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SAP CEO: SaaS Hurts Our Profits

The company has readied version 2.0 of Business ByDesign, but a broad-market push is too costly for SAP, incoming chief executive Leo Apotheker said.

January marks an important leadership change at SAP, with Leo Apotheker taking on the full CEO job as Henning Kagermann prepares for retirement. Last week, Apotheker was frank about a huge management puzzle he faces: How to bring SAP into the world of cloud computing without killing profit margins.

Apotheker flew into New York from Europe to participate in an SAP press conference on Nov. 21, where some of its customers gave testimonies on why their peers should use IT to innovate in the tough economy. Apotheker and Kagermann share the CEO title, but SAP said Apotheker will become the clear leader at the company starting in January as Kagermann begins his exit (his contract technically ends in May).

Innovating in a tough economy, however, appears to be SAP's problem as it tries to find a profitable formula for its new Business ByDesign ERP software-as-a-service. SAP introduced the SaaS product with great fanfare a year ago and then almost as quickly pushed it back as a low priority, limiting its use to a handful of customers, raising questions of whether the product was technically ready to market. Apotheker insisted that's not the problem: Not only is it "ready and done," but SAP has version 2.0 ready to go, and "it's the coolest app every written."

The problem for SAP, Apotheker said, is that it's a bad time, financially, for SAP to do a big market push on Business ByDesign. "We would be hurting our margin, and hurting our stock," Apotheker said.

He further characterized Business ByDesign's role in the bigger picture at SAP using this meteorologically inspired observation: "The gale winds blowing are also blowing in our direction. We want to come out stronger, and we will. We want to look out for our customer, bring innovation to our customer, and make sure we bring our own cost and infrastructure in place so that we weather the storm."

Apotheker's frank disclosure about the high cost of Business ByDesign highlights the problems ERP vendors face in moving from a licensed software model to one in which some of the software they offer is hosted as a subscription service over the Internet.

On the pure revenue side, it means transitioning from getting thousands or millions of dollars up front, to spreading what's essentially a rental fee across many months. Apotheker also indicated that all of the operational expenses that would go into a big push for Business ByDesign is too costly in this economy. But does SAP even have the right culture for cloud computing? Indeed, it was "built by German culture to run in a Silicon Valley cloud," he said.

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