SAP looks to be good host

Of all the software in this big old world, it's hard to think of a better candidate for outsourcing than the famously labor-intensive enterprise resource planning systems upon which SAP built its global empire. Given the option of a SAP-hosted solution, Michael Beller, chief information officer at Edgewood, N.Y.-based TechSmart.com, became perhaps the first person ever to speak the words, "We went with SAP in part because we thought it would be quicker to get up and running."

That's the way it worked out, too. "We went live in 13 weeks after choosing them, and that included Thanksgiving and Christmas," Beller says.

TechSmart is much smaller than the traditional buyers of SAP's industrial-strength enterprise resource planning (ERP) software products, which makes it just the kind of customer the German giant hoped to attract when it started offering a hosted option last year. "The business model behind this is to go into a very broad market," says Bernd Kidler, director of services marketing at SAP AG in Walldorf, Germany. "We expect the hosting model to open up the market on the lower end, given the lower barriers and lack of a huge up-front investment."

Partners carefully chosen

While SAP recently unveiled a hosting division, its focus remains on a network of hosting partners, each with expertise in SAP products and a particular industry; SAP expects to handle no more than 10 percent of its ASP-delivered business. "We founded our own hosting company to empower our partners," Kidler says. "We need to clearly understand the business rules and requirements, and the key success factors to hosting. We set up a certification process and can share best practices with our partners." The division is expected to be profitable, he says.

SAP customers who make the switch to hosted services are buying more software now than they did before, says Tom Melchiore, director of application hosting at SAP America. "At least half of them have bought additional licenses from us after moving to a hosted environment. They can handle more now than they could before."

ERP solutions, suites of software to keep a business running, aren't something you farm out to any yokel with a server farm and some extra bandwidth. SAP certifies its partners - there are about three dozen - for their industry knowledge, a practice that reflects SAP's vertical-by-vertical marketing approach. "We want to have about 20 verticals, and about five or six different product areas," Melchiore says.

Says TechSmart's Beller, who is using hoster eOnline: "We didn't pick SAP and then search for an ASP; we selected the hosting partner in tandem. They handle all the computers and provide low-level system expertise and upgrades if needed, plus things like capacity planning."

Reliable service key

For John Cagno, chief information officer at home delivery company Streamline.com, turning the ERP chores over to a robust partner was appealing enough that the company is switching to a hosted solution even after successfully implementing SAP on its own. "We're not this high-tech Internet company; at a certain level we're about processing, logistics and operations," Cagno says. "Our business is going to be driven by technology, and the more we layer in an integrated solution from SAP, the more vulnerable we are. It gives our customers and vendors incredible functionality, but if any part is down, it all goes down." Factors like power outages are of particular concern.

Streamline contracted with Siemens Business Services, which was hosting SAP before SAP even had a formal hosting program, to run its ERP systems. John Taylor, director of application hosting at Siemens in the Americas, points to the company's long-term relationship with SAP - Siemens was the first to implement SAP's R/2 software suite and was a beta user of R/3 - as bona fides. "We took what we learned from the school of hard knocks on R/3 and turned it into a business we called application outsourcing. We approached SAP several years ago, but they weren't interested. Finally, they phoned up and asked to us be a partner," he says.

SAP's early relations with its partners were not cozy. "They were very rigid and difficult to deal with," says Meta Group analyst Dean Davison. With the ASP business growing more slowly last year than SAP expected - "only as fast as a regular market," Davison says - SAP became more accommodating.

Davison says neither SAP nor competitors like Oracle or PeopleSoft have truly figured out how to deliver business value in addition to the obvious advantages of hosting. "SAP is going to be successful, because they own a huge percentage of the ERP marketplace," he says. "But they need to move beyond the technology to offer a broader range of services. ERP is just the platform." Davison is skeptical that the mySAP portal will be the vehicle to drive those additional services, which is what SAP is counting on it to do.

Another wrinkle is SAP's pricing, which is basically a rent-to-own model that gives users title to their software license in several years. That's not the low-cost solution many ASPs offer, but it's cheaper than buying the thing outright and, for customers motivated by concerns such as uptime and avoiding complexity, it seems to be a secondary consideration.

SAP's Kidler says hosted ERP could account for a third of new customers in perhaps two years.