The On-Demand supply chain software world is really coming.

I must admit I have been until recently a bit of a skeptic. Why? Well, many of the early On-Demand solutions simply were not that robust in terms of functionality. Second, I wasn’t convinced that in many cases that the economics made sense – why pay for something forever when you can pay for it once? Third, in many cases, especially with Transportation Management Systems (TMS), I have seen a tendency for implementations to be “dumbed down,” for a number of reasons, simply meaning they tended to be much less ambitious than traditional deployments.

But I am changing my tune. In my 10 predictions for Supply Chain 2015 late last year, I had as one of them that On-Demand Supply Chain software would come to dominate the market by that time, and in subsequent presentations I have given on the 2015 supply chain, I have told audiences that I am as confident in that prediction as I am any of the other nine on my list.

That doesn’t mean the thousands of traditionally deployed software applications are going to go away any time soon, but it does mean the preponderance of new software implementations by that time will be of the on-demand variety – and that this will have a profound impact on technology vendors and their customers.

We explore all this and more in our just released Supply Chain Digest Letter focused on On-Demand Supply Chain Software. Many of you should have received a copy in the mail. For others, as always, you can download the full electronic copy of the Letter and access a wealth of other information on the Resources page associated with the Letter. You will find it here: On-Demand Supply Chain Software Resources Page

First, as I have in the past, let me note that there are several dimensions to “On-Demand,” and that many companies don’t always well think this through.

The classic “On-Demand” model means that someone else physically hosts the application, and that rather than buying the software upfront, as has historically been done, the software is paid for through some kind of transaction and/or subscription fees. Conversely, traditional software meant paying for the license upfront, and having it installed on a server within the four walls of the enterprise and managing that system yourself.

But there are permutations, such as potentially installing the software within your enterprise, but paying for it on a transaction/subscription basis, or buying it upfront, but having some other party host the application for you.

The key point is that you have to think through what you are really trying to achieve.

You can add to that decisions about who is really going to run the software; for example, it is common in TMS selections processes for 3PLs to be also bidding along with software vendors for the business and saying they will not only provide the TMS (usually one of the ones also being separately bid) but manage some or all of the transportation process as well.

This last point is actually important, because I believe that it is inevitable that the combination of the On-Demand model and the mega-trend towards outsourcing will increasingly lead to on-demand software vendors and/or their partners offering both a solution and a managed service, or what is often called Business Process Outsourcing. The line between supply chain software and services will become increasingly blurred.

Which brings up all the terms, and there are a bunch of them here: Hosted, On-Demand, Software as a Service (SaaS), Cloud Computing, each somehow connected to this new approach to software delivery.

Do the terms matter? A bit. SaaS is often said to imply “multi-tenancy” (as in a tenant), meaning multiple companies are running on one “instance” of the software. That can significantly reduce management costs, which can lower prices for users. Of course, getting an application to securely support running perhaps dozens of different companies with their own database, configurations, etc, on one piece of software is a challenging technical feat – which is in part why the On-Demand model has been slow to come.

“Cloud Computing,” while very techie sounding, will also be important. The basic idea is that a software provider or hoster will have a farm of servers, each of which can be called on to provide processing power to a given application. In short, what that means is that rather than needing to acquire an expensive server that will easily meet your peak processing requirements but be well underutilized most of the time, you can tap into the power of the farm as needed, and just pay for that.

As we note in the Letter, it’s similar to installing a sorter in a distribution center that is scaled for peak days but is well underutilized most of the year. What if you could install a much smaller sorter that meets baseline needs, and have it magically expand just on heavy days? You would save a lot of money, and that in a sense is what Cloud Computing can offer on the hardware side.

I believe that On-Demand supply chain software is becoming a disruptive technology. Current vendors from ERP to planning to execution will be effected differently; some will make a good transition and thrive, while others will find themselves under assault from a new wave of On-Demand vendors built with that model from the get-go.

Why do I think the On-Demand model will take over? For one, it’s the Google generation moving up the management ranks. Everything else they access will increasingly be coming from an on-line provider – why should enterprise apps be any different?

Second, in the end, it is a better financial model for vendors. In the Great Recession, it was a lot better to be receiving a steady stream of subscription or transaction revenues, even if down some 20%, than having a tough time selling any new licenses for several quarters.

The challenge comes in the transition, from the software vendor’s basic financial model to how sale people are compensated. But here is the bottom line truth: once the traditional providers make their On-Demand offerings what they lead with, rather than as the fall back offering as is generally true today, then the percent of On-Demand sales for new deployments will take off like a rocket. That day is not too far away.

Think of some of the other changes we will see. Increasingly, you will be able to try the software before you buy it! What a dramatic, game changing impact that will have. No more trying to guess what the software really does through mind-numbing RFPs and software demos, but by accessing a version of the software on-line and seeing for yourself. It will certainly put the buyer in more control.

Of course, there are pros and cons as with everything, and today, you need to consider lots of factors. We cover that and more in the Letter, and on Monday on the Resources page will have a Total Cost of Ownership calculator that will allow you to compare On-Demand versus traditional solutions. The ability or lack thereof to build competitive advantage through a unique software solution is certainly one concern that has to be considered.

But On-Demand is the future. And 2015 is not that far away.

Do you agree that the On-Demand software approach will become dominant within about 5 years? Why or why not? How does your company think about this? Let us know your thoughts at the Feedback button below.