Should You Become A Data Collection ISV?

You’re not making the amount of money that you used to. That’s a sobering conclusion for any VAR. Unfortunately, it’s one that a lot of VARs — especially those selling AIDC (automatic identification and data collection) products — have faced during the last decade. Eric Luoma understands how painful it can be to watch healthy hardware margins slide into the low single digits.

Four years ago, after working for logistics and bar code scanner companies, Luoma noticed many businesses requesting custom data collection and asset tracking applications as part of their solutions. To accommodate this need, Luoma hired a team of software developers who had extensive experience in enterprise-level software. “I realized that technology product margins were going to continue to drop,” says Luoma. “I also knew there was a growing need for WMS software in the midmarket [i.e. $1 billion in sales or less]. That’s why I decided to start Scout, Inc.”

Scout was formed in 2002 and launched in 2004. Scout’s primary product is an inventory management/WMS application that is bundled with bar code scanners. The company also has applications for remote order management/route accounting, direct store distribution (DSD), and RFID (radio frequency identification) inventory management/compliance labeling. All of these applications are offered via an ASP (application service provider) model, which Luoma says is key to the company’s 25% (2005) and projected 45% (2006) growth rates. (With an ASP model, users access an application via a Web browser rather than installing the software on their computers.)

Know Which Clients Would Value An ASP WMS Application
One of the advantages Luoma had when starting Scout was that he understood his target audience’s needs. “Many of the prospects we’re targeting haven’t had good experiences implementing enterprise software on their own because they lack the IT staff to effectively deploy these applications,” Luoma explains. “Consequently, the app doesn’t meet their expectations.”

Another characteristic of this market segment is a tight IT budget. By using an ASP, customers don’t have to worry about updating their network infrastructure or hardware/software platforms to accommodate a new WMS. Instead, all they need is a Web browser, a high-speed Internet connection, and a wireless network. The latter connects the user’s handheld computer (which is included in the Scout bundle) with the hosted Scout application.

Finally, Luoma says the majority of the clients he targets are running inventory management systems that are completely paper-based. “Not only is our subscription model [clients have to sign up for a minimum of one year] less expensive and easier to deploy than a traditional software offering, we offer 30- and 60-day trial periods. If the client wants to cancel during one of these trial periods, there is no fee.” He says almost all clients take advantage of the trial periods, running both their existing paper-based systems and the Scout systems simultaneously. Further, every client that has taken advantage of the trial period has signed up.

Build It Yourself Or Outsource?
One of Luoma’s first decisions when starting Scout was to determine if he would outsource the hosting of the application and customer data. “We chose to host everything ourselves because, if we had outsourced, we would have needed to charge our customers more to cover the fees we would pay an outsourcing company,” Luoma says.

Thus, the challenge was to create a data center that was secure and offered sufficient backup. To do so, Luoma invested in blade servers (20), UPS (uninterruptible powers supply) units, a tape (i.e. backup) library, equipment racks, and SSL (secure socket layer) and VPN (virtual private network) equipment such as a Cisco PIX firewall. The servers are arranged as a server farm to assure fail-over redundancy. Furthermore, the company pays a monthly fee for two T-1 lines, so if one fails the other automatically takes over, ensuring constant uptime.

Most of Scout’s potential customers have only one concern regarding the ASP model: data security. “Not having their data in-house is a leap of faith for some of these customers, especially when we integrate the WMS data with a customer’s accounting software,” Luoma says. “However, once we show them the security measures we have taken and explain the redundancy of our systems, their fears are alleviated.”

Build A Recurring AIDC Revenue Stream
Most of Scout’s clients use the company’s TopShelf inventory management/WMS application coupled with some of the other modules. For instance, a produce company is using the route accounting module for DSD, an auto parts retailer uses the inventory management application, and a frozen foods company is using the software for its pick and pack (i.e. fulfillment) capabilities. Luoma says his company is currently in negotiations with a large retailer for deploying the Scout RFID solution.
Finding customers has involved old-fashioned cold calling, which is conducted by Scout’s three inside salespeople. In addition, Scout is working toward attaining ISV status with AIDC/POS (point of sale) distributors BlueStar, Ingram Micro’s Nimax Division, and ScanSource. “Establishing those distributor relationships will expose us to a lot of vendors and VARs that have clients in need of our software solutions,” explains Luoma.

Currently, Scout has 25 customers (with various numbers of users) subscribing to its applications, providing a recurring revenue stream for the company. While Luoma is excited about his company’s sales growth, he’s also encouraged about how Scout’s software has been adopted with his existing clients. For instance, he notes an unusual side effect that occurs at some of his company’s smaller customers once the Scout solution is implemented. “Newer members of warehouse staffs adopt our software more quickly than those employees accustomed to the old paper-based systems,” he explains. “Seeing the time savings these early adopters experience influences other employees to use the Scout solution. Then what happens is that many employees take ownership of the devices to an extreme. They hide the handhelds in lockers or even take the units home, so they don’t lose their favorite work device each day.”

AMR Research says that although the current WMS market is mature, it’s about to undergo radical changes. In an AMR survey of 256 supply chain executives conducted in July 2005, 67% of companies over $500 million in sales revenue cited having WMS applications. However, AMR estimates that 50% of these systems will have to be redeployed to execute successfully on demand-driven strategies (e.g. channel-driven fulfillment, demand-driven replenishment, agile networks for customer-centric replenishment). That’s good news for Luoma and Scout. “The biggest challenge we have ahead is the industry’s adoption of software as a service — and finding new customers, of course,” Luoma concludes.