SAP will offer on-demand, hosted software applications, or "components," that integrate with a customer's on-site SAP software, said co-CEO Henning Kagermann in a Monday interview with InformationWeek.

While SAP's on-demand (or software-as-a-service) offerings so far have been targeted at midsize businesses, the new plan shows how SAP is trying to make SaaS work for large companies.

SAP's on-demand component approach, like Microsoft's "software + services" strategy, underlies the unique ways traditional software vendors are handling the increasingly popular on-demand delivery model. SAP calls these planned offerings "components," since they're not likely to be used as standalone software apps that operate outside of SAP ERP. Instead, these components will have "out-of-the-box integration" with the other SAP applications a customer keeps and manages on-site, Kagermann said.

These components will be based and developed on the services-based platform SAP developed for Business ByDesign, its fledgling on-demand software service for midsize businesses. The components will be hosted and managed by SAP, Kagermann said, adding that SAP hasn't yet determined whether to price these apps as a subscription service or as licensed software; there's a possibility that both might be an option.

An on-demand component for collaborative supplier management is among the first planned and will ship in late 2008 or early 2009, Kagermann said. Additional ones are likely in the areas of supplier-relationship management and ERP. Other possibilities include talent management and analytics, he said, noting that customers can already get some SAP Business Objects apps in an on-demand model. The on-demand component strategy shows how the "Business ByDesign architecture and investment must not be focused on midmarket only," Kagermann added.

The integration between on-site and off-site software is possible because the Business ByDesign platform uses a "loosely coupled, asynchronous" services-oriented architecture, Kagermann said. As a result, on-demand software can communicate with a customer's on-site software through linked services, even if the software is running on different hardware systems.

SAP believes this integrated approach will appeal to large companies that don't want to host "mission critical" apps like financials in the cloud, yet would like to use on-demand apps in conjunction with mission-critical ones. "Mission-critical [apps], like ledger, I don't think large companies will go on demand," Kagermann said.

Still, SAP will need to answer some questions for large businesses considering the on-demand component model, said Stuart Williams, an analyst with Technology Business Research. In the area of supply chain collaboration, "who owns the data, and who manages the business network?" he asks. "Governance is a concept that by definition is not about mushy or ill-defined boundaries."

With on-demand collaboration, there must be a plan for defining user roles, particularly since the software runs outside of any participant's firewalls. "It's a different wrinkle in the governance issue if you're looking at that kind of software," he said.

SAP's strategy is somewhat similar to Microsoft's software + services strategy, broadly defined as the idea that on-demand software and on-site software are not exclusive of each other, and often work best when used together. It's a different approach than pure-play SaaS vendors such as Salesforce.com and Workday, which preach that conventional, licensed-based software is reaching the end of its life span.

This story was updated May 8 to reflect a changed on-demand component shipping date.