Mike Coney, VP of Business Development with WiseTech Global, explains how SaaS models can add value to your business in low-cost labor markets.
Even with the shift from traditional licenses to Software-as-a-Service, productivity gains from technology investments have to be significantly higher in low wage economies to justify the commitment. The truth is the flexibility within the SaaS model overcomes this issue too. How is this possible?
Until very recently, developing economies have had the luxury of being able to throw more people at any problem. But now, ‘developing’ is becoming a reality across Asia. As in Western markets, wages are climbing, so a focus on productivity is becoming increasingly important. And nowhere is this more pronounced than in the labor-intensive forwarding industry, where margins are under intense pressure.
Trade and the movement of goods is the ultimate global endeavor. And around the world, logistics providers are being pushed by customers and governments to deliver more integrated and automated processes with high visibility into every shipment. This has had a significant impact, particularly on the low wage, high volume trade economies of Asia.
The Impact of Low Wage Structures on Traditional Software Licensing vs Software-as-a-Service
Traditionally, you were charged for a set number of software licenses, which were paid annually in advance, and a maintenance contract. This inflexible model affected capital availability and cash flow. You also had to buy the maximum number of licenses to cope with the peaks in your business fluctuations. That left many seats unused during quieter times.
The advent of the SaaS model created mechanisms that give you the flexibility to pay according to individual users and the specific software modules they log into. It was an excellent concept, unless you are operating in a low wage environment.
There is a wide disparity in wage rates around the Asia Pacific region. An average monthly salary in Australia is US$4000 per month, while in the Philippines it might only reach US$300. If the per user software subscription price is US$150 per user per month, then as a percentage of US$4,000, it is relatively meaningless. But in a low wage economy the productivity gains from the software have to be massive to justify the purchase.
Transactional Pricing Model and Value Adding
To overcome this, a transactional SaaS model offers a relatively low per-user charge. Additional, smaller fees for value-adding transactions - such as forming shipment documentation, submitting customs entries, receiving goods into a warehouse, or other services in the freight forwarding context - could be charged as well. These activities add value to the organization in the sense that the logistics operator will invoice the customer for these services.
This accepts the paradigm that your operational staff, who are creating value for the company, will incur the transaction costs. Crucially, these follow your business cycle. Yes, in peak times your technology expenses will rise, but only in direct proportion to activity. And, should you lose a large customer, you also lose all the associated transaction fees.
Further benefits from this model can even arise from providing non-value adding transactions as well. Running a report, printing a document, or receiving a payment from a customer are not chargeable, so your administration and accounts staff incur the monthly user cost - a much smaller percentage of salary and affordable even in low wage economies.
SaaS significantly reduces the total cost of using the software. It also overwhelmingly crystalizes operational expenses and assigns them back to where value is actually created, thereby making the process of cost control more manageable.
The Push for Service Quality vs Price
As wages rise – particularly in places such as China, where inflation is hitting its cities and coastal fringe - the only answer is to chase the productivity improvements and service quality provided by automated workflows.
As the business environment evolves, and developing economies move further into the global marketplace, the considerations of price and quality are changing. Logistics providers must now be thinking about the more complex deliverables of value rather than simply undercutting your competitors. Price is no longer the differentiator. Clients are pushing for reciprocal invoicing, customized reporting and self-service portals.
As building strong relationships between customers and providers becomes the key to profitability, you now have the means to create cost effective, value-added services that can attract an income stream beyond standard transaction fees.
Mike Coney is VP of Business Development with WiseTech Global
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