SAP Scales Back SaaS Product Plans

Technical issues and profit-bleeding implementations prompt SAP to move more slowly with its ambitious Business ByDesign on-demand software service.
SAP says it's slashing by half this year what it previously planned to invest in its new on-demand software service, Business ByDesign, as it works to "fine-tune" the service for its first customers. The dramatic pullback points to the numerous obstacles SAP has hit in its efforts to embrace a new software delivery model.

SAP is going to limit the rollout of Business ByDesign this year to just six countries -- China, France, Germany, India, the United Kingdom, and the United States -- as it works to fine-tune the service, including both marketing efforts and the nuts-and-bolts performance issues associated with hosting software in its data center in Germany and delivering it to customers over the Internet, said Hans-Peter Klaey, president of the SAP division that serves small and midsize businesses, in an interview Wednesday.

"It's a revolutionary solution based on the most modern architecture and a new go-to-market concept; there are a lot of things we feel we need to fine-tune before going into full volume," Klaey said. "There will be no volume play for us in 2008."

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As a result, SAP is scaling back its planned investment by $156 million (100 euros) this year, with plans to spend between $117 million and $195 million (75 million and 125 million euros) on Business ByDesign, of which $62 million was already spent in the first quarter. It's also tempered its revenue goals for the product, estimating it'll take until 2011 or 2012 to hit $1 billion in annual sales for the service, originally a target for 2010. SAP, which has 150 customers for the product, will sign on "significantly less" than the 1,000 initially planned for 2008 when the company launched the service last September.

The pressure SAP faces to grow profit margins may also play a part in its decision to scale back the product's rollout, which is proving more costly than anticipated. SAP reported Wednesday a net income of $376.6 million (242 million euros) for its first quarter ended March 31, down 22% from its first quarter last year, and revenue of $3.83 billion (2.46 billion euros), up 14%. Both revenue and profit fell short of Wall Street's estimates.

In a conference call with analysts, SAP co-CEO Henning Kagermann cited several reasons for the subpar performance, including a slowing U.S. economy, the impact of the decline in the dollar against the euro, and the expense of integrating the recently acquired Business Objects.

In the earning calls, Kagermann indicated that some customers are seeking to adopt the Business ByDesign suite piecemeal rather than all at once, some are looking to integrate the offering into existing infrastructure, and some require more services and customization than SAP anticipated, said Stuart Williams, an analyst with Technology Business Research. "The net result is a more expensive and less scalable business than designed," Williams said.

The revised strategy is more realistic, Williams said, adding that "SAP is competing against packaged vendors such as Oracle, Microsoft, Epicor, and Lawson, as well as emerging vendors such as NetSuite and, for a slice of the midmarket, and that will take more time and experience to build sales momentum."