July 12, 2005

B2B outsourcing certainly isn't a new idea. The concept of vertically-integrated manufacturing has been unpopular for many years. Now, under the banner of BPO (business process outsourcing), the trend has accelerated greatly, and today businesses are outsourcing many portions of their operations that they would never have dreamed just a few years ago.

In the case of logistics, freight forwarders and third-party logistics (3PLs) companies have been around for many years and were early providers of logistics outsourcing services. These service providers typically focused on a subset of a company's logistics needs, such as warehousing, or export logistics. Today, however, lead logistics providers (LLPs) are emerging to provide deep logistics knowledge, transactional processing capabilities for all modes of transport and supply chain technology that together add up to a complete logistics outsourcing solution.

The entrance of LLPs is providing a new alternative for companies who wish to use leading edge supply chain software technologies. Initially, the only way to access supply chain software was to license it and install it on a company's own servers. Then, hosted, or application service provider (ASP), models became fashionable - at least it became fashionable to talk about them. For the most part the hosted software model has not met with widespread adoption in the area of supply chain software. Today, however, a new model is on the rise, incorporating a complete logistics outsourcing offering with supply chain software -- the best of both worlds.

The tried-and-true model for utilizing supply chain software involves licensing it from a software vendor. The up-front license fees and implementation costs are typically high -- normally at least $1 million for a large enterprise, and often several times that amount. The company must purchase hardware costing tens of thousands of dollars. The ongoing cost of ownership is also expensive. Annual software maintenance fees range from 15-20 percent of the original software license costs, and the recurring cost of production support and master data management (typically salaries) to keep a complex supply chain application running can be significant.

Most companies find keeping up with current versions of their licensed supply chain software to be a significant challenge. They invested significant resources in the initial implementation and want to reap the benefits of it without continuing to invest more resources. That's understandable. But it means living with nagging software bugs and shortcomings that the software vendor may have fixed in more recent releases. And eventually there comes a day when the version a company is operating is no longer supported by the software vendor.

A related issue many companies face is the problem of customizing software to more accurately fit business needs. The more heavily customized the software, the more difficult it is to stay current with a software vendor's upgrades.

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Service oriented architectures (SOA) promise to make customizations easier and more upgradeable, but this is still at an early stage and most software vendors just aren't there yet. Also, consultants are often used in the initial implementation and customization of the software, and once they have moved on, they leave a significant knowledge void. Frequently, the organization lacks people who understand the implementation well enough to help do upgrades. The result is stagnant implementations that don't evolve to meet the needs of a changing business.

At a superficial level, the concept of renting supply chain software delivered through the Internet seems to be an appealing option for reducing up-front costs and keeping supply chain IT capabilities up-to-date. However, the hosted software model has not been rapidly adopted outside of relatively simple, non-mission critical business processes that do not require complex integration with other enterprise systems, like sales force automation (SFA).

Why is this? Solutions, designed specifically to be delivered in a hosted model as "on demand" software, are just too basic to meet the needs of a complex enterprise. These systems tend to provide lighter functionality than the traditional licensed systems.

However, some successful supply chain execution solutions for the mid-tier market have emerged. These systems, combined with ubiquitous Internet access, have broken down the cost barrier that made supply chain software too expensive for most small and mid-size companies, and are starting to provide real benefits to these companies.

In some cases, even large companies with relatively straightforward supply chains (e.g., most shipments are outbound moves on pack trucks) have also been able to use on-demand supply chain systems. But these solutions have for the most part not penetrated into larger organizations with more complex global supply chains. They simply don't have all of the required functionality.

Hiring an LLP is an emerging option for accessing leading edge supply chain technology. An LLP is an outsourcing company that acts as the overall coordinator of all supply chain activities for a manufacturer or distributor. The LLP is comprised of experts who agree to deliver a solution on an ongoing basis, even after the original implementation is over. In essence, supply chain software applications are included as part of an outsourcing deal.

This solution provides a cost-competitive way of gaining access to best-of-breed supply chain technology with managed services included. Unlike IT outsourcing deals, where existing systems remain in place and are simply turned over to an IT outsourcer, best-of-breed LLPs provide their own standard supply chain application suite, in which they maintain a deep expertise.

As in the hosted model, the LLP is responsible for keeping the supply chain software up-to-date with regular software releases, and for resolving any day-to-day production issues that may occur. The best LLPs also have the knowledge required to pull off a complex, enterprise-wide supply chain implementation in the company's industry vertical.

Is there any reason that an LLP's customers need to have access to complex user interfaces that allow them to enter logistics contract rates? Or modify the business rules used to route shipments? Or adjust how an optimization algorithm is executed?

The attractiveness of the LLP model is that each of these situations is more appropriately handled by the LLP's staff. By contrast, a hosted software vendor would need to provide all of this complex functionality (and more) to end users. This is challenging for the software vendor, but even more important, the reality is that the end customer is going to have difficulty getting value out of much of this functionality. Complex functionality requires arcane expertise that most companies just don't have.

In the LLP model, the software is implemented, configured, maintained and used by trained experts. The LLP considers this expertise a core skill and can maintain a deep bench for this skillset. A typical manufacturer, by contrast, usually finds that when internal experts are promoted, transferred or leave the company, they are very difficult to replace.

The search for a qualified solution involves many different elements. A few questions to consider when looking for an outsourced supply chain technology solution include:

Is a standardized technology suite used? Many LLPs have emerged from the traditional 3PL industry, in which companies have grown through acquisitions. Additionally, they were willing to take on a customer's assets, information systems and all (e.g., a warehouse and its warehouse management system, or WMS).

This resulted in a patchwork of different systems, and the LLP is left with the difficult task of operating and maintaining expertise in numerous systems. Some 3PLs have reported that they have more than 100 transportation management systems (TMS) and WMS systems. While acquisitions in the 3PL industry are common -- most 3PLs have acquired a number of small companies -- if an LLP has too many disparate systems, it's very difficult to have deep expertise in all of these, and difficult for the service provider to keep innovating their IT platforms at a rapid pace.

Are vertical industry requirements supported by the system? Large enterprise supply chains are complex. Modes of transport, distribution scenarios and opportunities for savings and optimizations all vary by industry. For example, an automotive company's supply chain is very different from a retailer's, which is very different from a chemical company's. The supply chain adaptations seen in different industry verticals are significant and it is critical that an LLP's supply chain technology has been proven to work in each specific vertical market to meet needs accordingly.

Do the systems offer a proven customer integration model? While traditional integration approaches for licensed supply chain software assumed that a "behind the firewall" integration approach would be used, this won't work in an LLP environment, specifically one in which the LLP operates a standard technology infrastructure behind its own firewall. The LLP needs a proven message-based integration approach, hopefully moving toward a services-oriented architecture.

Can they provide complete visibility? When giving up the management of supply chain execution to an LLP, visibility into all transactions becomes critical. While every LLP will say they provide some form of visibility, few can provide real-time visibility across all modes of transport and into the LLP's internal execution processes. Having the ability to log onto a Web site and quickly find information about a specific shipment without having to contact the LLP is no longer a "nice to have," it's become a "must have."

Has the LLP demonstrated a track record of innovation? While clearly the number one reason companies outsource is cost savings, another reason is innovation. LLPs can cultivate and drive the implementation of innovative new ideas for improving their customer's supply chains. These ideas should eventually become manifested in the LLP's systems. So it's reasonable to ask: "Is the LLP pushing the envelope of what's possible? Are they demonstrating an aptitude for creating new ways to save money or improve service? Can you see this innovation in their systems?"

LLPs are emerging as an alternative supplier of supply chain technology to manufacturers. This marriage of outsourcing models -- obtaining logistics expertise and supply chain technology all from the same supplier -- truly offers the best of both worlds. Today LLPs can provide better supply chain technology expertise and functionality, at a lower cost than traditional software licensing models while offering a complete package of services and technology, all from a single supplier.

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