Understanding SAP's Business byDesign SaaS strategy

At this week's Sapphire conference, SAP spoke about the status and trajectory of Business by Design, the company's on-demand, software as a service (SaaS) offering. Here's what it means.

At this week's Sapphire conference in Orlando, SAP spoke at length about the status and trajectory of Business by Design, the company's on-demand, software as a service (SaaS) offering.

To learn about SAP's SaaS strategy, I talked with several current customers and the following five SAP executives:

  • Pascal Brosset - Chief Strategy Officer
  • Rainer Zinow - Senior Vice President for ByDesign Innovations
  • Jeff Stiles - Senior Vice President of SME Marketing
  • Christoph Behrendt - Senior Vice President for Midsize Enterprises
  • Frank Iannotti - Vice President for Business ByDesign, North America

During these interviews, I repeatedly cross-checked the main points, explicitly trying to uncover irregularities and inconsistencies. Despite my attempt to find discrepancies, the conversations yielded a consistent picture in several important areas.

Commitment. SAP remains deeply committed to the Business byDesign platform and product. In response to my direct question on the commitment topic, Jeff Stiles answered, "Categorically yes," and added:

SAP is 100 percent, unequivocally committed to bringing Business byDesign to market for the long haul.

Business model. For the low cost economics of SaaS software to work on a sustained basis, subscription software vendors generally strive to accomplish three goals:

  1. Continually reduce customer acquisition costs
  2. Constantly try to lower operating costs
  3. Develop a product the market wants to buy in large numbers

The economic differences between delivering software via SaaS and on-premise methods are substantial, with profound implications for how software companies optimize internal operations.

To reach the first two goals, SaaS vendors optimize software delivery with automation to reduce labor costs. In contrast, on-premise enterprise companies implement software through experienced (and correspondingly expensive) consulting services; these firms also offer high levels of service and support to customers through the entire relationship lifecycle.

In reference to reconciling these fundamental operating differences, Pascal Brosset said, "SAP is still trying to get the business model right," for Business byDesign.

For more information on differences between running on-premise and SaaS software companies, see my conversation with respected serial entrepreneur, David Friend:

User experience. Intuitive software design and user interface improves customer satisfaction, reduces training costs, and helps vendors lower costs associated with acquiring and retaining customers. For these reasons, SAP emphasizes its investment in making Business byDesign user friendly.

Since this is a new product, SAP designed the user experience to support current and future requirements rather than maintain consistency with older versions. On this topic, Rainer Zinow said:

We used existing design guidelines and created new ones as required.

It seems fairly obvious that the user interface and online training innovations developed for Business by Design will eventually migrate to other SAP products, including the larger Business Suite.

Customer satisfaction. Several existing Business byDesign customers told me how much they like the product. In private conversations without SAP representatives present, these customers said Business byDesign lets them run their companies without dedicated IT staff, which is a significant benefit to resource-constrained SME organizations.

On the other hand, SAP carefully selected these early stage customers to participate in the Business byDesign program, so they receive a disproportionate level of handholding, support, and attention that will be not available when the product is released for general availability. Without doubt, SAP's personalized attention contributes to these customers' high level of satisfaction.

THE PROJECT FAILURES ANALYSIS

Despite being a major corporate initiative, Business byDesign has not met SAP's ambitious rollout schedule. Reuters compiled a Business byDesign timeline, which begins with this entry:

Feb 2, 2006 - SAP says it will expand its customer relationship management software to include an on-demand option, to be delivered via the Internet and paid for by subscription.

Back in 2007, fellow ZDNet blogger, Dennis Howlett, called the original sales forecasts "aspirational:"

During the launch of Business ByDesign, SAP said that it expects to achieve a run rate of adding 10,000 BBD customers a year by 2010. This raised questions about whether SAP will reach its previously stated target of 100,000 customers by 2010.

During my conversations at Sapphire, SAP acknowledged that earlier forecasts were misplaced and stressed they are trying not to repeat that mistake.

My take. The Business byDesign initiative presents two broad strategic challenges to SAP. First, from a Board-level perspective, the company must decide, on an ongoing basis, how much to invest in this product, which has long-term potential but is expensive in the present. The relatively slow rollout reflects the Board's measured and carefully paced level of investment.

Second, Business byDesign reflects a new way of managing and delivering software for SAP, a company with deep on-premise roots. As SAP has learned, on-premise vendors face formidable challenges and a steep learning curve during the transition to SaaS deployment. SAP obviously underestimated these obstacles.

SAP says it possesses the resources required to traverse these challenges and is prepared to take whatever time is needed to build its on-demand business. Should SAP be successful in making the transition, it will end up with a rich and potentially market-leading business process suite. Reasonable speculation also suggests the company's SaaS vision goes far beyond the mid-market. The existence of a broader, yet unannounced, SaaS strategy would help explain the apparent depth of SAP's commitment to Business byDesign.

I asked IDC Group Vice President for Software Business Solutions, Michael Fauscette, to comment on this speculation:

Based on its process expertise, SAP has the potential to release a strongly competitive and compelling SaaS offering. However, there are many caveats in that statement and past delays have cost the company credibility.

Given adequate strength of will to bring Business byDesign to market, combined with sufficient investment of time and resources, it's likely SAP will eventually gain the operating experience and technology required to drive customer acquisition and retention costs down to a reasonable level. As I said earlier, that's a prerequisite for success.

However, to achieve success SAP must also find a way to keep the Business byDesign team enthusiastic, creative, and motivated during the lengthy development and transition period. Given the company's size, resources, and determination I believe this ordinary human issue ultimately represents SAP's greatest challenge in bringing Business byDesign to market on a large scale.

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