• Technology
  • CFO Magazine

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.’”

On the face of it, SAP’s entry into the on-demand market should worry executives at established SaaS vendors (as should the company’s recent $6.8 billion bid for midmarket BI specialist Business Objects). For all the complaints about the cost and complexity of ERP software, the notion of becoming an “SAP shop” still holds great appeal for managers at many growing midsize companies. Hans-Peter Klaey, president of SAP’s small and midsize enterprise division, says Business ByDesign represents a major, yet carefully researched, change for SAP. “While our new business model represents uncharted territory for us, we’ve invested smartly,” says Klaey. “We’re confident we laid the groundwork for success.”

Others aren’t so sure. R. “Ray” Wang, a principal analyst at business technology research firm Forrester Research, claims that Business ByDesign is “nothing special.” Wang is especially critical of the company’s approach to on-demand software, pointing out that Business ByDesign is not a genuine software-as-a-service offering, because it does not have a “multi-tenant/multi-version” architecture. Thus, he cautions, customers may end up paying more in the long run for the SAP suite.

Some observers also note that other software companies (Microsoft among them) have reportedly had difficulty getting powerful ERP systems to work in a hosted, multiuser environment. In many cases, vendors have had to simplify — some would say dumb down — their products. Shepherd, for one, points out that Business ByDesign doesn’t provide the industry-specific, in-depth business support that SAP is famous for. “It will have functionality for all types of companies,” he says, “but nothing specifically targeted toward verticals.”

Then again, SAP appears to be betting that simplicity will sell. Klaey notes that SAP will host the software, provide a scalable technology infrastructure, and supply support and services. “In doing so, we believe we can simplify IT and drive down the total cost of ownership for our customers.” SAP will charge $149 per user per month (based on a minimum of 25 users) for access to the entire suite of on-demand applications.

Christian Hestermann, midmarket ERP research director for technology consultancy Gartner, believes that Business ByDesign’s fuzzy, nonthreatening approach may well appeal to managers who are borderline technophobic. Says Hestermann: “There’s a long-standing joke that the ERP system used at most companies is Microsoft Excel.”

Kagermann addressed this very issue in his speech at the Business ByDesign unveiling. “These companies don’t have very sophisticated IT knowledge,” he noted. “And they don’t want to have to have sophisticated IT knowledge.”

Great Expectations

Of course, some industry-watchers believe SAP’s on-demand ambitions go beyond servicing businesses with limited IT chops. Should SAP succeed in building a substantial customer base among midsize businesses, observers predict the company will begin offering a more powerful on-demand product for large businesses. Earlier this year, Wang and fellow Forrester analyst Paul Hamerman suggested as much, noting that the potential of the hosted product “will eventually lead SAP to move it upmarket once the functionality matures and SAP gets comfortable with unlocking more flexibility to its customers.” AMR’s Shepherd envisions a similar scenario. “Many of the design goals of this product — ease of use, ease of implementation, embedded education and training — are the sorts of capabilities that buyers of all sizes will want in the future.”

It’s still not entirely clear when SAP will release Business ByDesign for general purchase. The company’s management has indicated it intends to make the product widely available in the United States next year. At the unveiling, one official noted: “You can be sure we will ramp it up based on our profitability expectations.”

You can also be sure managers at rival ERP vendors will be watching closely to see if those expectations are met. “Everyone is waiting to see what the response is going to be,” says Shepherd. “Nobody really knows if there are 1,000 companies that are looking to buy — or 100,000.”

John Edwards is a frequent contributor to CFO.

Suite Smell of Success
If Business ByDesign catches on, it could give SAP a hammerlock on the ERP market.
ERP Vendor License Revenues* Share
SAP $3.8 bill. 42%
Oracle $2.3 bill. 25%
Sage Group $641 mill. 7%
Microsoft $602 mill. 7%
Infor $535 mill. 6%
Epicor $100 mill. 1%
Exact Software $91 mill. 1%
Deltek Systems $76 mill. 1%
Lawson $73 mill. 1%
IFS $59 mill. 1%
* 2006; Source: AMR Research

Discuss

Your email address will not be published. Required fields are marked *