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ByDesign: has SAP unleashed a cannibal?

September 19, 2007

The business software giant SAP finally made its formal entry into the software-as-a-service (SaaS) market today, as it unveiled Business ByDesign, a version of its popular business software that will be delivered over the Internet rather than installed on clients' computers. SAP CEO Henning Kagermann called the introduction of ByDesign "the most important announcement" he's made during his 25 years with the firm, underscoring what has slowly become clear over the past year: SAP's leaders now believe that SaaS represents the future of business software.

ByDesign, which was codenamed A1S while in development, is aimed at midsized companies, who will be able to subscribe to the package of applications for $150 per user per month. While details of ByDesign remain sketchy, SAP will, by dint of its size, customer base, reputation, and cash, be a force to be reckoned with in the market for supplying business software over the web. Zoli Erdos predicts that the company "will become the dominant SaaS player in the mid-market." That seems premature, but at the very least SAP will be a strong competitor for pure-play SaaS companies like Salesforce.com, NetSuite, and Workday as well as other mainline software companies, like Oracle and Microsoft, which are also moving, if timidly, into the SaaS market.

But in the end the company most threatened by ByDesign may be SAP itself. Launching a complex on-demand service requires big investments in both capital and labor, and the economics of supplying software as a service for a company like SAP remain uncertain. The big risk is that ByDesign will begin to cannibalize SAP's traditional and very lucrative software business - without providing similar revenues or profits.

That risk hangs like a cloud over today's ByDesign launch. SAP is bending over backwards to position the new service as appealing to a narrowly defined segment - companies with between 100 and 500 employees and fairly standardized processes. At the same time, though, it is promoting the dramatic cost savings and flexibility gains provided by the SaaS model. "ByDesign," the company says in a marketing document, "combines the benefits of integrated, end-to-end business applications with the low risk and low total cost of ownership of an on-demand solution." James Governor notes that the service is designed to cost customers one-tenth of what a typical SAP installation would go for.

The obvious question that larger companies will be asking, either today or tomorrow, is this: Hey, why can't we get those low costs and low risks, too? And that's the question SAP doesn't yet have an answer for.


This SaS fetish is becoming hilarious.

Are they going to build gigantic server farms out in the midwest near rivers too? Or will they outsource that minor infastructure detail to someone who already has? If I have a problem, do I call my ISP, SAP, or this infastructure vendor? Or do I check if someone accidentally turned off my company router?

SaS is hard too, especially when the internet remains extremely unreliable. I can live when my gmail/gcalendar browns out for a bit (that's how I roll), but my ERP? Blogga, please.

Give this to me as a simple plug-in appliance (no muss, no fuss), and you've got my attention.

BTW nick, I'm glad to see you have time to write, given all the ads you are poring over (recall, you stopped using ad block plus) ;)

Posted by: dubdub [TypeKey Profile Page] at September 20, 2007 02:40 AM


You sound like Ken Olsen dismissing the PC as a rinky-dink machine in 1977.

Posted by: Nick Carr [TypeKey Profile Page] at September 20, 2007 09:33 AM

I wonder at the naivete of the "technology punditry" industry. Every time something new comes along you try to persuade us we should jump up and down and wave our knickers in the air. But since when was new necessarily better?
Ken Olsen was right, PCs at the time were "rinky dink" while a DEC VAX would run an excellent operating system and support many big applications and hundreds of users.
What the PC industry did was shrink a VAX til it would fit in a tower case. And then saddle it with an inept OS that required the PC to use 90% of its resources just to run itself.
As for the SaaS market, it was around in the 1970s when using bureau services brought many companies to their kneees, it was around in the eighties and nineties when running of the in-house computers was outsourced to "facility management" companies. Again this brought many companies to their knees. And now it rears its ugly head again in yet another disguise.

Show me something new that works and I will jump up and down and wave my knickers in the air, but try to tell me that the same old junk idea with a new label slapped on it is somehow a breakthough and I'm going to play the world weary old sceptic.

How can it be anything but an act of gross folly for any business to put something as important as its I.T. in the hands of another business which may well have a conflict of interest?

Posted by: edbuttuk [TypeKey Profile Page] at September 20, 2007 10:48 AM

How can it be anything but an act of gross folly for any business to put something as important as its I.T. in the hands of another business which may well have a conflict of interest?

That's what Henry Ford said about his steel mills.

Posted by: Nick Carr [TypeKey Profile Page] at September 20, 2007 11:27 AM

@Nick -- I agree with edbuttuk. We will have flying cars someday, but they don't do a great job today.

You are omitting the context of Olsen's famous remark, by the way -- see here. In fact, you could argue that, in context, his comment may be more-true than ever!

In any case, you didn't address any of my points about network reliability, and vendor accountability, and quoting Olsen is like quoting that Gates remark about memory.

Our company uses online calendaring, mail, spreadsheets right now (settled on google), so it's not like we're luddites. We can live with the brownouts, but if we couldn't, there's nothing we could do about it. A company as large as google has no customer service, no real recourse. If google can't do it, how can SAP?

My experience so far is the web-based ERPs we have looked at are "snake oil" (quoting Olsen again).
Talk to real companies and see.

Nobody wants a web-based universe more than me, but I deal with this stuff every day, and I can tell you it's not there yet today. And if I pretend it is, I go out of business (or at least put a real hurt on my workflow). Business consultants can move to the next victim.

... unless you want this to be a science fiction blog, in which case almost any statement will be true (flying cars) if you wait long enough -- I just saw your henry ford quote above.

Posted by: dubdub [TypeKey Profile Page] at September 20, 2007 11:51 AM

Nick, you've put your finger on the real issue. The cannibalization problem is the biggest one, harder by far than building multitenancy or getting a service focus. It's also the part of the iceberg that is submerged, and largely invisible outside the organization. We'll hear great things about SaaS initiatives constantly, but we won't know unless they break out enough data, and vendors don't like to do that.

Part of what killed Ken Olsen at DEC was his lack of vision, but it was also horrendous channel conflict. Minicomputers were sold radically differently than PC's.

More on my blog:


Posted by: BobWarfield [TypeKey Profile Page] at September 20, 2007 12:20 PM

Folks, do you really think that this is a sci-fi subject? Some big enterprises already rely so heavy on internet as they do with electricity. Think not only in SaaS, but voip and data communication between buildings from the same company, for example.

Why not to make better ISP contracts and spend a lot less in software and infrastructure?

I know this seems too obvious, Nick. My fingers were trembling.

Posted by: pepicon [TypeKey Profile Page] at September 20, 2007 01:30 PM

'dubdub' and 'edbuttuk' need to re-read their copy of "The Innovator's Dilemma". Today SaaS has some real deficiencies when compared to 'traditional' apps, but these deficiencies are addressable. The net get's more and more reliable every year (I have to wonder about dubdub's provider if outages are that big of a problem for his company). Web-based apps get better and better every year (Ajax, rich clients, etc.) The integration problem . . . well that never goes away, you have the same problem with traditional apps, and there's hope that cross-enterprise SOA will ease some of the pain.

Meanwhile the SaaS model has qualities that the traditional software model will never be able to adopt like zero-installation, better pricing, zero-configuration, better pricing, zero-administration, (you get the point). Once SaaS catches up on reliability, features, etc. there will be very little reason to stick with the traditional model.

Posted by: Gilbert Pilz [TypeKey Profile Page] at September 20, 2007 02:34 PM

@pepicon: 100-250 employees is not "big enterprise"; @gilbert, there's alot of future tense in your post: Tho I'm on pins and needles about the "hope" of "cross-enterprise SOA". Does it have something to do with me opening my wallet? Also, you appear to work for BEA consulting; that's nice.

Again, we're not luddites (we use web-based almost everything). But one-size web-based ERP is snake-oil, for us (I cofounded and run a small manufacturing business). Of course it's cheaper than building out an absurd IT infastructure, but I came to that realization many years ago, and my standards are a higher now. We get it; move on.

Subjectively, my broadband connection isn't much "better" than it was in the early 2000's (except now I can watch low-quality videos, which is nice). Ever wonder why the web 2.0 boom is focusing on advertising, sharing photos, videos, bookmarks and social networks? Because unreliability for these apps is consequence-free. Nobody really cares when twitter is down.

Ironically, it's improvements in local software and hardware (e.g., better browsers, faster computers, cheaper storage) that have allowed all these glorious revolutions everyone is pontificating about, not improvements in network infastructure reliability.

What has improved in the last 7 years is intranet networks -- my office network is amazing compared to what I had back then. This is why I mentioned the appliance model (think google mini, but for ERP). In fact, this is what we use in my business in house -- sorry, nick, we built it ourselves. Everyone who has an office network already deals with this model: at a minimum, you have to plug your broadband router in.

I think the future will be a mix of these two approaches: local appliances serving business critical issues, with a less-reliable "internet cache". No need to build as many server monuments in the middle of nowhere. We aren't betting against the internet; were just using our heads!

And gilbert, I can give you examples where SaS is actually more-expensive for small businesses than simple desktop software (both in actual cost, and workflow complication).

In 50 years, we will all laugh at these comments, but you can say that about anything: I'm sure Julius Caesar had some hilarious ideas about the viability of Gaul as a nation-state.

I'll stop commenting on this thread: I enjoy this blog, and thank you nick for your patience (and apologies for the anonymous posting)!

Posted by: dubdub [TypeKey Profile Page] at September 20, 2007 03:11 PM

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