couple of years back, software vendors hit upon the idea of leasing their logistics-related applications to users rather than requiring them to buy the costly programs. Banking on the simplicity and potential economies of renting, they built Web-hosted solutions, assuming that if they built them, clients would come. But the customers didn't come—at least not in droves. In fact, of all the programs offered via the application service provider (ASP) model, as the rental approach is known, the only one that attracted any interest was the transportation management system (TMS). "TMS is one of the few markets where the ASP model has gained traction and continues to move forward," says Adrian Gonzalez, a senior analyst at ARC Advisory Group in Dedham, Mass. ASP-provided enterprise resource planning (ERP), warehouse management and supply chain programs, by contrast, have generated little interest.

Why hasn't this approach taken off? Industry analysts and supply chain software vendors can recite a host of reasons for the cool reception—concerns over security, the desire to maintain control over information technology and skepticism about the financial value of leasing software, among them. Chastened by their experience, many supply chain software vendors are now rethinking the Web-hosted approach, although TMS vendors still think they're on the right track when it comes to meeting customers' needs.

In the beginning, Web-hosted solutions from application service providers (ASPs) were positioned as the low-cost alternative to budget-busting software installations. Historically, a company that wanted to use a particular program would buy a package license from the software maker and install the software on its corporate computers. License fees, installation costs, and expenses incurred in integrating the software with existing systems often raised the project's price well into the thousands, if not millions, of dollars.

Under the Web-hosted model, by contrast, the application service vendor keeps the program on its own computers, giving the user access to it via the Internet or a private communications link. In return, the user simply pays either a periodic subscription fee or a transaction fee based on actual usage.

Its simplicity notwithstanding, the idea of the ASP has failed to catch on in corporate America ... for most applications anyway. AMR Research Inc. of Boston reports that the ASPs only accounted for 2 percent of the $2.1 billion in revenues generated by supply chain management software in the year 2000.

Perhaps not surprisingly, the more complex the program, the lower the interest shown by potential clients. The sales pitch for online ERP systems, for example, has fallen on deaf ears, says Dwight Klappich, an analyst with the Meta Group Inc. of Stamford, Conn. Large corporations typically maintain huge internal information technology staffs for their critical systems, he says. Because they have to pay for their own IT staffs anyway, they see no advantage to Web hosting. "What's the value add to host ERP?" Klappich asks. "When you look at the cost for the vendor to host the software, I can bring it in-house cheaper."

IT staffs, moreover, often are opposed to using Web-hosted ERP solutions because they fear loss of control over corporate computing. "IT guys want the applications in their domain and want to run queries against them and write their own reports," says Darren Ward, a vice president for logistics products at Dallas-based supply chain software vendor i2 Technologies. "They want to manage and control."

Vendors of supply chain applications—planning, warehouse management and order management systems—have faced the same challenge their ERP counterparts have confronted in selling the ASP model. "Back-office systems like warehouse management and planning are considered too complex to outsource," observes John Fontanella, an analyst with AMR Research Inc. in Boston.

At one point, Milwaukee-based vendor Irista Inc. considered offering its supply chain suite of applications on an ASP basis. But it never went through with the plan. "The demand wasn't there," explains Scott Rishel, Irista's vice president of development. "[Obtaining software under the ASP model] is like leasing a car. You pay the rent, but you don't own anything at the end of the year. People did the [arithmetic] and decided to buy the system because financially it made more sense in the long term."

Among warehouse management system (WMS) vendors, only V3 Systems of Charlotte, N.C., currently offers a Web-hosted application. Richard Sherman, V3's chief marketing officer, notes that his company uses communications giant AT&T to host its application on AT&T's servers. "We think the ASP strategy will be more a partnering strategy," says Sherman. "The benefits are quite clear. Companies can implement these solutions as an expense."

Although ASP advocates are quick to point out the financial advantages of the ASP approach, their arguments have apparently held sway only with companies interested in transportation management systems. "The only place where ASP is strong is in transportation management," notes industry analyst Fontanella.

So far, a variety of TMS vendors are leasing their wares. These include Celarix Inc. of Cambridge, Mass.; GT Nexus, based in Alameda, Calif.; and Descartes Systems Group of Waterloo, Ontario. The vendors' customer bases vary widely: Provia Software of Grand Rapids, Mich., reports that it has about 50 customers for its ASP-delivered TMS, and Logistics.com of Burlington, Mass., says it has a dozen customers for its online TMS. Dallas-based i2 Technologies Inc. has two customers who have gone live with its Web-hosted TMS and two more implementing it.

In addition, two third-party logistics providers have entered the TMS market with ASP models. ClickLogistics of Boston has a dozen customers for its program, and Schneider Logistics of Green Bay, Wis., now sells the TMS it developed for its business as an online application. Schneider has a half dozen clients for its TMS offering alone, reports Rich Piontek, vice president of development and new marketing at Schneider Logistics.

Why is the ASP approach working with TMS? Part of it is pure economics. Leasing an application gives logistics managers ready access to a TMS program without having to wait for—or compete for—precious IT resources. "Transportation folks are often at the bottom of the priority list when it comes to IT investment," points out Gonzalez of ARC. "So any request to have someone approve a million dollar capital expenditure on software and hardware is dead on arrival. A hosted model becomes more manageable for companies. You can put it under 'Expenses' rather than 'Capital Purchases.'"

Champions of Web hosting also point out that the ASP model relieves the burden on stressed-out IT staffs. "We've seen this as a significant reason why large and mid-sized companies want a hosted solution," says Beth Enslow, a senior vice president at Descartes.

ASP transportation providers contend, too, that because renting eliminates much of the time and cost associated with systems integration, they can provide a company with a quick return on investment. "TMS gets chosen because of its ability to create a quick ROI," says Piontek of Schneider Logistics. Adds Joe Wagner of Logistics.com: "If you buy a TMS as a package, the typical installation time is 12 months; we can bring up a company in less than four weeks."

Other reasons have more to do with the nature of transportation management systems themselves. Compared with other supply chain applications, TMS programs are better candidates for Web hosting largely because they're more externally focused than an ERP program or a WMS is. Under the usual setup, a user submits a query via a browser for a rate quote or tracking information. The vendor then supplies the answer from a database that resides offsite on a server that the vendor updates regularly to reflect market changes.

The advantage a TMS program offers over other online applications, then, is efficiency. Once a TMS vendor has built links to one carrier, other users can build on that interface. "A service can build a connection once to a carrier and it can tender all the loads to a carrier from each shipper," says Klappich.

Although users have shown some interest in Web-hosted TMS programs, vendors feel they have achieved only limited market success to date. Some analysts believe that the vendors have only themselves to blame for this, noting that they tend to market their wares to large corporations and ignore small to medium-sized companies. "It hasn't taken off as much in transportation because the providers have focused on the higher end of the market," says Klappich. "They want to get the bigger shipper to recoup the money they spent [on development]."

For their part, the vendors that offer their TMS programs via the ASP model still believe that over time they will win companies over to their way of doing business. Even Klappich concedes that TMS vendors will expand their share as they move toward the mid-market in the next three years. "Using hosted applications is a big change," says Vijay Sundaram, a vice president with GT Nexus. "It may be a little bit too early to pass judgment on it."