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2/3/2006
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Better Late Than Never? SAP Spices Up On-Demand CRM

The contrasts couldn't have been greater. Last week, SAP debuted its long-anticipated on-demand CRM service, just three days after rival Salesforce.com suffered its second service outage in little more than a month. SAP is late to the market, but its approach of running software as a service for customers on dedicated servers is aimed squarely at the reliability glitches that have hit Salesforce recently and might give large customers pause. It all makes for a much more interesting playing field for on-demand CRM.

SAP's announcement also came just days after Oracle closed its $5.85 billion acquisition of Siebel Systems, in which Siebel's on-demand capabilities were part of the attraction. It also was on the heels of Microsoft's second-quarter earnings announcement, in which sales of Dynamics CRM 3.0, which debuted in December, gave its enterprise applications division a financial boost.

SAP will have to make good on its big promises. Agassi says companies can buy and deploy the same day. -- Photo by Jamie Tanaka

SAP will have to make good on its big promises. Agassi says companies can buy and deploy the same day.

Photo by Jamie Tanaka
SAP entered the picture with a technology approach different from Salesforce's in a critical aspect: Rather than running services for all customers on common hardware--an approach known as multitenancy--SAP's on-demand architecture, built on its NetWeaver platform, lets each customer's application run on its own dedicated server hosted in an IBM data center. SAP contends that its "isolated tenancy" design protects customers from widespread system failures. The dedicated servers are supported by a master copy of the services running on IBM pSeries and iSeries servers and DB2 databases.

SAP's on-demand offering begins with the immediate availability of a sales-force automation service, SAP Sales, which will be followed by releases of SAP Marketing in the spring and SAP Service in the summer. Subscriptions are $75 per person, per month, for the sales module and $125 for a package of all three. (Salesforce prices start at $65 per user and Siebel's at $70.) The service is integrated with SAP's conventional applications so records updated in the on-demand CRM service trigger updates in other SAP apps.

Conventional wisdom is that software on demand appeals primarily to small and midsize companies. SAP's offering is geared toward using on-demand to jump-start CRM usage among customers that run its ERP and other enterprise applications and have sales staffs of 100 or more. "Just like our model gets stretched if it gets too small, Salesforce's gets stretched if it gets too big," says Peter Graf, SAP's product marketing executive VP.

Even with bigger on-demand customers, speed of implementation is key. "Our goal was to have a same-day deployment model," said Shai Agassi, president of SAP's product and technology group, at a news conference announcing the on-demand services. "You sign up in the morning, and you're up and running by the afternoon."

Time Matters
Chemical maker DuPont, a longtime SAP customer, plans to implement SAP Sales on-demand to provide field sales personnel with quick access to important data. "We can't afford a long-term CRM road map that would take a couple of years," Mike Michlovich, DuPont's sales and marketing director, said at the news conference.

SAP scores near the top of most CRM vendor rankings by revenue, and the company says it has 34,000 companies using MySAP CRM. But AMR Research analyst Rob Bois says most companies acquired MySAP CRM as part of an application package and only a third use it. By offering an on-demand product that's integrated with MySAP CRM, SAP hopes to move customers to the packaged software.

While SAP has been preparing its on-demand offering, rivals have moved to capture market share. Oracle is betting heavily on a hybrid on-premises/on-demand approach with its Siebel acquisition. Microsoft plans to re-create much of its software as Web-based services, and in December it introduced the beefed-up version of its CRM software, which is available either as a packaged application or as a hosted service via its partner network. Salesforce, meanwhile, predicts a 50% increase this fiscal year, although the outages could sour that rapid growth.

Salesforce didn't offer much explanation for the latest outage. During a keynote presentation at Merrill Lynch's IT Services and Software Conference last week, CEO Marc Benioff attributed the outage to "shaking out our new data centers," a reference to its recent $50 million investment to create two synchronized data centers to support its on-demand applications. That reluctance to provide specifics angered one customer, who asked not to be identified. His company was frustrated that Salesforce had estimated the length of the outage at 30 minutes when his staff was unable to access its data for nearly five hours, he says by E-mail. The company is considering canceling its contract with Salesforce and moving to an on-premises version of SugarCRM's open-source CRM application. "This is becoming a big problem," the customer says. "I was hopeful that they had put these issues behind them with their big data center investments. Apparently that's not the case."

Demand Increasing
Sales of on-demand CRM services grew 48% last year, nearing the $600 million mark, or about 12% of the total CRM market of $4.8 billion, according to AMR. Salesforce accounted for more than half of the on-demand CRM market.

SAP is betting its strategy will distinguish it from the pack. It has a lot to prove, including that its own network will hold up and that it can be more than a niche player in the on-demand world. "The game here is getting critical mass," AMR's Bois says. The on-demand business model is very different from selling traditional software. Says Credit Suisse analyst Jason Maynard: "SAP's business isn't ready to make this 180-degree change."

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