Online Outsourcing

With the rise of software as a service, distributors may not need computers anymore.

The next “new” thing in information technology for distributors is 50 years old. Called “software as a service” (SaaS), its providers claim it lowers distributors' information technology costs by replacing the distributors' computers, IT staffs and software with off-site data processing the distributors access online. In a SaaS world, only PC terminals and printers would be needed on-site. In these tough times, getting the benefits of a new system without paying for one is welcome news — especially for small and mid-size electrical wholesalers. But is this reincarnation of an old form of outsourcing, sometimes called “utility computing,” really worth pursuing? What are the pros and cons?

Before mini-computers and software packages came on the scene in the late 1970s — well before PCs — most distributors could not afford to buy hardware and then create their own software. But they could get the benefits of data processing by subscribing to “service bureaus.” There was even one used by many electrical wholesalers. In that original version, a wholesaler mailed copies of documents such as invoices to the service bureau, which key-punched cards and loaded them into a room-sized computer for processing. Reports were printed and mailed back to the electrical wholesalers. A subscriber paid a small fixed monthly fee and paid for the resources used — number of transactions processed, amount of data stored, number of pages printed and so forth.

When low-speed data communications became cost-effective, wholesalers bought terminals and printers, did their own data entry and printed their documents and reports overnight. When data communications became much faster, subscribers were able to do instant online inquiries into such data as stock status and accounts receivable.

Low cost mini-computers and packaged software drove data processing service bureaus out of business because it became more cost-effective for distributors to have their own systems.

Back to the Future

The Internet and advances in computing power have now brought back a form of service bureau. Today, the world is wired together by fiber-optic cable, which has enabled almost all wholesalers to access websites anywhere and instantly transact business. Computer speed and storage capacity are thousands of times faster and larger than in the days of mini-computers. A very fast and large computer can be located anywhere in the world and be used by many wholesalers.

Online payroll services are one example of SaaS. The provider has the computer and software in its data center and subscribers have terminals and printers. As of now, there is no SaaS focused on or dedicated to electrical wholesalers.

SaaS works like the online service bureaus of old, or like the on-line payroll service described above. Each subscriber logs into the SaaS provider's website to access the software's functions. Most relevant to distributors are providers with modern enterprise resource planning (ERP) software that handles most of the distributors' business functions. Subscribers usually pay a small set-up fee, plus a certain amount per month per user, for a set of business functions such as order entry or inventory management, regardless of the amount of resources used (with some limits).

System Costs

The SaaS concept is applicable to wholesalers of all sizes, though most SaaS providers aim at small to medium-size distributors, who find the initial and ongoing costs of having their own systems to be prohibitively expensive. Initial costs for an in-house system include one or more computer servers, networking equipment, a software license, training and education, and conversion of data from their old computer system.

Ongoing costs include a maintenance contract for the server(s), a contract for vendor-provided software support and updates, one or more in-house people to answer users' questions, perhaps annual software license payments, and data communications circuits for branches. Leases are available, but the monthly payments are usually still unaffordable.

SaaS Costs

The cost of using a SaaS provider can be much less than owning or leasing because the SaaS business model assumes that many wholesalers will share the same computer and software and will subscribe for many years. This sharing enables a provider to spread its cost over a larger, longer-term base and charge subscribers smaller amounts than they would pay to own or lease a system. Even the down payment, if any, is usually much less than the cost to initiate a lease. As SaaS providers like to brag, they provide subscribers with more resources than any wholesaler but the very, very largest could afford, at PC prices. Some SaaS providers do not require more than a one-year contract, which allows a wholesaler to cancel the service without losing a lot of money. This is not possible with a purchased system.

Some Concerns

Although the savings from using a SaaS provider can be substantial, this is a new concept for wholesalers, so here are some things to check out before signing up:

  • If a SaaS provider does all of a wholesaler's data processing, that wholesaler's business would be totally dependent on that provider. If that provider suddenly went out of business, how would the subscribing wholesaler do business? How would the wholesaler get its data back?

  • How secure from hackers is a subscriber's data? Even with exotic data encryption, hackers can figure out how to read secured data. What stops an unauthorized user from logging into the service like a legitimate user and viewing data — or worse, damaging it? Passwords aren't effective in small distributorships.

  • Monthly fees can increase quickly if users are added. Fees also increase when a subscriber starts using a new module, such as activity-based costing, that was not included at the start of the arrangement.

  • Some providers do not own the software they use, but license it from the software's author. That license can be terminated by the author under certain circumstances, which would leave subscribers with zilch. The contract between a SaaS provider and the author of the software used by the provider could allow the author to increase the license fees or limit subscribers' use of the software.

  • True SaaS software was created specifically to be used by multiple subscribers. But some SaaS providers use software that was created for one company and then modified to support multiple users. This can lead to unexpected bugs that don't occur when the software is used by only one company. The author of the latter kind of software may or may not be the SaaS provider, and if it isn't, the author may not be obligated to fix problems caused when multiple companies use the software, and SaaS personnel may not know how to do so.

  • Some providers of SaaS for distributors may require that all user companies use the software as is. They won't make modifications, and subscribers can't make modifications because they don't possess the source code.

  • Part of the cost reduction claimed by SaaS advertising is achieved by replacing expensive leased data communication circuits with access over the Internet. Use of the net is cheap, but the net is not totally reliable. If access becomes temporarily unavailable, how would a subscriber run its business?

  • The support people at a SaaS that didn't create its own software may not know the software as well as the author. When subscriber personnel call with questions, SaaS personnel may have to call support people at the author company, thereby delaying a response.

With these thoughts in mind, any distributor should be better prepared to make the decision about whether using software based on a SaaS model will be the right solution for their company.

Dick Friedman is an authority on information technology for electrical wholesalers, with more than 25 years of experience. His firm does not sell systems or software, or provide computing services. They make unbiased recommendations about replacing a system with an SaaS, or using an SaaS as the first form of data processing; or replacing one system with another. Dick is a contributing author to EW and consults with readers. Call (847) 256-3260 for a free consultation, visit or e-mail him at [email protected].

TAGS: Archive
Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.