Many companies wouldn't hesitate to outsource their basic logistics functions to a skilled independent provider. They don't view the nuts and bolts of transportation management as something that must be kept in-house for competitive advantage. When it comes to giving up direct control of the information technology piece of the puzzle, however, that's another matter.

Logistics service providers (LSPs) haven't fully convinced manufacturers, distributors and retailers that they can deliver the same quality of service on the IT side as they can with the physical storage and movement of freight. At least up to now. Major LSPs, sometimes in partnership with software vendors, are beginning to chip away at that perception. One of their most powerful tools is the emerging practice of Software as a Service (SaaS), whereby key applications are remotely hosted and don't come anywhere near a client's hard drive.

LSPs believe they can handle the IT component. But convincing clients has been an uphill battle. A 2006 study on third-party logistics (3PLs), conducted by Capgemini, SAP AG, DHL and the Georgia Institute of Technology, found 92 percent of 3PL users viewing IT as "a necessary element of overall 3PL expertise." Yet they were far from happy with the results. Just 35 percent said they were satisfied with their 3PL providers' IT capabilities.

In fact, at the time of the 2006 study, clients' satisfaction with 3PLs' IT services was actually on the decline. The percentage of happy customers in that area slipped steadily from 75 percent in 2003 to 45 percent in 2004, and 40 percent in 2005. One reason might have been the introduction of new technology, such as radio frequency identification (RFID), that had yet to reach full maturity. Another was the rising service expectations of customers, even as 3PLs were struggling to cope with a wave of unfamiliar systems.

Despite this discord, the demand for outsourced IT continues to rise. Companies are asking hard questions about how much technology they can support in-house, and how much can be spun off, says Greg Aimi, director of supply chain research with AMR Research Inc. For the moment, he says, the decision isn't splitting along clear lines. Some companies are loath to part with expensive internal systems. Their transportation and warehouse management applications, which appear ripe for outsourcing to an LSP, may be tightly integrated with order-management and customer-service functions. Divvying up responsibility for managing those systems, the companies might reason, is simply too great a risk.

Others no longer have the internal IT staff to manage complex software. Or they're tired of paying high maintenance fees and playing catch-up with a steady stream of upgrades. In such cases, they would welcome the advances of reputable LSPs who can handle physical freight as well as the bits and bytes needed to manage it. In a third possible scenario, a company might ask its LSP to use certain pre-selected software packages on its behalf, especially the kind required to achieve visibility over shipments moving around the world.

The Hosting Option

The arrival of SaaS has added a new element to the insource versus outsource debate. When software vendors first began offering their wares in a hosted model, they were met with widespread reluctance on the part of prospective customers. That was especially true if the vendor was a small operation or outright newcomer to the market. If the vendor went out of business-hardly a rare occurrence in the post-2000 dotcom bust-the client's IT infrastructure would collapse as well. But Aimi says those fears have abated in recent years, as surviving software vendors and LSPs have gained in strength, often by absorbing their competition or beefing up their IT offerings.

In fact, many companies saw the arrival of SaaS as a welcome invitation to shed some of their onerous IT burdens. When it came to managing logistics, those systems tended to play second fiddle to expensive enterprise resource planning (ERP) implementations. Aimi relays an additional complaint by some companies: "Once I get the software in-house, I can never get it upgraded or keep it up to date, and the database turns out not to be supported by the old version. With the hosted model, it's always up to date."

The idea of hosted software is still young. While there's a trend toward the outsourcing of logistics IT, Aimi says, "the traditional model still reigns."

That hasn't stopped some providers from forging ahead with a SaaS offering-or even something beyond. IBM is eager to replicate its own success with logistics outsourcing for clients of its Global Business Services unit. Quentin Wedan, global logistics program manager within IBM's Integrated Supply Chain function, says the company stresses long-term relationships with LSPs, both from a staffing and IT perspective. In such cases, he says, "both we and our suppliers are more willing to invest in the necessary IT and integration to achieve seamless information exchange ... up and down the supply chain."

At a plant in North America, for example, IBM's shipping dock is staffed with the personnel of an LSP. The vendor performs freight planning, carrier selection, booking and documentation. Key applications are run by the LSP as well, with status information relayed to IBM, mostly on an exception basis, via electronic data interchange (EDI).

When IBM shifts roles from customer to vendor, it looks to implement similar arrangements. The company is pushing its business process outsourcing (BPO) capabilities on a number of fronts, to the point of becoming what it calls a "global trade orchestrator." Under that scenario, IBM acts as the client's single point of contact for supply chain services around the world, securing subcontractors for whatever physical processes are needed to manage inventory or get product to market.

The First in Line

On the logistics side, the first candidates for IT outsourcing are usually transportation management (TMS) and warehouse management (WMS) systems, says Naresh Hingorani, associate partner for travel and transportation in IBM Global Business Services. Further down the line, he sees retail customers willing to outsource their entire electronic-commerce function, requiring the vendor to maintain a complete IT platform for managing order-to-cash cycles. Direct procurement is another area that is ripe for outsourcing, Hingorani says.

As manufacturers narrow the definition of their core competencies, they become more willing to outsource additional aspects of logistics, says Bob Shellman, chief executive officer of Danbury, Conn.-based Odyssey Logistics & Technology. On the IT side, he says, they have three options. They can acquire a TMS and manage it internally. They can link up with a software vendor acting as an application service provider (ASP)-essentially another term for SaaS. ("On-demand" software is yet another.) Or they can look to an LSP like Odyssey, which deploys Web-native IT on a global basis, with accompanying physical services.

A vendor with a global platform can offer access to multiple carriers, while taking care of all reporting and data collection. Odyssey also provides freight bill auditing and claims resolution. "What we see is a significant push away from acquiring a TMS system [internally] for those reasons," says Shellman. Exactly how the LSP is utilized, however, differs from case to case. For the most part, clients allow Odyssey to select carriers on their behalf. Around 20 percent, however, are big enough to have their own contracts with a network of core carriers, which are entered into Odyssey's network (and, claims Shellman, are usually there anyway).

The systems behind shipment tracking and tracing are especially well-suited for outsourcing, says Steve Hensley, president of Dallas-based Blue Sky Logistics. LSPs can provide clients with a single source of information derived from multiple carriers. The internet offers a convenient channel for relaying data to the shipper, as well as updated rates from carriers. "Because of that," says Hensley, "a hosted model makes a lot of sense."

Less suitable for hosting are applications designed for long-range supply chain planning and optimization, Hensley says. For companies trying to decide the best distribution of inventory across multiple warehouses, it makes more sense to draw the necessary data from internal systems. For that reason, he says, vendors of planning software have had little success in selling hosted versions.

Blue Sky focuses on linking disparate systems and boiling down the results into a management dashboard, which shippers can use to monitor the performance of their extended supply chains. Hensley says his firm doesn't aspire to the widescale BPO approach of IBM, preferring to remain a channel for critical data.

A Variety of Approaches

Each LSP offers a different flavor of outsourced IT, depending on its size and market focus. LeanLogistics, based in Holland, Mich., is taking a "managed services" approach. According to Pete Stiles, vice president of marketing and strategy, that means assuming the day-to-day responsibilities of a traffic department for a number of clients. "We'll do the planning, execution management, tendering and settlement," Stiles says.

Some clients retain their own carrier contracts, however. They procure the vendors, then let LeanLogistics handle the execution. The company provides full visibility into shipment status, supported by best practices which help clients to benchmark their operations and monitor ongoing performance. LeanLogistics can also advise on which carrier should be selected for a given lane, based on its knowledge of rates and services. Stiles says companies opted for this approach out of a desire to retain their carrier contracts at a time when capacity was tight, due to congestion and new restrictions on truckers' service hours.

For IT, LeanLogistics maintains a complete TMS. The hosted model is available in a single instance to all clients. Stiles says companies began embracing hosted software in logistics around 2003. That followed the introduction of on-demand software in other areas, such as the success of salesforce.com in hosting customer relationship management (CRM) applications.

Unlike TMS, warehouse management is not well suited to an outsourced approach, Stiles says. Radio frequency technology, a growing feature of warehouse operations, must be implemented on site. Each location needs its own system, to conform to the needs of that facility.

Tom Sanderson is now president and chief executive officer of the LSP and technology provider Transplace, based in Plano, Tex. But, as former CEO of Click Logistics, he was an early proponent of the SaaS model. He recalls the difficulty of selling the concept to big companies. "When you're starting from scratch, it's a little bit hard to convince a Fortune 1000-type manufacturer or retailer that they ought to outsource their transportation management technology solution to a little start-up.

"What it did was pave the ground a bit," says Sanderson. "It got recognition in the industry that maybe there's a better approach to TMS technology than spending seven figures on a software license, and two times that to get systems implementation and integration done." Today, companies like Transplace are benefiting from the growing acceptance of SaaS as a legitimate way to manage transportation.

TMS lends itself well to the hosted model because it is inherently a multi-partner application. "You have to connect with all of the outside carriers, either by EDI or Web-suite capability," Sanderson says. Companies also want a means of connecting with both vendors and customers, for everything from release orders to shipping terms, tracking and tracing and customer service.

The notion of a hosted WMS hasn't taken off, Sanderson agrees, because the software is so closely tied to a particular facility. That hasn't stopped LSPs from providing outsourced warehouse services-many of the most successful players got their start in public or private warehousing-but the basic software isn't likely to be residing at a remote location, or maintained by anyone other than the warehouse operator.

Transplace can accommodate a hybrid approach to transportation and technology outsourcing. In some cases, its TMS fills in when a client's own contracted carriers aren't available to move a load. But such a setup can only work when the LSP's technology is offered on a hosted basis, and the customer can draw on it as needed, Sanderson says.

The Vendors Jump In

Software vendors, too, are embracing SaaS for logistics-related processes. But that doesn't necessarily put them in direct opposition to LSPs who are doing the same. Instead, they're working with those entities to provide a complete set of transportation services to underlying customers.

Infor, based in Alpharetta, Ga., is one of those technology providers for whom LSPs are a prime marketing target. Eric Nilsson, vice president of product management, says the company sells both to LSPs and shippers in numerous vertical markets, including consumer packaged goods, chemicals, engineering and wholesale food. The software involved ranges from strategic tools to tactical applications for day-to-day management.

At least some aspects of strategic planning are suitable for the hosted model, Nilsson believes. Companies might do their own long-range planning, setting initial production levels based on demand forecasts. But an outside software provider can help companies to plan continuously, in line with changes in the marketplace. The idea, says Nilsson, is to decrease planning windows, so that companies can better match their supply chains to the real world of consumer demand. Hosted applications can provide an extra level of visibility, on which shippers can draw to fill orders.

Nilsson agrees that WMS lends itself less to hosting than TMS. But there are times when the remote maintenance of warehouse software makes sense, he says. If a company has multiple warehouses that are operated from a central point, the software for all facilities could reside within a network center. Other opportunities for hosting software include truck fleet and facility maintenance, he says.

Equaterra, a Houston-based outsourcing consultancy, believes that business process and IT outsourcing are on the upswing. In a report issued earlier this year, the firm noted "positive but slow demand growth" in that sector for the fourth quarter of 2006. But the concept is still slow in catching on for supply chain services. Much of Equaterra's work at present centers on the outsourcing of IT for human resources, says Robin Shahani, who leads the supply chain advisory services practice. Other areas in which outsourcing can gain a greater hold include financials and procurement. When it comes to traditional supply chain processes, companies prefer to purchase their own technology platforms, customize them, and bolt them on to existing ERP systems, Shahani says.

Equaterra does see the outsourcing concept spreading beyond back-office business processes to embrace more supply chain oriented activities. "What's driving it is a definite cost-savings potential," says client executive Dave Zink.

Companies might worry that an outsourced application, maintained by a third-party for multiple clients, will not be suited to their unique needs. But such services can be easily customized, says Valerie Bonebrake, executive vice president and chief logistics officer of Meridian IQ. Headquartered in Overland Park, Kan., the company is the logistics management subsidiary of YRC Worldwide.

Some of Meridian's clients download purchase orders directly from their ERP systems to the provider. At that point, Meridian assumes complete supplier management responsibilities. It ensures that the parties in a transaction are up to date on the status of all orders. It can also oversee the timing of shipments so that suppliers deliver within set purchase order windows.

Customers "are really enabling us to act as an extension to their companies, with information and visibility that they didn't have before," says Bonebrake. Many ERP systems don't have the ability to link a purchase order to an actual shipment, she adds.

Companies can choose which processes they want to spin off, "but the trend is more toward full outsourcing," says Bonebrake. Larger entities might prefer to keep some capabilities in-house, although the decision isn't entirely based on size. For some bigger clients, Meridian performs operations planning, execution and procurement, among other activities.

Even warehousing software is subject to hosting in certain cases. For one client in the automotive aftermarket, Meridian manages inventory at more than 10 facilities around the country from a centralized site, deploying a Web-based WMS. "It would be cost-prohibitive to do installed technology for that particular solution," says Bonebrake.

Indications are that the hosting or on-demand model will continue to grow in popularity. A 2006 study by the research firm IDC predicted that SaaS would increase over the following three years at an annual rate of 21 percent. And an Aberdeen Group report from last year found that half the firms surveyed were considering the use of on-demand applications to manage portions of their supply chains. Says Bonebrake: "There really is an evolution of shippers' comfort level in doing that."