Recently Aberdeen Group published research conducted in partnership with Liaison, declaring that “IT organizations are about to undertake one of the most dramatic infrastructure shifts in the past twenty years.” Namely:
- 76% plan to fully or partially replace their integration middleware platforms
- 78% will do so within 3 years
- 70% of the selected applications will be based in the cloud
It’s clear on-premises Enterprise Service Bus (ESB) solutions and integration tools built on nearly 20-year old technology are going to be replaced. The question is: With what?
It’s easy to limit the scope of benefits to just a lower cost model of delivery via the cloud. However, this thought process effectively replaces a 20-year-old model with a 10-year-old model. Improvement? Sure. Digitally disruptive? Hardly.
Business models like AWS, Uber, or Airbnb are considered disruptive because they change the way we consume services and reduce mismatch costs between expensive resources and demand. This type of disruption unlocks huge sums of value in our economy.
What does this have to do with middleware? In the current paradigm, IT organizations must budget for licenses, maintenance fees, and staff over a given operating period. This results in a fixed capacity of resources to perform integration work. The problem is business cycles create variation in demand relative to capacity. One month the organization may be asked to complete 20 integrations and 200 the next. My colleague Dylan Hogan has written an excellent blog post on this phenomenon in the retail industry.
How does this impact Logistic Services Providers (LSPs)? Customer Lifetime Value.
There are two generally accepted definitions of Customer Lifetime Value (CLV). First, it represents the net profit that businesses attribute to the ongoing future relationship with a customer. Second, it can be defined as the dollar value of a customer relationship, based on the present value of projected future cash flows from the relationship.
Consider this fictional example of a global 3PL:
The firm has annual revenue of ~$10 billion over 15 million shipments and an operating margin around 15%. This leaves them with $100 of operating income per shipment. Today, 50% of the firm’s revenue comes from a smaller distribution of large clients, while 30% of their revenue comes from a larger number of medium size clients, and the remaining 20% comprise the smallest and most dispersed clients.
An emphasis on CLV encourages firms to focus on the long-term health of their customer relationships and customer retention. Customer lifetime value is an important number because it represents an upper limit on spending to acquire new customers.
For LSPs its generally accepted that electronic integration with clients improves customer retention. If we accept that premise, then we must also accept that a lack of integration hurts retention and ultimately impacts customer lifetime value. In my conversations with analysts and IT leaders in the industry, the retention rate for non-integrated customers ranges from 10%-25% vs. 80%-90% for integrated customers.
Integrating large clients has never been a challenge for most LSPs. Large customers have sophisticated IT departments and the resources available to support and test integrations. From a revenue standpoint, larger clients will receive priority over other projects. It’s the mid-market clients that often bear the cost of resource shortages, and therefore, are at the biggest risk of loss from competition.
Given the assumptions above, the mid-market represents $135MM in annual operating revenue. Over a 5-year period, the lost customer value equates to $450 million worth of operating income, or roughly $3 billion worth of sales. By removing the mismatch between capacity to deliver integration and the demand for it, LSPs can protect large sums of revenue in a customer segment that’s most vulnerable to competition: the customers who have to wait in the queue while platinum clients get served first.
How Do We Eliminate the Integration Mismatch?
Just like IaaS offerings deliver storage, network, and compute capacity on demand; Liaison delivers integration and data management via the cloud in a secure service that can scale to meet our customers’ demands. By eliminating the challenge of allocating scarce resources across a diverse customer base, we allow our clients to deliver the type of customer service that will really disrupt the logistics industry.
How does Liaison enable this type of outcome? The Liaison ALLOY™ Platform is built with a microservices architecture based on Hadoop and Cassandra database technology. This means we can scale quickly for customer demand and store large amounts of multi-structured data for future use. Many competent IT organizations have successfully performed hundreds of integrations, while Liaison has completed more than 18,000 to date. We retain and reuse this data so we can intelligently build new integration maps and connect any two endpoints in the supply chain. This is why we offer a 10 day SLA for onboarding trading partners.
If you’re one of the 76% of companies going through a middleware transition, Liaison can combine a technical assessment with the revenue model above to give you an ROI estimate from a digitally transformed integration process.