I know that a client can be forced to use a local Software Update Server by managing the preferences on the directory server.
You can do this through the command line too. That app is just editing the software update .plist file. For a global change of software update server for all users, type this.
sudo defaults write /Library/Preferences/com.apple.SoftwareUpdate CatalogURL "http://you-server:8088/"
Remember to add that "/" after the port number. And the part with the address, you do actually put that in quotes when entering in the terminal.
In our environment it is also necessary to add the software update server to the list of servers that will not pass throug our web proxy server because the software update won't work with a proxy between client and server...