Software for hire

No budget to buy the software you need? Not a problem. Application service providers (ASPs) are now renting out sophisticated packages.

By -- Logistics Management, 4/1/2000

Avery Dennison Office Products-North America has found a simple solution to at least one complex info-tech problem. Earlier this year, the Brea, Calif.-based manufacturer decided to forego the purchase of costly load-planning software in favor of renting a transportation planning application called FreightLogic.

Although the software's vendor, Provia, actually runs the program on its computers, Avery Dennison managers at three separate warehouses can tap into the program from their sites. In operation, the transportation application takes information from Avery Dennison's order-management system, processes that information, and groups the orders into loads. The software then exports the load assignments back to Avery Dennison's warehouse management system with the shipments already configured and assigned to carriers.

Software rental expedited implementation of the program because Avery Dennison didn't have to install the package on its own computers. "It shortened the startup time because we didn't have to train technical people. All we do is file mapping with them," reports Tom McGilloway, senior project manager at Avery Dennison. "To me, it was a better option. We don't need to be experts in the software. We just need to be able to use it."

If the pundits are correct, a lot more companies in the next five years will be following Avery Dennison's lead and renting sophisticated supply chain programs. Software vendors will be transformed into what are known as "application service providers" (ASPs), which will give users access to their packages on a transaction basis or for a fixed monthly or annual fee-often over the Internet. "Five to seven years from now, almost all software will be [distributed via the] ASP model," predicts John Fontanella, research director for supply chain execution at AMR Research in Boston.

Web-hosted supply chain software applications offer the promise of quick deployment and easy connectivity among trading partners in a given industry channel. But some consultants question whether a company can still obtain all of the benefits of improved supply chain operation if all the requisite applications are not linked together under one roof.

A New Software Model

Since the industry's inception a decade or so ago, logistics software makers have charged for their products by means of licensing fees. In addition, their clients usually had to budget money-which typically was paid to an outside party like a consulting firm or systems integrator-to tie the software to existing programs for information exchange. And the costs didn't end there. Users also incurred expenses for training their personnel how to use a specific software application properly.

Once a company purchased the rights to a software package, it then installed the program on its own machines. But recent advances in computer technology have made it easier for companies to use an application remotely, with the actual application sitting on a computer miles away from the user's location.

Dan Gilmore, an analyst with the Meta Group in Stamford, Conn., says that many logistics software vendors take advantage of what's termed "thin-client" technology to provide access to business applications run off-site. One thin-client technology provider, Citrix Systems Inc. of Fort Lauderdale, Fla., helped foster the advent of ASPs by developing an enabling technology called Citrix MetaFrame. Because the applications are installed and updated on big computers called servers rather than maintained on individual computers, MetaFrame reduces the time and resources required to run applications that are not stored in the computer itself. It also makes it possible to run the application to any so-called client computer over a network, including the World Wide Web.

Working with application server software such as Citrix's package is just one approach used by ASPs to distribute their applications. Others are using HyperText Markup Language (HTML), the traditional language of the Internet, Gilmore notes. Still others are taking advantage of Web-enabled languages such as Java, which make it possible to have programs located on a server furnish operational instructions across the Internet to a client computer.

These technological developments allow software vendors to host the application themselves on their computers and offer the use of their programs through a private network or the Internet. The customer in most cases simply employs a standard Web browser to operate the application. In turn, so-called "Web-hosting" makes possible a new business model, one in which the software maker can charge for program use on a transaction basis or by charging a periodic fee.

Initially, some supply chain software providers seized upon this approach as a way to offer their wares to small companies that could not afford the huge upfront costs of license fees and installation. "The economics are shifting toward renting software because of the cost of IT (information technology) resources and talent," says Ken Ramoutar, vice president of marketing in the supply chain group of business software vendor InterBiz in Islandia, N.Y.

But as it turns out, many larger corporations are just as interested in the ASP approach because software rental requires less setup time than a purchase would and doesn't impose as much of a burden on the company's own information-technology staff. "There's a perception in the marketplace that it's the way for smaller companies," says Ronald Riggin, managing director at warehouse management system vendor TRW in Reston, Va., "but it's the bigger companies that are expressing the most interest."

AMR's Fontanella confirms that bigger companies are considering the ASP approach because they do not have to commit their own precious hardware and inhouse resources to supporting a rented application. "It has a light impact on internal IT resources, which are just plain scarce," says Fontanella. "The hurdles for joining an ASP are pretty low."

ASP Pioneers

Makers of transportation management systems (TMS) led the way in switching to the ASP model of business. Provia in Grand Rapids, Mich., for instance, has rented its load-planning software, FreightLogic, this way for a couple of years. Nistevo (formerly called Transview), based in Eden Prairie, Minn., also has been providing a service to manage, rate, and procure inbound and outbound carriers on a subscription basis for some time now. Likewise, Descartes Systems Group in Waterloo, Ontario, has been Web-hosting its EasyRouter route optimizer application as well as its supply chain visibility application, E-frame, for several years.

A couple of recent entrants into the supply chain marketplace are offering transportation applications based solely on the ASP model. Celarix in Boston has partnered with hosting concern Digex in Balfour, Md., to provide a tracking and visibility management tool that shippers can use with a standard Web browser for a monthly fee. Another recent startup, Capstan in San Francisco, offers for an annual subscription fee four application modules that shippers can use with a browser or even an old-fashioned telephone. The modules cover logistics management, export management, import management, and transaction management.

But the TMS software vendors are hardly alone. Syntra in New York City, which makes software for handling exports and imports, also has begun offering its wares using the ASP model. For the past year, companies have been able to use Syntra's Web-hosted service to check regulations and determine duty costs on a transaction-fee basis. "The [international] regulations change so often that we believe our clients will be interested in taking this on a service basis rather than as an internal application," explains Stephen Cole, Syntra's vice president of marketing.

San Francisco-based Qiva recently launched IQuator to provide shipment visibility and facilitate collaboration for shippers worldwide on an ASP model. Another concern, Logility in Atlanta, which makes forecasting software, has partnered with ebaseOne Corp. in Houston to deliver supply chain management solutions to facilitate trading partner collaboration and demand forecasting for products. Logility says the service will cut implementation time to between 60 and 90 days from six months or more. Andrew White, Logility's vice president of product strategy, says the company has a "fluid pricing model" for the service based on the volume of data. "Medium-sized companies can now have access to Logility without the usual costs and implementation cycle," he says.

Another supply chain vendor, Interbiz, has offered its MK Everywhere distribution and manufacturing software on an ASP basis for about 18 months. Most of the service's users are outside the United States, says Ramoutar of Interbiz.

Some of the traditional warehouse management system (WMS) providers are even adopting the ASP model. For example, TRW in Reston, Va., began Web-hosting its MARC-CS warehouse management system this past year. TRW maintains the WMS software on its own equipment and rents access on a user-fee basis. It's offering the service through a partner, US Internetworking of Annapolis, Md.

Other WMS players are expected to follow suit and begin online rental of their applications soon. HK Systems in New Berlin, Wis., for one, says it plans to Web-host its suite of supply chain programs, which includes a TMS, a WMS, and an order-management system.

In fact, some industry analysts see the ASP approach as the way of the future. Analysts at the ARC Advisory Group in Dedham, Mass., for instance, expect the market to climb from $77 million last year to $8 billion in five years. (See the accompanying chart.) ARC projects that shippers will spend $495 million on renting TMS software and another $80 million on renting WMS applications by 2004. "The biggest market for this will be enterprise resource planning, followed by TMS, and then CRM (Customer Relationship Management)," says Adrian Gonzalez, a senior analyst with the ARC Advisory Group. "For transportation, the ASP model makes particular sense when collaboration is involved."

Not for Everyone

Although industry experts believe that ASPs will gain plenty of converts among shippers in the coming years, online software rental isn't for every company. A business still must ensure that any Web-enabled application it uses interfaces with its own internal software programs. "Access to the software via an ASP attacks a portion of the cost of ownership of a piece of software-the installation and maintenance," notes Gary Cross, the supply chain ERP practice leader at IBM Consulting. "But in most supply chains and business management systems, there are a lot of other investments and commitments [necessary] to get the benefit out of it. All of the interfaces that have to be redesigned are a significant part of the implementation. The interfaces have to be constructed to feed the system and get value out of the software."

Most ASP vendors disagree with Cross, however, saying that their model based on Internet protocols can provide easy connections to corporate applications. Indeed, they argue that extended enterprise connectivity represents their greatest advantage. Trading partners with disparate information systems can obtain access to a central Web-hosted application that's housed on the vendors'computers. "Single connectivity is the greatest asset," says Ron Alvarez, president of Capstan. "The advantage is that the ASP establishes connections with the participants."

Indeed, the ASPs'ability to make good on claims of enhanced connectivity may well determine the practice's acceptance among shippers and the industry's whole future, says analyst Gilmore of the Meta Group. "There's a potential for increased information delay based on having to go through a more complex network rather than going through the four walls of a company," the analyst notes. "It places more responsibility on the ASP to perform this integration. There's not a whole lot of evidence on how well this will work. Everyone's looking to see how this will all play out."

Web-Hosting Expected to Grow