SAP's On-Demand Strategy Draws Tepid Reviews

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A day removed from the debut of its first software-as-a-service (SaaS) (define) offering, Business By Design, SAP on Thursday got immediate and what can only be called less-than-enthusiastic feedback from the very people it most hoped to please.

SAP CEO Henning Kagermann on Wednesday called Business By Design “the most important announcement I’ve made in my career.”

And it’s easy to understand why.

Earlier this year, Kagermann impressed shareholders with a bold prediction that SAP would grow its total customer base from 39,000 to more than 100,000 by 2010. Much of that growth, he said, will come from small- and mid-sized businesses (SMB), the very market SAP has spent an estimated $500 million thus far to address with Business By Demand.

Kagermann, along with fending off Oracle’s relentless, acquisition-fueled assault on SAP’s enterprise-application supremacy, also faces the daunting challenge of winning over investors who want to know why Oracle’s stock has appreciated roughly 24 percent in the past year compared to just nine percent for SAP shares.

Peter Goldmacher, an equity analyst at Cowen & Co., reiterated his “underperform” rating on SAP shares and said that while he agrees with SAP’s assessment that there is a tremendous opportunity in the SMB software market, “we have a hard time seeing how this product will drive material revenue growth or margin expansion.”

Goldmacher added that “over time, we are concerned that this product and distribution model could compete…with SAP’s higher-end offerings.” He added that Business By Design might be “too horizontal to sell into the mid-market, particularly the low end of the mid-market which demands a high degree of vertical expertise.”

While SAP representatives were unavailable to comment on concerns raised by Goldmacher and other Wall Street and software industry analysts, it’s safe to say the world’s largest enterprise software vendor was hoping for a decidedly more positive reaction to its first foray into the on-demand software market.

Business By Design features a broad range of intuitive (define) and(define) applications, is SOA-based (define) and powered by SAP’s NetWeaver platform. Right now, only 20 pilot customers in the U.S. and Germany are actually using it but SAP executives expect that figure to grow to more than 10,000 customers by 2010.

Dan Sholler, an enterprise software analyst at Gartner, said that projection represents a best-case scenario.

“SAP itself says the addressable market for Business By Design is about 600,000 customers,” he said in an interview with InternetNews.com. “They made that extravagant prediction of 100,000 [total] customers by 2010 and they already have about 40,000. So to reach their goal, they’re going to have to get 10 percent of this new addressable market. I don’t know if they can considering they only hold about 14 percent to 15 percent—maybe even less—of the large enterprise market where it’s the 800-pound gorilla. And this is a whole new market, a new model and a new channel that, so far, doesn’t even exist.”

When pressed to quantify just how concerned he is about the potential for Business By Demand to confuse customers and compete with SAP’s bread-and-butter ERP 6 software suite, Cowen & Co.’s Goldmacher said “serious enough to write a note to Wall Street addressing it as a concern.” Meanwhile, Andy Miedler, an equity analyst with Edward Jones & Co., called SAP’s on-demand service a “first mover” but warned SAP will find attracting new customers to this model “doesn’t come fast and it doesn’t come cheap.”

Salesforce.com CEO Marc Benioff would surely disagree with Miedler’s “first mover” characterization.

On Monday, Salesforce.com, which now has more than 900,000 subscribers tapping into its on-demand business application service, showed off Force.com during its Dreamforce 2007 conference. Force.com takes the SaaS model to the next level, providing an on-demand application development platform that could extend Salesforce.com’s subscriber base beyond traditional business software users.

Opening minds to the SaaS model

“I feel like sending Henning Kagermann a fruit basket today,” Bruce Francis, Salesforce.com’s vice president of corporate strategy, said in an interview with InternetNews.com. “This is a fantastic thing. What SAP is doing is confusing their customer base and opening minds and markets for the SaaS model.”

Francis said Business By Design puts SAP in a precarious position, not only with its existing enterprise customers but also within the rank and file of its organization.

“SAP has it baked into its DNA to sell perpetual license software and maintenance,” he said. “It’s what their sales and engineering people do. If I’m an SAP account executive, what do I sell? This SaaS product or the perpetual license software? And if you’re a customer, you’re even more confused. What it tells you is that SAP doesn’t really believe in this model.”

Gartner’s Sholler said it’s clear Business By Design is still a work in progress, adding “I have no doubt SAP is going to sell a bunch of this stuff.”

However, he said “the biggest problem is going to be the channel. SAP is trying to do two things: build a new channel for a new customer they’ve never reached before and ask the channel to operate this volume sales model. Channel development—and they’ve done a good job of building it out in the past—is going to be the real key.”

This article was first published on InternetNews.com.