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SAP's SaaS Effort Falls Short Of Design
[May 05, 2008]

SAP's SaaS Effort Falls Short Of Design

(Information Week Via Acquire Media NewsEdge) SAP's decision to cut the amount it will invest this year in its midmarket ERP on-demand software service, Business ByDesign, points to obstacles the company has hit in trying to extend the SaaS model to ERP. It also raises concerns about the slowing economy's impact on the new software delivery model.

SAP is cutting its investment in Business ByDesign this year by about $156 million, company executives say, from the estimated $300 million or so it had planned to spend. SAP still intends to invest between $117 million and $195 million, with $62 million of that already accounted for in the first quarter.

At the same time, SAP has scaled back its revenue projections for Business ByDesign, estimating it will take until 2011 or 2012 to hit $1 billion in annual sales, rather than reaching that goal in 2010, as the company had hoped. The service has only 150 customers, and SAP said it expects to sign "significantly less" than 1,000 this year-the subscriber base it had projected when it launched the service last September.

And while SAP said last fall the service would be widely available this year, it's still limiting it to six countries: China, France, Germany, the United Kingdom, the United States, and, later this year, India.


SAP says the retrenchment is a deliberate go-slow strategy. "There are a lot of things we feel we need to fine-tune before going into full volume," says Hans-Peter Klaey, president of SAP's small- and midsize-business division. Unfortunately, one of those is Business ByDesign's performance over the Internet, which Klaey admits needs improvement.

Another is cost. Some customers want to adopt the Business ByDesign suite piecemeal rather than all at once, while others are looking to integrate it into their existing infrastructures and require more services and customization than SAP had anticipated, says Stuart Williams, an analyst at Technology Business Research. The result is "a more expensive and less scalable business than designed," says Williams.

Pressure SAP faces to increase profit margins may play a part in its decision to scale back the on-demand service. SAP's first-quarter results, reported last week, fell short of Wall Street estimates. Net income for the quarter, ended March 31, was $376.6 million, down 22% from a year ago; revenue came in at $3.83 billion, up 14%, but still short of what Wall Street had hoped for. In a conference call with financial analysts, co-CEO Henning Kagermann cited several reasons for the subpar performance, including the slowing U.S. economy, the decline of the dollar against the euro, and the expense of integrating recently acquired Business Objects.

Kagermann said SAP is sorting through the complications of how to host ERP as a service and make a reasonable profit with it. "It's very important to adopt our plan every step of the way to ensure highest quality and maximum profitability," he said on the conference call. "Now, we are much smarter, because we have some milestones behind us." The revised strategy is a more realistic one, agrees analyst Williams, noting it "will take [SAP] more time and experience to build sales momentum" for its ERP service offering.

Difficulties in expanding the SaaS model beyond one-off applications for CRM and security may not be limited to SAP. Microsoft, NetSuite, Oracle, and Workday offer ERP suites in the SaaS model, and while all have seen growth, none is having blazing success with online ERP.

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