Does Software as a Service Work for the Meter to Cash Business?

In the world of Information Technology, there is a massive wave coming, and one may argue it has already arrived. The wave is On Demand Software, or Software as a Service (SaaS), which is a new model for delivering software applications to end-users. Traditionally, organizations have purchased software and installed it in-house using highly specialized staff or expensive consultants. However, with the SaaS model, using no more than an inexpensive PC and secure Internet connection, end users simply access web-based software that is developed, maintained and hosted by third party vendors. SaaS vendors typically charge a monthly subscription fee, and have developed strong expertise in delivering software solutions over the Internet, which are reliable, scalable, secure and highly available.

The emergence of this new software delivery model is no doubt what prompted Bill Gates in 2005 to write in a leaked memo to his executive team that stated “The broad and rich foundation of the internet will unleash a ‘services wave’ of applications and experiences available instantly over the internet to millions of users… This coming ‘services wave’ will be very disruptive.” How prophetic his words have turned out to be. According to IDC, a global provider of market research, SaaS was a $4 billion market in 2006, and by 2011, it is projected to grow to $14.5 billion. A website that catalogs SaaS vendors, www.saas-showplace.com, lists more than 1,100 vendors in over 40 categories.

Why all the fuss?

So, why does SaaS have everyone talking? Well, if you can imagine the ridiculous inefficiencies of an office tower with an electricity generator, a boiler and an air conditioning unit on each and every floor, you can easily see why. The benefits of everyone sharing the output of a boiler in the basement, an air conditioner on the roof, or simply plugging into an existing power grid, are obvious. Likewise, to many forward-thinking IT executives, the growing reliability of Internet connectivity, growth in bandwidth capacity, and advances in web technology make SaaS equally obvious. SaaS solutions appeal to a wide spectrum of industries – and can scale to address the needs of even the largest organizations. SaaScon, an organization created for the purposes of bringing together thought leaders in the area of SaaS, points to recent studies that say 61% of North American companies with revenues over $1 billion plan to adopt one or more SaaS applications in the next year.

However, what about those organizations in the meter to cash business, such as Utility companies and Energy Retailers? Does SaaS make sense for them given the complexity of their business and their unique software requirements?

To help answer these questions, we need to look briefly at the benefits of the SaaS model in general, and then evaluate the advantages and disadvantages in context of the utility and energy retailing industries.

Benefits of SaaS

Cost savings

Without a doubt one of the biggest benefits of SaaS is cost savings. Consider a simple example where you implement a new system. In the first case, you decide to purchase a system and install it in-house. With the traditional approach of owning your own on-premise software, you will have to:

• Purchase hardware including servers, storage devices, backup and recovery mechanisms, as well as networking equipment.
• Purchase software licenses for the application, operating system, database and all other supporting software applications.
• Hire (or redeploy) one or more system administrators and/or consultants to install and configure both the hardware and software.

And these are just the upfront costs. In addition to initial (and likely significant) capital outlay, ongoing “cradle to grave” costs must also be considered, including the cost of installing upgrades, applying patches, as well as all other costs associated with ensuring the system’s availability, reliability and security on an ongoing basis. Of course there are the more intangible impacts as well. Ask anyone who has sweated through a weekend-long system upgrade, hunkered down amidst empty pizza boxes and Coke bottles, working around the clock to ensure everything comes back up for Monday morning. A few weekends like that and most people are ready to let someone else deal with upgrades and patch installations.

It is also important to consider the opportunity cost of system implementations. While you are spending time and money installing hardware and software, as well as redirecting employees on a number of levels away from the core objectives of your organization, your competitor can focus their dollars and employees on activities that build competitive advantage. The costs of redeploying employees are often overlooked, but can be significant.

Now let’s consider a scenario where you take the SaaS approach and simply purchase subscriptions to a software service for the number of users that require access. There is no need to buy special hardware on which to install the application, buy database or operating system licenses, or hire/redirect employees or consultants to do the installations. Provided that the SaaS vendor you select hosts the system in a professionally managed, secure data centre, with all the appropriate disaster recovery measures put in place, and provided the partner allows for some customization and access to data, all you will need to do is provide users with standard desktop computers and secure internet access.

Although this example is overly simplified, it does show why the cost savings alone can make SaaS a very attractive option. A study done by Nucleus Research found that just 40% to 50% of customers with licensed CRM applications achieved a positive ROI, where 82% of companies using a CRM solution via a SaaS model achieved a positive ROI.

Cost certainty

SaaS also significantly simplifies the budgeting process since subscription fees are monthly or annual, and are therefore known upfront. This is a significant benefit for utility companies, especially those that are municipally owned, who must finalize their budgets many months in advance for municipal council approval. According to one of Cognera’s municipal utility clients, there is nothing worse than going back to city council to ask for additional funds to replace a piece of expensive hardware that has failed unexpectedly, or to request incremental budget to hire consultants needed to install several new and unexpected security patches across their systems.

Access to best practices and rapid innovation

When you choose to use a SaaS solution, you are joining a community of users that will consistently press for enhancements to the system. As a result, you can benefit from improvements in best practices, and also can gain immediate access to the innovations suggested by other users or proactively developed by the software vendor, while maintaining your competitive advantage.

This is true in cases where a SaaS vendor supports a specific industry – especially one with highly complex regulatory requirements, such as billing systems for utilities and deregulated energy retailers. In this industry, when there is a regulatory change that requires a change in system functionality or configuration, the SaaS vendor will implement the change to ensure the system is up to date, thereby keeping existing customers happy and attracting new clients with a solution that is current. A real-world example of this took place when new government regulations were put in place in Alberta. These regulations forced electricity retailers to conform to a new standard for calculating and billing tariff and distribution charges. Even though the changes were significant, Cognera’s SaaS customers did not miss a beat. Cognera had the in-house expertise to analyze the impacts, made the necessary system changes, performed the testing, and rolled the new functionality out for all clients to use when the regulatory changes became effective.

Time to market

Some of the longest running jokes about software implementation projects have to do with the fact that projects often cost twice as much as budgeted, and take twice as long as expected to complete. Setting up new hardware, installing configuring, and testing software, and implementing disaster recovery mechanisms all take time. However, when a company uses a SaaS offering, they are typically added as a new tenant to a system that is already up and running, and customizing the system to meet their needs can usually be done in a matter of weeks.

Since many SaaS providers develop their systems with a view to expansion into new markets, the work to adapt and configure their systems for new clients can often be done very quickly. This was the case with two new Cognera clients who wanted to be in the British Columbia (BC) natural gas market when it opened up to competitive retailers. Cognera was able to adapt its existing systems to support the BC market and regulatory environment in less than three months.

Reduce key person risk

One of the big challenges facing all organizations, and especially utility companies in rural areas, is the aging workforce. How many of your current employees, especially those with highly specialized knowledge of your in-house systems, are near retirement? How much cross-training has been done in your organization? Smaller companies can often only afford one or two system administrators, which puts them at risk if one of the team members wins the lottery or gets hit by the proverbial bus.

Because SaaS providers tend to have a larger technical staff, they are able to proactively cross-train their teams to ensure there are multiple experts in-house on all key aspects of their systems. Because SaaS providers are developing solutions utilizing leading-edge technology, they are also able to attract some of the best and brightest technology professionals. And in industries requiring highly specialized knowledge, SaaS providers enjoy the advantage of attracting leading industry experts who are interested in the opportunity to work across a wide variety of clients that can all benefit from their expertise.

Are all SaaS solutions created equal?

No, not all SaaS solutions are created equal. There are a number of key areas that companies planning to use a SaaS application must consider when evaluating SaaS providers. These considerations include:

Does the partner offer a robust, secure infrastructure?
It is important to ensure that the SaaS vendor you choose has a very robust infrastructure, and provides you some contractual guarantees around system availability, recoverability, and security.

Is their solution customizable?
There is no such thing as a “one size fits all” solution. Every organization has unique business process needs, and most companies don’t want to re-invent process just to support an inflexible software infrastructure. Look for a vendor that allows you to customize their offering to fit your needs, or whose system allows for sufficient user based configuration.

Will you have access to your data?
There are many “black box” solution providers who provide 100% outsourced solutions that remove all visibility to your systems and data from your control. This model reduces your ability to mine your data for insights that can help you improve and grow your business. To maintain visibility to your business data, seek out a vendor who will export raw data out of their system in a format that you can work with, or who will provide data interfaces separate from the user interface so that you can access your data through applications you develop yourself. As an example, Cognera has secure web services that enable a client to pull data directly from the hosted billing system into their own applications.

Conclusion

SaaS provides many business benefits over traditional in-house systems development and maintenance. The SaaS market includes a rapidly growing and expanding set of solutions available to support key business processes. SaaS is quickly moving away from a focus on simple CRM applications, to include many types of more complex offerings such as billing, resource planning, human resources, financial accounting, procurement and collaboration. Cognera is one example of a successful SaaS provider which offers highly complex industry-specific billing solutions for energy retailers operating in deregulated markets, as well as to utility companies who bill many different types of charges including water, sewer, electricity, natural gas, recycling and solid waste to residential customers. A key step to a successful SaaS implementation is a rigorous evaluation of a prospective vendor to ensure they provide a robust, secure infrastructure, that they offer a solution that is customizable, and that they deliver access to your data for making important business decisions.

To learn more (references):

Cognera Corporate Website
http://www.cognera.com

“Five Benefits of Software as a Service”, Jason Maynard
http://www.trumba.com/connect/knowledgecenter/
software_as_a_service.aspx

CRM Landmark
http://www.crmlandmark.com/saasindustrynews.htm

Salesforce.com
http://www.salesforce.com/

Software as a Service (SaaS) Sightings, Directory and Showcase
http://saassightings.blogspot.com/2006/06/saascon.html