Originally posted on on the e-Sourcing Forum [WayBackMachine] on Wednesday, 16 May 2007
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).