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The Host with the Most

SAP boldly goes where a number of other software vendors have already gone.

At the September unveiling of SAP’s latest product offering — a hosted application aimed at midsize businesses — company officials extolled the virtues of rented software. “Globalization and digitalization are creating a new world of business,” noted CEO Henning Kagermann. “[This] fundamental shift in business requires a fundamental shift in business-software architecture.” Kagermann then went on to warn competitors about SAP’s entry into the rented-software business. “We intend to change the on-demand marketplace.”

Actually, the on-demand marketplace appears to be changing SAP. Management at the Walldorf, Germany-based company has for years railed against the concept of offsite, subscription-based applications. With good reason, too. SAP and most other enterprise-software publishers have made good money off the more traditional on-premise approach. Under that setup, customers buy licenses from individual vendors, typically running the software on their own in-house servers.

But rollouts of on-site business applications — particularly supply-chain and ERP systems — are notoriously drawn-out affairs, saddling users with pricey annual maintenance fees. What’s more, purchasing dedicated programs to address specific functions has left many customers struggling with a welter of stand-alone applications.

By contrast, on-demand software enables users to easily access offsite applications for a relatively cheap monthly (or yearly) subscription fee. The approach — sometimes referred to as software as a service (SaaS) — has become wildly popular with managers at smaller businesses. (But some urge caution; see “Software as a Serpent,” September.) Research firm IDC believes revenues from on-demand applications will jump by almost 60 percent this year alone — a huge increase for a mature segment like business software. IDC expects sales of on-demand services to grow 32 percent annually over the next five years.

Indeed, the early success of several on-demand vendors — most notably Salesforce.com and NetSuite — has clearly gotten the attention of larger rivals. Reportedly, IBM and Google are readying hosted versions of some of their business apps, with Microsoft expected to launch a subscription service for its CRM application this quarter. SAP’s surprising foray into the market, a suite of applications called SAP Business ByDesign, targets businesses with 100 to 500 employees. According to SAP’s reckoning, that’s a $15 billion market — not exactly pocket change.

Nonetheless, some observers wonder if SAP’s new offering will catch on. They point out that many midsize businesses have adopted alternative on-premise business applications. Moreover, scores of smaller companies have shunned sophisticated software altogether. Jim Shepherd, an analyst with AMR Research, a technology think tank, says that Business ByDesign is something of a gamble for SAP. “They’re experimenting with on-demand to see if there’s really a market for a product featuring an integrated suite of applications,” he says. “At this point, nobody really knows.”

Simplified or Dumbed Down?

It’s a heck of an expensive experiment. Ultimately, Business ByDesign will cost SAP between $425 million and $565 million to develop and market. Part of that money has gone toward developing a try-before-you-buy feature, allowing prospective customers to essentially test-drive the program from their desktops. SAP has also worked hard at integrating a wide array of modules (financials, CRM, and others) into a single software offering with a single user interface. Says Peter Zencke, SAP executive board member and technical lead for Business ByDesign: “This is no longer a solution that is ‘ERP plus something on top.’”

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