IT|Redux

SAP Should Get Serious about SaaS

Tuesday, April 3rd 2007 | Ismael Ghalimi

The market for enterprise applications is not growing much anymore. Faced with this challenge, large enterprise software vendors have only two options: grow through acquisitions, or go after the SMB market, which has been traditionally underserved. This transition is particularly obvious for a couple of vendors — Oracle and SAP. On the M&A front, nobody could execute better than Larry Ellison and his team today, therefore I contend that SAP’s future lies in the SMB market. But SMBs do not like to buy software, mainly because they do not have access to the IT resources that are necessary to deploy and maintain it. Instead, they would rather buy it as a service, as Salesforce.com’s demonstrated so well. This is why SAP should really get serious about the Software as a Service model.

So far, SAP’s foray into the SaaS market has been unimpressive at best. Over the past couple of years, SAP focused mainly on the NetWeaver middleware and the A1S platform. The later is available as a hosted solution, but is targetted at the mid-market. SAP calls it game-changing, but I do not believe that it has anywhere near the disruptive power of Salesforce.com and the AppExchange, for a couple of reasons: first, it’s out of reach for the smaller SMBs that represent the bulk of the potential market opportunity; second, it lacks a strong ecosystem of partner solutions. I believe that SAP needs a new solution, directly targeted at the SMB market, and only available as a service, for this is the only way to make it work.

As of today, SAP is maintaining three separate product lines: Business One, A1S, and mySAP. What I am advocating is the development of a fourth one, for the following reason: while Business One might be appropriate from a functionality standpoint — even though this is highly debatable — it does not have the right architecture. As our friend Marc Benioff so eloquently taught us, SaaS only works if you have multi-tenancy, and multi-tenancy is not something that you can fake. Also, to support the variety of needs found in smaller organization, the application needs both objects and processes to be configured or customized in a model-driven way. Business One is capable of doing this only for objects, and the way it does it is nowhere near as easy-to-use for non-technical people as Salesforce.com is. Like it or not, a new platform needs to be developed, most likely from scratch.

If it decides to do so, SAP should focus on three functional areas: Finance, CRM, and HCM (Human Capital Management). CRM is a no-brainer, and is what most SMBs need from the start. HCM, and especially an easy-to-use employee self-service portal, is where I would expect most CRM players to go next, mainly because it’s easier to implement than a financial package, and because it gives you the ability to sell many seats — theoretically one seat per employee. Finally, Finance is where SAP could truly leverage its global expertise, and leapfrog its most established SaaS competitors, Salesforce.com being first among them.

As of today, SMBs looking for a financial package have only a handful of options, and few of them are available online. Intuit’s QuickBooks is very strong in the U.S., but not much of a player elsewhere, and it only works with Internet Explorer — what a shame! Microsoft Dynamics is a good on-premise solution, but the on-demand version is at the stage of demoware right now. NetSuite and Salesboom both have decent financial offerings, but they are not fully localized yet, and are supported by limited marketing resources. Workday is an interesting player, but with only 10 customers as of today, it still has a long way to go.

If SAP were to release an on-demand solution including FI, CRM, and HCM sometime in the first half of 2008, it would most likely be one of the very first players to do so. And if it were to release it with something equivalent to Salesforce.com’s AppExchange from the get go, it would have a very decent shot at building one of the next-generation platforms that will be used to build the composite applications that will support most business activities in the future. If it were to inject a healthy dose of Office 2.0 magic as well, it might even have the most attractive platforms of all.

Granted, what I am proposing is no simple feat. For starters, SAP would have to adopt a brand new business model — renewable subscriptions as opposed to perpetual licenses — and get rid of its not-invented-here syndroma. For example, if it were to enforce the use of its own middleware to build such a thing, it would most likely fail. Instead, it should learn from the successful experiences of other players in the field — especially Google and Salesforce.com — and make extensive use of open-source technologies, for the database, the application server, and the web services stack. Also, it should rely on a network of third-party vendors for providing a rich set of Office 2.0 user interfaces that will drive end user adoption.

Such a program is virtually impossible to run internally, for it would face too much opposition, from too many stakeholders. Instead, it should be developed through a semi-independent entity. Of course, similar initiatives have been met with mixed results in the past, but it should not prevent SAP from giving it another shot. Quite frankly, there is not much to loose, and a lot to gain here. I write semi-independent, because one critical success factor would be to get access to functional IP, especially with respect to financial applications. Through the development of Business One, A1S, and mySAP, SAP AG has accumulated a unique expertise that would give an SAP-funded spin-off a truly unfair advantage on the market.

At the time of writing, SAP is going through a major transition, prompted by a series of unrelated events that have created both formidable challenges and fantastic opportunities. There is no way to tell which direction the company will go, but one thing is clear to me: the company has extraordinary assets that could be leveraged for developing a truly game-changing platform, and I find such a prospect quite exciting.

Entry filed under: Office 2.0, SaaS

13 Comments - Add a comment

1. Dennis Howlett  |  April 4th, 2007 at 1:03 am

Ismael,

I’m probably going to get this wrong, because SAP is putting enough FUD about to keep us all guessing. A1S is supposed to be their upcoming SaaS offering, originally slated for Q1, now May, and maybe further out. You might be thinking about A1N.

Business One is good, and it meets a specific segment need. The fact that it is largely on-premise right now doesn’t matter. It is being re-engineered to SaaS for 2008 — so they say.

2. Ismael Ghalimi  |  April 4th, 2007 at 7:08 am

Dennis,

My point, exactly. Re-engineering Business One won’t give them something to really compete in the marketplace. You need a new platform. You could reuse the business-level data schemas, but not much more. Hence my post.

Best regards
 -Ismael

3. Online CRM Guide  |  April 5th, 2007 at 8:14 am

The problem with the SaaS progress at the big players is by switching to a SaaS offering they would loose a big stream of cash flow immediately. Customers are paying SAP large upfront payments for on-premise solutions; and embracing a software-as-a-service business model will decrease revenues greatly as customers will only pay for the service on quarterly or yearly basis.

The pure play on-demand CRM vendors that are focusing on bringing more and more ERP tools totally integrated out-of-the-box in a wall-to-wall fashion similar to CRM products are the clear winners.

4. Online CRM Guide&hellip  |  April 6th, 2007 at 12:59 am

[…] Amy wrote an interesting post today… […]

5. Manoj Das  |  April 6th, 2007 at 12:28 pm

SAP should buy Salesforce.com. Other than filling their product hole, they will also fill the gap created by Shai’s departure with Marc, who may be second in vision only to Larry.

6. Ismael Ghalimi  |  April 6th, 2007 at 1:56 pm

Manoj,

I’m sure Marc will like the compliment, especially coming from you.

Best regards
 -Ismael

7. Ken Rudin  |  April 7th, 2007 at 1:31 am

Ismael,

Great post. I can empathize with the challenges SAP faces today regarding SaaS. I was in charge of creating and managing the Siebel CRM OnDemand division at Siebel. Our first problem was trying to take Siebel’s massive code base and rebuild it to be multi-tenant. But, multi-tenancy is only one facet of successful SaaS applications. SaaS applications also need to be simple to set up, simple to use, and simple to buy. Taking Siebel’s massive code base and making it multi-tenant meant it could be shared by multiple customers, but it didn’t help to make it easier to set up or easier to use. It took an enormous additional amount of engineering effort to make the necessary improvements in those areas.

But technology wasn’t our real issue. It was the challenge of changing business models. Not much internal fighting occurred when my division was small, but as our revenues grew, everyone became scared of cannibalization. It created an internal civil war which helped speed up Siebel’s collapse.

In my experience, it’s nearly impossible to change large enterprise companies to the SaaS model. They have the wrong DNA. I started my latest company (LucidEra — we’re focused on SaaS Business Intelligence) to be a SaaS company from the ground up. It’s much easier than trying to change your own DNA!

8. Ismael Ghalimi  |  April 7th, 2007 at 7:39 am

Ken,

I could not agree more. Thanks for sharing your experience with us.

Best regards
 -Ismael

9. David  |  April 7th, 2007 at 7:07 pm

It seems to me that one of the biggest problems/challenges for companies such as SAP and others is that they can’t bring themselves to offer real solutions to the small business market, because they are worried that it would cannibalize their meat and potatoes that they have counted on for so long. If they offer a real solution for small businesses, many of their corporate customers would want to use it for all of their branch offices.

Of course, at some point the market will force them to change, kicking and screaming, but I am not sure that time has come yet, and I am not sure that if I were them I would not also want to see that day come later rather than sooner.

One of the things that is humorous if you look at the websites for many of the large software companies is that their idea of a small business is someone with fewer than 1,000 employees. Of course in the grand scheme of things they are correct, but my point is they have very little interest in offering solutions to what most of us thing of as a small business, which is a business with anywhere from 1 to 100 employees that is looking for solutions in the Salesforce.com price range.

10. David  |  April 7th, 2007 at 7:16 pm

To follow up a little bit further on the above, I like many small business owners have been frustrated by the lack of real software offerings for small businesses. Software offerings that really offer power, as opposed to trying to run my business with Act and QuickBoooks (which thankfully I no longer do). If you call up most of the companies such as SAP, Siebel (pre-Oracle), and many others, their entire operation is built around 6-7 figure software implementations.

Even if you are willing to spend a few thousand dollars per software seat (imagine you have 10 employees), the problem is that they just don’t want to deal with you unless they can add on a few hundred thousand in implementation fees. When I check on SAP for instance, their small business offering started at $100K!

I can understand them, for the same thing to some extent exists in my business. If you focus on big jobs, the small jobs just aren’t worth your time. SaaS would allow SAP and others to go after small businesses, but as noted in my post above, I think the challenge is that they need to purposely limit their offerings so as not to intrude on their big corporate sales. Which makes it hard for them to compete with Salesforce.com and others who want to make their software as powerful as possible at a lower price.

11. Ismael Ghalimi  |  April 9th, 2007 at 1:14 pm

David,

I fully agree with you. The challenge is quite formidable!

Best regards
 -Ismael

12. Praveen Kumar  |  April 18th, 2007 at 6:45 am

Ismael,

Whenever somebody starts a conversation related to SaaS, they mention Salesforce.com, not NetSuite. In fact both companies are partly owned by Larry, the Oracle guy. I have not seen any other vendor offer anything close to NetSuite’s features. Why is there not much talk about NetSuite? Anything fundamentally wrong with NetSuite?

13. Ismael Ghalimi  |  April 23rd, 2007 at 12:04 pm

Praveen,

There is nothing wrong about NetSuite. In fact, they are doing great. The only problem is that Salesforce.com is doing even better… Also, it should be said that Salesforce.com’s user interface is significantly better than NetSuite’s, and if you’re planning to use them as the cornerstone of your computing environment, user interfaces really matter.

Best regards
 -Ismael

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