German software giant SAP is today introducing an on-demand version of its customer relationship management (CRM) software. It looks, though, like SAP’s intent is not to praise the software-as-a-service (SaaS) model but to bury it. Business Week’s Steve Hamm notes that “while this product introduction endorses the on-demand approach, it does so tepidly. SAP says it believes most large corporations that buy CRM as a service will use it only temporarily and eventually move the applications on-premises. ‘Most customers are hitting a wall in terms of flexibility and the ability to integrate with other programs,’ says Peter Graf, SAP’s executive vice-president for solution marketing.”

It’s amusing that a SAP marketer would promote the company’s traditional elephantine applications as offering more “flexibility” than simpler on-demand alternatives, but you’ve got to admire the guy’s chutzpah. He’s on firmer ground, though, in raising the integration issue, which is something SaaS providers have yet to fully address.

SAP’s desire to hedge its bets makes commercial sense. It knows that SaaS is a disruptive technology for enterprise software companies – it threatens their pricing and profit models. At the same time, it’s seeing SaaS pioneers like Salesforce.com chip away at its franchise. By trying to recast SaaS as a small-time offshoot of the traditional on-premise model, SAP is hoping not to build a big on-demand business but rather to protect its traditional business. It’s allowing customers to take a ride on the SaaS pony without leaving the SAP ranch. As Wall Street analyst Jason Maynard says in the Business Week report, “They’re positioning on-demand as a niche offer. That’s smart. If I was SAP, the last thing I’d do is validate on-demand as the biggest trend in the software industry. They’d be crazy to do that.”

The strategy may work, particularly in the short term, but there’s a big risk. SAP is going out of its way to call its on-demand offering a “hybrid” rather than a “pure-play” SaaS offering. In its press release, it coins a new piece of jargon, “isolated tenancy,” to differentiate its service from the “multi-tenancy” computing architectures used by companies like Salesforce. But such careful distinctions may be lost on the market. SAP’s announcement may end up being interpreted simply as an endorsement of the SaaS model. Indeed, Steve Hamm opens his article by calling the SAP service a “signal” that the “big industry shift” promised by Salesforce CEO Marc Benioff has begun.

SAP has called on IDC analyst Mary Wardley to assist in the unveiling of its new offering. But when Wardley says to Business Week, “It’s a new day for software,” she may be giving voice to SAP’s greatest fear.