Last week, SAP unveiled an entirely new line of applications that represent the company’s first foray into the “software as a service” (SaaS) market. As the world’s largest enterprise application vendor, SAP has the potential to take the SaaS market by storm with its latest offering and challenge Oracle in a new product segment in the process. However, it will take years of work and a little luck for SAP to become a leading SaaS player.

The new applications, known as SAP Business ByDesign (or BBD for short), took four years and roughly $400 million for SAP to build from scratch. By starting from a clean slate, SAP was able to design BDD using a “no compromises” service-oriented architecture (SOA). While the applications are new, they run on SAP’s existing NetWeaver middleware platform and leverage its support for SOA. Like similar products from Salesforce.com, NetSuite, and other SaaS vendors, BBD is only available as a hosted offering.

The initial release of SAP Business ByDesign covers eight major functional areas: financials, customer relationship management, human resources, supply chain, supplier relations, project management, compliance management, and executive management support. The target market for the applications is companies with 100 to 500 employees. By comparison, SAP targets its Business One product at companies with fewer than 100 employees and its Business All-in-One offerings at firms with 100 to 2,500 employees.

To make Business ByDesign attractive for the smaller companies it is targeting, SAP is pricing the solution at $149 per user per month for a minimum of 25 users. The software giant will sell the product directly and through its partners. Last week, the company said that it has garnered commitments from 20 partners to sell the SaaS offering. At the moment, the software giant is piloting BBD with 40 companies in the United States and Germany. Expansion to other countries will take place during 2008 and 2009. SAP has set a goal to have 10,000 new customers on the applications by 2010.

Will “Slow and Steady” Win the SaaS Race?

While its SaaS rivals jumped from the starting gates with their offerings years before SAP did, the application vendor does not think that this puts it at a disadvantage. Indeed, the software giant is taking a slow, deliberative approach to building BBD. The company readily admits that at present, its new offering lacks much of the functionality that it will gain via “enhancement packages” it will deliver over the next two years. That does not concern SAP, as it has a history of taking more time than its rivals to craft applications into market-dominating forces.

That approach may have worked for other products, but it is unclear whether it will work this time around. Before it can become a leading SaaS player, SAP will have to resolve several issues with BBD that could put its success further out in the future than even it may be forecasting. Among those issues are the following ones.

  • Little to no vertical industry focus. At this point, SAP has no plans to enhance BBD with functions for vertical industries. Moreover, the vendor does not intend to let its partners customize the SaaS offering to meet vertical industry requirements. That plan could limit BBD’s appeal, as many companies with 100 to 500 employees are in microverticals that have unique business process requirements.
     
  • Incompatibility with SAP’s other offerings. Since BBD is completely new code, its users will not be able to upgrade to SAP Business All-in-One or SAP Business Suite if they outgrow their applications. As such, companies that adopt BBD must trust that SAP will keep extending the applications to meet their growing requirements. That will be a big leap of faith for companies in the high end of BBD’s 100- to 500-employee target market. Most of these companies will likely feel more comfortable with Business All-in-One, as that offering supports vertical industry requirements and is upgradeable to the “large enterprise” SAP Business Suite.
     
  • Potential channel conflicts. If SAP sells its new offering directly as well as through channel partners, it will likely cause significant conflicts with its partners. Since BBD’s target market overlaps the low end of the Business All-in-One market, SAP could end up competing with Business All-in-One partners for accounts. That could tarnish SAP’s reputation as a good partner, not to mention cannibalize Business All-in-One sales.

While SAP Business ByDesign faces these and other issues, that does not make the product a non-starter. Because of its leadership position in the software industry, SAP has the resources and the patience to work out these issues. However, that is going to take two to three years at the least. That gives SAP’s rivals time to respond to its new offering and stay ahead of the vendor for what could easily be the remainder of this decade.

What About Oracle?

At this moment, SAP Business ByDesign does not look to be much of a threat to Oracle’s applications, which are largely priced and packaged for larger companies than those that BBD targets. Besides, BBD lacks much of the vertical industry functionality that Oracle has built into its offerings. For the immediate future, therefore, the main matchups for BBD will be against offerings from SaaS vendors such as Salesforce.com and NetSuite.

From what Oracle CEO Larry Ellison is saying, it appears that he sees the competitive matchup in much the same way. Last week, Ellison used Oracle’s first quarter conference call with analysts to state that the vendor has no immediate plans to offer a BBD-like product. Noting the high costs of developing such a product and the low margins that would be realized from it, Ellison stated, “We’ll watch and see how SAP does going after small companies [with BBD]…It’s interesting…but so far nobody has figured out how to make any money at it.”

That’s an interesting comment for Ellison to make, as he just so happens to be the majority owner of NetSuite, an SaaS vendor that now faces SAP as a competitor. Obviously, this gives him a reason to downplay the German giant’s chances of success. At the same time, Ellison’s involvement in this market means that he is speaking from experience when he says how tough it is to make money selling hosted solutions to smaller companies.

In short, the odds are high that Oracle will not respond to SAP Business ByDesign with a similar offering. Instead, it will stick to its strategy of extending its existing applications as it prepares its Fusion Applications for their debut. In our opinion, that is exactly what Oracle should be focusing on for next two to three years. Then again, if BBD starts looking like a big success, who knows what Oracle might do? Perhaps it will convince its CEO to sell NetSuite to it at an attractive price.

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