing, especially vertical-specific requirements. But we are now finding that SaaS providers at least deserve a look. These include the following:
  • Plex Systems was the first SaaS provider out of the gate with a full-suite ERP offering for manufacturing firms. More on Plex in a minute.
  • NetSuite is a full-suite provider. But until recently, it has only been a viable option for service businesses, because it lacked many fundamental features for manufacturers, such as standard costing, shop scheduling, capacity planning, and MRP. However, since I last visited this issue, a NetSuite partner, Rootstock, has been building extended manufacturing functionality on top of NetSuite's platform. I've spoken at length to the developers at Rootstock, whom I know from their previous work at Relevant (since acquired by Consona). They are making very fast progress, thanks to the ability to rapidly develop on NetSuite's platform. Rootstock's extensions to NetSuite are claimed to operate seamlessly with NetSuite's core financials and CRM.
  • SAP is moving in the same direction with its Business ByDesign (ByD) offering. Although SAP has been slow to move the product into general release, you can't fault the objective, which is to become a full-suite offering. I especially like the use-case for large SAP installed-base customers, which have a hard time justifying use of SAP ERP in smaller divisions. Such organizations frequently adopt a "two-tier ERP" strategy, where SAP runs at the corporate office and in larger business units, while a smaller footprint ERP, such as Epicor, QAD, or Microsoft Dynamics AX, runs in the smaller divisions. The use of ByD in this scenario, should be an attractive alternative.

    Update: Since this post was first published, I have learned that in FP 2.0 (released Sep. 2009), ByD now has what appears to be very complete functionality for manufacturing operations, including integrated quality control, as well as supply chain planning.
  • Workday is a SaaS provider, currently serving the HRMS and financials functions, but they have ambitions to be a full ERP replacement, at least for services-based organizations. With Dave Duffield as one of the founders they appear to be following the path that Dave took at PeopleSoft: start with HR, add financials and purchasing, then fill out to become a full-suite offering. Personally, I think Workday is underestimating how long it will take them to get there, but I have little doubt they will reach the goal. And they are going after the large company segment, which is unusual for most SaaS providers.
  • Update: Infor's Syteline is now being newly launched by Infor in a SaaS deployment model. Based on a lengthy briefing I received from Infor, it appears that Syteline qualifies as a full-suite SaaS offering. The new deployment option uses a single instance of Syteline's application server, with separate databases for each customer. While some might argue that it doesn't fully meet the pure definition of multi-tenancy, it more than makes up for it in functional parity with on-premise ERP suites, which is the point of this post. I'm hoping to write more on this new offering soon, as it appears to be another good option for those looking to go with SaaS for full-suite ERP.
  • Update: Epicor Express is another full-suite SaaS offering. Running as a pure multi-tenant deployment of Epicor 9, the offering today is supporting about 15 live customers, with another 15 in implementation. Epicor is currently targeting this offering at small job shops, with customer friendly subscription terms and very low fixed-fee implementation services ($7,500, including a defined set of data migrations). But I can see this product being up-sold to larger customers with more complex requirements as well.
The number of SaaS providers with full-suite offerings still pales in comparison to traditional on-premise ERP. Note, however, that I don't consider hosted versions of on-premise software in the SaaS category, such as hosted versions of Lawson's ERP products, or Oracle's E-Business Suite. Single-tenant hosted products simply do not offer the full benefits of SaaS outlined earlier.

Full-suite SaaS gaining traction
Although the number of true multi-tenant full-suite SaaS offerings today is limited, they are rapidly becoming a viable alternative to on-premise products or single-tenant hosted offerings.

The latest example is a big win for Plex Systems, at Invensys Controls, one of three business units of UK-based Invensys plc. This business unit provides components, systems, and services used in appliance, heating, air conditioning, refrigeration, and residential thermostat products. It has locations in 15 countries which include 22 manufacturing sites, two distribution centers, and seven engineering centers--and Plex Online will be implemented in all of them.

It sounded like a pretty big deal for a SaaS provider, so I followed up with Plex to find out more. Here are the details:
  • Plex will be replacing 11 different traditional on-premise ERP systems in the various locations at Invensys Controls, which has revenue of approximately $900 million.
  • The win by Plex comes not only against traditional on-premise ERP vendors--SAP, Infor, and Oracle, but also against NetSuite. So, Invensys actually was willing to consider two full-suite SaaS options: Plex and NetSuite.
  • The decision in favor of Plex came down to two factors: (1) functionality--a single, comprehensive solution that covered all of their functional areas, and (2) the SaaS deployment model with associated benefits of cost-savings, speed of implementation, and scalability.
Interestingly, according to my correspondence with Plex, Infor was de-selected as it did not have a true SaaS offering, and both SAP and Oracle were eliminated for non-response to the RFP. One can only speculate that Invensys may have become focused on going with a true SaaS offering, and neither SAP nor Oracle couldn't come up with one. If so, we may be coming to the point where even organizations as large as Invensys Controls see true multi-tenant SaaS as their preferred deployment option.

If that's the case, why didn't NetSuite win the deal? According to Plex, NetSuite had gaps in meeting key functional requirements. It would appear then that the deal came down to Plex versus NetSuite--two true SaaS offerings. If so, this underlines my point that the only thing holding back full-suite SaaS offerings from taking further market share is functional parity.

Back in the 1990s and early part of this decade, ERP selection often came down to long checklists of functionality, becoming more and more detailed as full-suite offerings matured. Eventually, such long checklists became less useful, especially for large deals, as the Tier I providers (SAP and Oracle) could pretty much check every box. (As a result, in our own ERP selection consulting at Strativa, we prefer these days to focus more on key differentiators and industry-specific requirements.)

Furthermore, in software selection deals we've worked lately, we are seeing much more interest on behalf of buyers in true SaaS deployment than we saw even one or two years ago. As buyers hear about the success of other companies with solutions such as, the benefits of SaaS are much more well-understood, and the traditional objections (security, reliability, "where is my data," etc.) become less of an issue.

So, as the focus shifts to SaaS for full-suite ERP, we may be seeing functional requirements again becoming the key selection criteria. If the deployment option of true multi-tenant SaaS is superior to traditional on-premise deployment or single-tenant hosted offerings, then the only thing standing in the way of SaaS is functional parity. But, as development platforms such as NetSuite's make addition of new functionality much easier, the functional gaps are being closed much more rapidly than many realize.

Traditional on-premise vendors beware: the full-suite SaaS providers are catching up quickly.

Update, Oct. 15. Updated the post with newly-learned information about SAP's Business ByDesign and rearranged the sequence of solutions. Updated also to clarify Workday's intent to support services-based businesses with a full-suite offering.

Update, Oct. 21. Added information about Infor's Syteline offering in a SaaS deployment model.

Update, Nov. 17. Added information about Epicor Express, which is deployed as full multi-tenant SaaS offering.

Related posts
Ensuring win-win in SaaS aggregation of customer data
Plex Online: pure SaaS for manufacturing
Workday pushing high-end SaaS for the enterprise
Lawson's cloud services: good start, but no SaaS
NetSuite a viable alternative for SAP customers?
A game-changing play in enterprise software
The inexorable dominance of cloud computing
Computer Economics: The Business Case for Software as a Service


Si Chen said...


Do you think once SAAS vendors achieve parity, they will take over the ERP market? Or will there always be a significant portion (1/3? 1/2? 2/3?) of the market that won't or can't have their ERP "in the cloud"?

Frank Scavo said...

Hi Si, always good to hear from you.

I think for the foreseeable future there will be a "significant portion" (as you say) of organizations that retain their on-premise systems. I say this for no other reason than it takes a LONG time for many organizations to replace their legacy systems. As you know.

But for so-called "net new" deals (new sales of ERP), I think there is no question that the percentage will continue to shift to SaaS providers. In my opinion, the major thing holding this back is the lack of functional parity of those ERP SaaS providers today, compared to more mature on-premise offerings.

Frank Schoen said...

Hi Frank, please consider changing feature pack 2 to SAP Business ByDesign FP (Feature Pack) 2.6 - that is the actual version being launched in July. Cheers, Frank

Frank Scavo said...

Frank, thanks for the correction. I've fixed the reference accordingly.

Subraya Mallya said...

Good post. I wonder, besides parity, if the way Multi-tenancy implementation is done in NetSuite and Plex also contributed to the deal. Plex from my knowledge does separate-database-same-code per customer, not that there is anything wrong with it.

Frank Scavo said...

Subraya, when I interviewed Plex president Mark Symonds back in April, he told me that there is a single database for all customers on the same instance. (They run a few separate instances for load balancing purposes.).

See my post here:

Ben Kepes said...

Frank - great post. As a SaaS evangelist since early on, I've battled barriers to adoption, steep onramps and general lethargy frequently.

I generally agree with your contention however I do think there is more to this than just the functional parity discussion. As an example, professional services automation (PSA) has been pretty much at feature parity (as an example, NetSuite ERP/CRM plus OpenAir) for quite some time now, yet still adoption is good... but not stellar.

I'd class the functional gap as step one in the due diligence process - it's the traditional feature comparison and until recently the traditional vendors have been able to rely on this to "win the deals". However functional parity is now the norm in a number of verticals and the traditional vendors are resorting to other means to slow adoption - concerns round jurisdiction, security, vendor viability etc etc

Frank Scavo said...

Ben, I consider you an expert in this subject, so I appreciate your insights.

Some buyers still get hung up on the traditional objections to SaaS, such as security, vendor viability, etc. But as I noted in the post, I am noticing that these objections are fewer these days than even a couple years ago.

The PSA market in particular has had SaaS-based point solutions for many years, though not full-suite offerings until recently (e.g. NetSuite/Open Air, as you point out). If you count single tenant hosted solutions, the PSA market goes back even further. My own firm, Strativa, has used a hosted PSA solution since 2001. I can't imagine a green field professional services firm today going with anything but a SaaS solution. The ease of use for the mobile workforce is simply too good.

So, if you are still seeing the traditional objections, that is a surprise. Perhaps this is more the case with older professional services firms that have already invested in on-premise financials, for example, and don't want to make a 100% conversion to a full suite?

Still, the lack of feature parity for most verticals, in my opinion, is the biggest barrier. At least, from what I've seen, it's what keeps SaaS providers off the finalist list, even if they make the original long (let's take a quick look) list.

Stephen said...

I have heard a number of objectives over the years regarding SaaS, but two seem to be still valid. One, with SaaS, you are forced to upgrade when the vendor does the upgrade regardless of whether you want to. Why wouldn't you want to? Your users are trained on the current version and you may not want to do additional training now.

Second, when a SaaS upgrade is done, it is done in a production environment. You don't get a chance to test it in a test or development environment to ensure that your customizations or integrations work properly.

Interested in your opinions on these.

Frank Scavo said...

Stephen, I think the answer both points depends on the SaaS provider. Many of them do allow quite a bit of configurability on new features. For example, Plex claims that customers can selectively turn new features on or off. This is important for all customers (as you indicate) but especially for customers in regulated environments (such as medical devices) where the system must be validated for intended use.

On the second point, of course upgrades occur in the production environment. I believe some providers, however, do allow customers to have access to new versions in a sandbox or testing environment. I don't have a good example of this, however. Maybe someone else can chime in.

Daniel Kushner said...

An email came in from Dani Shomron pointing to various articles that deal with scalability in SaaS operations. I think that this should interest most of you: