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SAP: Big Businesses Won't Be Interested In On-Demand ERP

Despite soaring interest in software-as-a-service, SAP's new product is aimed at companies with fewer than 500 employees.

Conventional software companies such as SAP have good reason to want to keep on-demand software tucked in the small-business segment: They want to avoid cannibalizing highly profitable existing customers. Instead of a customer paying thousands or even millions up front for a software license, SaaS buyers pay around $25 to $250 per month per user, depending on the application. An unhappy customer can turn the service off and go elsewhere. SaaS vendors face high marketing and infrastructure costs, explaining why some of them have limped along for years without a profit.

For vendors of on-premises software, creating a separate on-demand product can lead to internal strife, especially among salespeople who risk losing juicy commissions to lower-price subscriptions. Credit Suisse software analyst Jason Maynard says most vendors won't be able to make the two models co-exist. "On demand is like a virus in an on-premises software company," said Maynard, speaking at the InformationWeek 500 conference last week.

Ken Rudin, CEO at on-demand business intelligence vendor LucidEra, knows firsthand what can happen, having served as general manager of Siebel Systems' OnDemand unit. Part of the problem was that Siebel tried to take code developed for on-premises software and transform it into a service. The bigger problem, though, was the resistance from Siebel's sales force. He recalls briefing a top sales executive about Siebel OnDemand a month before its launch: "As I got up to leave, he said, 'By the way, stay the hell away from my accounts.'" Rudin describes it as "civil war."

Not at SAP, promises deputy CEO Leo Apotheker. The company has spent four years developing the model while building the code from scratch to work as a service. "We feel very comfortable that this will not create a civil war but will create peace, harmony, and lots of revenues," Apotheker says.

Oracle CEO Larry Ellison doesn't see the profit potential in small businesses or software as a service, saying during a conference call last week that the added product development, marketing, and customer support costs make the margins unattractive for Oracle. Specific to SaaS, he said, "We think it's very interesting, but so far no one has figured out how to make any money at it."

SAP estimates there's a potential $15 billion market of small companies looking to automate their business processes for the first time, and its goal is to have 10,000 companies signed up for Business ByDesign by 2010. Kevin Flanagan, CEO of Compass Pharma Services, an early user of Business ByDesign, chose it partly for the "comfort level" of working with a company the size of SAP. Peter Novak, CEO of Sunflower, a startup focused on alternative lighting technology, says his company has Business ByDesign almost ready to handle its manufacturing, purchasing, and supply chain processes, after eight weeks of part-time work implementing it.

SAP will spend 300 million to 400 million euros this year and next developing Business ByDesign, including building the support infrastructure. It has one data center to run the service at its headquarters in Waldorf, Germany, and plans to build or partner for additional data centers as needed.

Rivals Oracle and Microsoft offer some applications as hosted services, but neither has rewritten their software to fit the model. With a pure on-demand model, customers don't worry about the staff and support costs for upgrades, for example, since new features are added to the service by the vendor.

SAP needed to do something if it's serious about the small-business market. Textile maker Asahi Kasei Spandex America, with 170 employees, recently moved off SAP and onto NetSuite's on-demand software for accounting, inventory management, procurement, order management, and financial reporting. "We didn't want to pay for that high-powered in-house programming staff" to keep SAP running, says Asahi CFO David Stover.

SAP is treating software as a service as a chance to expand into a new market without disrupting its licensing model. Businesses, however, are looking to SaaS for more choices in how software is delivered--and that includes businesses of all sizes, even if SAP and its on-premises software peers try to convince them otherwise.