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SAP CEO calls SaaS "the better model"

March 17, 2007

SAP has changed its tune. The German software house, the leading maker of enterprise applications, has long looked down its nose at the idea of supplying software as a service over the Internet, arguing that companies will continue to buy complex programs and install them on their own machines in their own data centers. In February 2006, when SAP introduced a decidedly underwhelming on-demand version of its CRM application, it seemed less an endorsement of the SaaS concept than a dismissal of it. Commenting on the SaaS model, one SAP executive told Business Week, "Most customers are hitting a wall in terms of flexibility and the ability to integrate with other programs." Last April, in a CNET interview in which he was asked about the challenge posed to SAP by SaaS suppliers like Salesforce.com, SAP CEO Henning Kagermann stressed his view that SaaS had limited applicability and value:

We have not changed our strategy ... You can do this on-demand for certain areas and certain functions, but not for everything. Everybody starts with salesforce automation because it makes sense since it's not very structured. It's simple and more office-like. But the more you come from this type [of system] to the core of CRM [customer relationship management], the more difficult it will become to do it on-demand. People don't want to share the data with others ... I have spoken to many clients and they want to own [the software]. They are happy with this model.

What a difference a year makes. Last week, at the big Cebit trade show in Hanover, Kagermann heaped praise on the software-as-a-service model and introduced the company's forthcoming suite of SaaS apps - codenamed A1S - as SAP's future engine of growth. Kagermann calls the subscription-based suite, which spans not only CRM but also supply chain management (SCM) and SAP's bread-and-butter enterprise resource planning (ERP), "game-changing." It represents "a completely new model for us," he said at Cebit. According to an InfoWorld report, he praised the SaaS suite as a much simpler and more business-friendly alternative to traditional installed systems:

"Once businesses have used the application, they'll get the hang of it pretty quickly." Kagermann expects even some senior managers of companies, who typically don't spend much time with software issues, to show an interest and master many functions on their own. Traditionally, the software industry has developed applications and businesses have had to adapt their processes, according to Kagermann. "Now with A1S, users define their software requirements," he said. [In addition to mid-sized and smaller companies,] Kagermann expects subsidiaries of large enterprises to be interested in the product.

Most remarkable were the comments Kagermann made about the SaaS suite in a Financial Times interview published on Friday:

Mr. Kagermann said investors were nervous as the new product was coupled with a new business model. While big groups buy SAP's software for their offices, small companies will rent A1S and use it online. Installing databases meant the subscription model had big start-up costs. "People know this is the better model. But the upfront cost means few dare to introduce it," he said. "You only start printing money later."

Although Kagermann appears to have been referring to mid-sized and smaller companies, the fact that he would call SaaS "the better model" - both for customers and for his own company's future profitability - represents a striking change of heart and of strategy. As Salesforce has demonstrated, the SaaS model, after proving its value in the mid-market, naturally moves up-market to ever larger companies - in classic disruptive-technology fashion. If SaaS is "the better model" for mid-sized companies today, how long will it take before it becomes the better model for big companies as well? Kagermann's conversion, spurred no doubt by his firm's recent earnings shortfalls, seems like a milestone on the road to the transformation of business software. The game, indeed, has changed.

UPDATE: Vinnie Mirchandani smells a rat.

Comments

SaaS is just a delivery method (as you mentioned and know) for a particular applications. Sure it provides the ability to "include" others within the application, but it's still just a delivery method. The real key to success in applications is what SFDC has done with it's appliation - they made it functional and decided that "features" would be created either by them (because customers requested them) or by someone else (because they had a need for them).

The delivery method has nothing to do with the basic philosophy of a company - if you want to get a good read on it - check out 37 Signals "Agile Application Development" - it all comes down to "convenience over quality" - or Google's mantra "Simple is better than Complex".

All of which has nothing to do with how an application is delivered.

Posted by: Arnie McKinnis [TypeKey Profile Page] at March 21, 2007 02:01 PM

SAP's success or failure here will be determined by how they think about SaaS. I was one of the early employees at Salesforce.com, I was involved with NetSuite on their original board of advisors, and I started and ran the Siebel CRM OnDemand group in Siebel -- and from these experiences I've learned first hand that SaaS is much more than a delivery model.

Vendors who think it's just a delivery model (usually they're the traditional enterprise vendors trying to move into the SaaS market) end up providing very little of the type of value that SaaS is really focused on. SaaS is really about providing solutions that are simple to set up, simple to use, and simple to buy. Just taking an existing product, tweaking it a bit, and delivering it over the web achieves none of those goals. That is, physically moving an enterprise solution from the customer's data center to the vendor's data center doesn't make it any simpler to set up, use, or buy.

The companies that rethink what can be done given a new approach to delivering software are the market leaders (e.g. salesforce.com and NetSuite.) The ones that just think it's a new delivery model for an old solution never gain market leadership (e.g. Siebel CRM OnDemand.)

As an interesting parallel, Siebel dismissed the SaaS model for a long time, and then jumped on the bandwagon later. But, in an effort to make it fit in with their existing business model, it was positioned as just another delivery option for customers. It seems that SAP is following that same unsuccessful approach.

Posted by: Ken Rudin [TypeKey Profile Page] at March 21, 2007 02:52 PM

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