For decades logistics software vendors competed more with potential customers’ internal IT departments than with each other. Logistics service providers – particularly non-vessel-operating common carriers and freight forwarders managing containerized ocean freight — only had a choice between two types of implementations: custom-built or installed software from a third party. It was a “black and white” issue.
Today the debate over the merits of building versus buying technology is not so simple. With legacy systems becoming long in the tooth, the emergence of software-as-a-service (SaaS) technologies, and the more recent revolution of cloud computing, service providers have more choices among the many shades of grey in between.
It’s pretty safe to say that every NVO and forwarder of size has an IT platform of some kind. Electronic documentation and interfaces to customers, carriers, and regulatory agencies are a requirement of business. The debate now has more to do with the service provider’s plans to support and modernize their platform. Do they shift to off-the-shelf software or continue to invest in the existing legacy systems?
“Prior to 2000 commercial applications for warehousing and transportation were simply not adequate to cover the need of third-party logistics,” said Greg Aimi, research director for logistics at research firm Gartner. “Companies were left
with one choice which was to build their own or, alternatively, grab some part of an application to build around and customize it.”
Competitive forces drove most service providers to bring production in-house. Service providers felt that off-the-shelf software was too slow for their processes, too expensive, didn’t work for every customer and required customization.
Aimi said build-versus-buy became a more legitimate debate when vendors began developing systems that could manage multiple clients. Recently, vendor software has begun supporting standard but customizable architecture that allows for in-house development on top of pre-built systems. As a result, software vendors can offer more affordable packages to even tier-two and third-level customers, often using a “pay-per-drink” cost structure.
Embracing this multi-client mentality yields software that service providers can expand cautiously as they add more services, geographies and customers.
Today many NVOs and forwarders see in-house systems struggle to support new business and increasing demands for functionality and connectivity. The common debate has often become “update versus buy.” While the nature of the issue may have changed, the debate remains as lively as ever.
“If you’re in one of the standard, mass industries that have pretty basic or well-known functionality, I don’t see any reason to build it if you don’t have it up and running already,” Aimi said. Modernizing through in-house development requires a large infrastructure and development investment. However with the issue, like many in the supply chain, there is finesse in the grey areas.
“Ninety-five percent of what someone would build is what the off-the-shelf system has today,” said Gene Gander, vice president of North America for logistics software provider CargoWise. “It’s that other 5 percent that they view as unique or gives a competitive advantage if they build it, and most of that is between them and their customers.”
Gander confirms that very few NVOs and forwarders are making a build-versus-buy decision for their entire operations platform. “The bigger question is over already sunken costs in internal systems, so do companies keep throwing dollars at an older technology or ‘bite the bullet’ and go out to look for something new?”
Today NVOs and forwarders need to consider the merits of in-house or custom development versus off-the-shelf software on a case-by-case basis. “Build is still the right answer in many cases where there are no applications to solve or automate the problem,” Aimi said. “Logistics is so broad that the software world hasn’t solved every problem.”
Software vendors want to build systems that they can mass-market which means highly specialized or specific issues typically do not get addressed in off-the-shelf systems.
Klaus Jepsen, group chief executive officer of Shipco Transport, is a steadfast believer in the merits of in-house development. “Our decision to develop our own software was based on the fact that there was nothing tailor-made for a neutral NVO and the services we offer,” he said. “Very few companies offer the services we do and consequently there is no one we know that offers an off-the-shelf platform addressing the intricacies of the neutral NVO business and the tools that we need to operate.”
NVOs and forwarders wrestling with the question of in-house development versus off-the-shelf systems purchases should consider the following questions when assessing their options:
- Is this feature or function a differentiator or competitive advantage?
- Does an existing off-the-shelf system address this development need?
- Can a current vendor affordably add this feature or function?
- Will a vendor be able to provide this feature or function in the timeframe required?
- Are expertise and capital available in-house for development?
- What’s the cost of maintaining this function going forward in-house versus off-the-shelf?
- Can the cost of adding this feature be passed on to customers without being cost prohibitive? How is this cost different for in-house versus off-the-shelf?
- Is the current platform new or specialized enough that it makes sense to invest in updating existing infrastructure?
This litmus test will generally show fundamental logistics functions and features can be effectively automated using off-the-shelf systems, while highly specialized or niche functions will favor in-house development. This will favor large NVOs and forwarders with the ability to make the sizable development investments and pass that cost across many customers via small fees.