Is SAP ready to provide SaaS?

Not quite yet, analysts say, noting that even if it is, Asian businesses aren't ready to accept software-as-a-service as the new delivery platform.

BERLIN--Having emerged amid much hype and market growth, software-as-a-service (SaaS) has become a warcry traditional software vendors have also been eager to chant as they address the market.

But, it may take more effort than expected for some to enter this lucrative space.

SAP acknowledged it needed additional time on its on-demand software offerings, following a recent move to delay the general launch of Business ByDesign. Company executives said the timeline was revised primarily to ensure SAP gets it right when it debuts its SaaS offering to the global market.


If somebody talks about replacing an SAP installation with Salesforce.com, to me, they do not know what they're saying.

Claus E. Heinrich, SAP executive board member

"The reality is that you have to look at so many things...whether TCO (total cost of ownership) will rise, whether you have the right user interface, and so on," Claus E. Heinrich, a member of SAP's executive board, told ZDNet Asia Tuesday on the sidelines of the SAP Sapphire conference in Berlin, Germany. Heinrich is also responsible for SAP's human resources, internal IT operations and SAP Labs.

"We are in a very good position. We have an excellent traditional [software] business and we shouldn't make any compromises by accelerating the whole thing," he said, and reiterated the company's stance that SAP is not reducing, but slowing down the pace of investment in SaaS.

According to Alan Tong, IDC's Asia-Pacific senior manager of enterprise application research, SaaS is still a new delivery format for software adoption among many organizations in the Asia-Pacific region, excluding Japan.

The analyst told ZDNet Asia that low awareness of the on-demand software model is posing a challenge for SaaS providers such as SAP, as businesses struggle to understand the benefit of deploying such infrastructures.

"Furthermore, the new business model will require an entire circle of partner-ecosystem to support, service and train users," Tong said in an e-mail interview.

Amid the SaaS hype, SAP has lost very little share--if any--in core ERP markets to SaaS players, according to David Mitchell, senior vice president of IT research at Ovum.

The analyst told ZDNet Asia that SaaS players have been most successful in the CRM market, with companies such as Salesforce.com gaining share in this segment. However, they have not gained much traction in the ERP market, Mitchell said in an e-mail interview.

Last September, SAP announced that Business ByDesign was the future of the company. At this rate, it always will be.
Steve Russell, Salesforce.com

"The picture is highly variable by geography. In some markets, SAP has grown and continues to grow faster than the competition such as Oracle, while in other [markets], the reverse is true," he said.

Market share also varies depending on verticals, where SAP continues to be the clear dominant player in manufacturing, Mitchell said, but added that Ovum did not have specific data on SAP's market share in the Asia-Pacific region.

SaaS market leader Salesforce.com, says it welcomes the competition from traditional software vendors, which include Oracle and Microsoft.

"We're very excited to see more companies enter the SaaS market [as] it validates the 'no software' vision we have been pioneering since 1999," Steve Russell, Salesforce.com's Asia-Pacific president and CEO, said in an e-mail interview.

"The fact that the leaders of the client-server age are acknowledging the need to shift toward SaaS in order to remain competitive, confirms the industry is in the midst of a 'tech-tonic' shift--similar to the shift from mainframes to client-server platforms," Russell said.

Not apples to apples
SAP executives at the Sapphire conference, however, have expressed indignant that the company should be compared to other SaaS players.

"If somebody talks about replacing an SAP installation with Salesforce.com, to me, they do not know what they're saying," Heinrich said, adding that comparisons between both companies' products are unbalanced. "If we look at our software, we don't just provide a layer...Business ByDesign is a complete suite."

SAP Co-CEO Léo Apotheker said in a press meeting Monday: "SAP is trying to do something unique in the market that no one else has ever tried before. And therefore, to compare one so-called SaaS solution to [SAP's] is a bit of a stretch to the imagination.

"We're not going to bring to market a very single application like salesforce automation. We're bringing to the market, with Business ByDesign, an end-to-end mission-critical supporting business suite, containing all of the functionalities a company needs to run its business," Apotheker said. "Therefore, some of the technologies that you need to deploy to do that are, by definition, different than what you will need to support only talent management, or only salesforce automation, or any other sliver of a company solution."

The challenge and therefore, opportunity for players such as SAP, is significantly larger, he said, adding that he believes SAP is "the only company that can really address this challenge".

According to Russell, however, Salesforce.com has already evolved beyond the on-demand CRM vendor that it was four to five years ago. Through its AppExchange platform, he said the company today offers over 800 applications from some 400 ISVs (independent software vendors).

In addition, its "platform-as-a-service" model will allow developers and IT departments to develop "anything on-demand", he said, adding that this extends beyond SaaS and across the entire software industry.

Citing figures from research firm Gartner, he noted that by 2011, more than 25 percent of business software will be delivered as a service.

"Last September, SAP announced that Business ByDesign was the future of the company. At this rate, it always will be," Russell quipped, as he pointed to SAP's decision to delay the launch.

"I believe SAP's deferment is the result of product readiness, and is strong indication that many 20th century software vendors are struggling with these new [software delivery] models, and some may in fact not make the shift at all," he said.

According to Ovum's Mitchell, to make its SaaS strategy a success, SAP needs to build strong partner implementation communities that are generating profits based on their implementations. He added that this was a key factor that helped fuel SAP's early growth and continues to be so.

"[SAP must also] further develop the ISV ecosystem and BPP (business process platform) concept so that vertical-market ecosystems develop even faster around SAP products," he noted. "Their IVN (Industry Value Network) concept was good but seems to have lost pace and visibility."

"SAP will also need to consider further acquisitions to help it further grow scale and move more strongly into industry-specific applications," Mitchell said.

In addition, he said, for Business ByDesign to be a success story, the company will need to show concrete returns on investment when customers implement the on-demand software model.

The Ovum analyst also noted that the mid-market business segment, which Business ByDesign is targeted at, is often assumed to be an untapped opportunity. In reality, however, this market is already richly served by a supplier base--though hugely fragmented--of companies in each country, and by local consulting and systems implementation firms, he explained.

"It is a very hard market for a large international company to break in to, and SAP has perhaps underestimated the partner economy that it needs to build to be able to capture the market," he said.

Mitchell added that the multi-tenancy aspects of SaaS have also proven to be more difficult to achieve at scale than most software companies including SAP and Microsoft, have estimated.

"Although multi-tenancy is not the only way to consider SaaS, and those take this stance are unnecessarily short-sighted and unbalanced, it is a common way for companies to develop a SaaS architecture," he said. "So, the development problems were probably significantly under-estimated."

However, Russell dismissed suggestions that multi-tenancy has issues in scalability, noting that Salesforce.com's base of 1.1 million subscribers demonstrates that this platform "allows massive scale". Its customer Japan Post, for example, currently runs 70,000 seats which were deployed within months, he said.

He added that Salesforce.com handles an average of over 150 million transactions per day at less than 300 milliseconds per transaction.

Eileen Yu of ZDNet Asia reported from SAP Sapphire 2008 in Berlin, Germany.