We invited Patrick Reames, managing partner of Commodity Technology Advisory (ComTech), the leading analyst firm in the ETRM/CTRM markets, to discuss current trends and issues related to energy companies’ decisions to build, buy or acquire SaaS ETRM solutions.
Q: Given ComTech’s position as analysts covering the ETRM marketplace, can you provide some insights into current and emerging trends related to build, buy or SaaS decisions for end user companies seeking new ETRM capabilities?
Patrick Reames: We’ve watched these markets for more than two decades, both as market participants and as analysts, and while there has been a bit of a cyclical trend to and from bespoke builds of ETRM solutions for any number of companies, we have clearly seen a broad movement away from “homebuilt” solutions. Observing the experiences of those that have, in the past, attempted to build complex ETRM capabilities, we’ve certainly seen more projects than not that have run over budgets, have failed to meet user requirements and expectations or could otherwise be considered partial or complete failures. The hard lessons that have been learned in these efforts, combined with a maturing of commercially built and licensed solutions, have certainly reduced the number of custom or bespoke build projects over the last decade.
Further, up until the past two or three years, the default for most energy firms has been to acquire commercially developed software under a perpetual license agreement. The software would then be installed on the customer’s servers and supported by the vendor under a support & maintenance agreement in which that vendor would provide code fixes, updates and occasionally, some level of new functionality as the markets might require. These agreements, by their nature, place a significant amount of the total cost of ownership up-front at licensing, long before the software can result in commercial value to the customer. Now, with the advent of web-delivered ETRM software (including hosted in third-party environments such as private clouds, hosted in public cloud and multi-tenanted software) and the attendant commercial agreements structured essentially as “rental” payments, the upfront costs of acquisition, support & maintenance and, in some cases, implementation, can be reduced - lowering the financial barriers for many smaller companies seeking to acquire critical ETRM capabilities. These new delivery models have proven successful; so much so that we are seeing an accelerating rate of adoption of hosted and cloud-based solutions and a relative decline in the number of traditional ETRM licenses being sold.
So, is the decision to choose build, buy or SaaS now a fairly straight forward one?
Patrick Reames: While market trends do clearly point to accelerating adoption of SaaS/cloud solutions, for many organizations it’s not necessarily straight forward. Each company contemplating a new system is faced with a plethora of factors, ranging from budgetary considerations to requisite market and/or commodity coverage. Setting aside the poor history of success in developing and supporting bespoke systems, a decision by any particular company to build some ETRM capabilities is still not unheard of; however, it is rare and such an effort is now most likely to involve a hybrid approach that includes some commercially supplied components in addition to custom built capabilities…sometimes called a buy and build decision. Companies that pursue such a path are usually seeking unique and specific capabilities in modeling and managing a complex mix of energy and non-energy commodities, and have complex supply chains comprising a number of unique assets positioned in diverse locations around the globe. Aside from this small subset of companies that might choose such a hybrid approach, the decision for energy companies is now essentially between a traditionally licensed system or a cloud/hosted solution…with the latter becoming a more and more popular approach with each passing day. With advances in web technology and the development of capabilities that leverage advanced tools like HTML5, web delivered/SaaS applications are providing significant improvements in performance, accessibility and scalability. Though some individuals or companies may still harbor concerns about security risks associated with having their data outside their firewalls, the market’s experience with these types of solutions and the growing adoption of cloud products by an increasing number of highly-respected, global-scale companies has resulted in a rapidly growing acceptance of cloud solutions. And even for those that continue to insist on having their data held within their firewall, these same web-delivered solutions can be deployed within a customer’s datacenter…though much of the benefits of a sophisticated cloud solution may be lost, in particular, the ability to dynamically scale computing resources on demand.
Are there other considerations related to the “build, buy and SaaS decision” that software users should be aware of?
Patrick Reames: While multi-tenanted ETRM software offerings (in which all customers of a particular software product use the same instance of that software, much like the customers of Salesforce.com), can be financially attractive, these solutions may not provide the depth of functionality and configurability that larger energy companies require. For instance, most physical gas or power producing or trading companies will require capabilities for scheduling, tracking and managing of gas transportation and/or power transmission – a functionality not commonly available in most of today’s multi-tenanted solutions. For these companies, a hosted or hosted-in-the-cloud solution, configured and extended to meet their needs, will most likely provide the greatest benefit. Further, when considering such a hosted solution, the company also needs to understand the level of services and support provided by the vendor. Some vendor hosting provides only access to the software, leaving the responsibility of routine technical maintenance tasks to the user company - including activities such as database maintenance, patching, testing, etc. Managed services agreements, such as those offered by FIS, provide not only the software but also the requisite specialized services for maintaining and managing the technology, ensuring the software is always up-to-date, fully functional and optimized for the client. By leveraging the economies of scale and experience inherent within a very large provider of cloud and hosted solutions, like FIS, these services can be provided a higher level of quality and at a cost lower than what most customers can achieve within their own organizations.
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