SAP gets SaaS: can it run with it?

When talking to software vendors about SaaS, my mantra is that SaaS is a journey. Having seen SAP unveil its Business ByDesign product today — formerly codenamed A1S — I have to say it is on the right road and it has hit the tarmac at an impressive pace. There are still some factors that could steer it off-course, but SAP seems genuinely determined to learn everything it can about this new environment, and that's the right frame of mind for achieving success with SaaS.

Here's what SAP has done right with Business ByDesign:

• Start from customer need. There's been no attempt to repurpose an existing software product or feature set for SaaS delivery. "This is no longer an ERP system," said Peter Zencke, the SAP executive board member who has led development of the product. "It is no longer a departmental solution. It is something that runs behind the scenery and touches every workplace." Providing end-to-end automation of business processes that are important to midmarket companies, it cuts across CRM, human resources, collaboration, supply chain management, and, yes, financials. Rivals like NetSuite and Workday will be irked at SAP's claims that no one has done this before, but the completeness of the offering is impressive.
• Get the infrastructure right. Actually, this is a work in progress, but that merely emphasizes that SAP hasn't underestimated the scale of the task. There's evidently been a lot of debate within SAP about the ideal architecture for Business ByDesign and what I find really impressive is that SAP seems to have realized the true answer can only be found from experience. Questioned on the platform it's chosen and whether it's gone for a multitenant architecture, Zencke explained that SAP has gone for "complete virtualization at every layer," while implementing what the company calls "database isolation" for individual customers within that shared infrastructure. This fits cleanly within any realistic definition of multi-tenancy, although how effective it is depends on how sophisticated the shared infrastructure really is at managing service delivery across multiple customers. That the Business ByDesign team fully understands this latter point became clear when, answering a later question about profitability, Henning Kagermann said that general availability will only come once SAP has understood how to scale the infrastructure while keeping costs under control. In other words, SAP recognises it won't find the optimum way to tune the infrastructure until it's got some more live production experience under its belt. That's very astute.

• Offer try-before-buy. This is by far the most impressive aspect of Business ByDesign as demonstrated today. Customers will be able to go to a website, select the set of features they want to implement, and get an instance provisioned within five minutes. They will then be able to get a full trial version up-and-running and start creating their implementation. The website will also have extensive documentation, help, and access to the community of existing customers and prospects. Business ByDesign does this better and more comprehensively than many of the current leading names in SaaS.
• True subscription pricing. SAP has resisted the temptation to fudge this. Business ByDesign is offered at a sensible, competitive $195 per-user per-month subscription price, with no automatic multi-year lock-ins. In answer to a question at the launch about whether perpetual licenses will be offered in the future, deputy CEO Leo Apotheker said, "the market will decide future licensing models." Given the debate there's been within SAP about how Business ByDesign should be licensed, that's a sensible position to hold, just in case market conditions change. But at present there's little appetite in the market SAP is currently targeting with the product for anything other than the low-risk subscription model it has chosen to adopt.
• True shared-services SOA. SAP has taken NetWeaver, its SOA platform, and demonstrated how to implement SOA in a pure shared-services model that keeps business processes completely separate from the underlying services definitions, maintains a completely interchangeable user interface, and is open to bringing in third-party services for any component.
• Keep learning from your customers. SAP has already set up an impressive dialog with its beta users and looks set to continue that through the community it's setting up for Business ByDesign. Internet delivery makes it so easy to have a conversation with customers that it's surprising more SaaS vendors don't do it. Salesforce.com of course provides a great object lesson in how to do it well. Business ByDesign may quickly come to rival its example.

So much for the good parts. Here are a few ill winds that could yet blow SAP's Business ByDesign initiative off course:

• A shortage of suitable partners. "Partners need to understand that their business model needs to change," said Apotheker in answer to a question from fellow ZDNet and Enterprise Irregulars blogger Josh Greenbaum. "We are creating a new ecosystem of partners." Another ZDNet and EI colleague Dennis Howlett picked up some concerns from CEO Henning Kagermann on this point. Finding suitable partners and building good relations with them is a journey of adventure that SAP has only just begun. Other more experienced SaaS players know how difficult this can be — and how easy it is to overestimate the capabilities of seemingly well-qualified candidates.
• Lack of customization capabilities. There's a lot of configuration flexibility in Business ByDesign, and a creditable acknowledgement of the role business managers need to play in configuring business processes. But I'm not sure that SAP really understands the degree of customization and verticalization that the SaaS market demands, even in the midmarket sector it's targeting. And it may hold back from catering to that demand for fear of impacting the market for its existing products.
• Fear of cannibalization. To a man, the SAP executives assembled for the launch stonily refused to admit so much as an iota of possibility that Business ByDesign might cannibalize revenues from SAP's other product lines in any material way. This is such a clearly untenable position that one can only conclude they are simply doing their best to stem the tide at least until the evidence to the contrary becomes impossible to ignore. Were they to admit the possibility earlier, it would simply further accelerate the pace of cannibalization.
• Economic pressures. Imagine for a moment that a slowing of enterprise demand leads to a downturn in license revenues from SAP's established business lines. Meanwhile, Business ByDesign is ramping nicely, perhaps at the fringes even winning deals at the expense of some of the licensed products. What better way to restore SAP's financial fortunes for a quarter or two than to convert some of those subscription deals into perpetual licenses? Even if the executive board won't condone such actions, how can they be sure managers lower down the hierarchy — under pressure to meet sales targets — aren't putting pressure on the Business ByDesign team to pass over some of those deals? Transitioning to SaaS from a licensed software model is a tough challenge, especially when trying to keep both forms of product alive in parallel.