SAP Embraces Software on Demand

On September 19, 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. In this analyst's opinion, 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 available only 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. At the announcement event, the company said that it has garnered commitments from 20 partners to sell its 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.

While any product from SAP stands a good chance of becoming a leader in its category, I believe that Business ByDesign will have to overcome several issues before it can win its laurels. At the moment, BBD lacks many of the functions it will gain from "enhancement packs" that SAP plans for it over the next couple of years. Until those enhancements ship, many companies will adopt a "wait and see" attitude toward the product. Even after those enhancements are in place, BBD will lack support for many vertical industry business processes that competitive alternatives are offering. In addition, BBD's target market overlaps with the lower end of the market for SAP Business All-in-One. That overlap could lead to customer confusion, not to mention channel conflict between SAP and its partners.

Though SAP Business ByDesign faces these and other issues, that does not make the product a non-starter. What it could make it, however, is a slow starter. To read more of what I think about BBD, check out my recent posting about the product at the JD Edwards Advisor, a Web site that I manage for Andrews Consulting Group.

Oracle Books a Blowout Quarter

One day after SAP's coming out party for BBD, Oracle announced financial results for its first fiscal quarter. In what has become something of a tradition, the vendor pointed out that its financial figures once again beat those of SAP. For the first quarter of its fiscal year 2008, the company announced that its net income grew by 25 percent to $840 million. In similar fashion, revenues grew by a strong 26 percent to $4.5 billion. By contrast, SAP grew its net income by 8 percent and revenues by 10 percent in its most recent quarterly report.

One area where Oracle was a big outperformer was in sales of new software licenses. For the quarter, the vendor grew new license revenues by 35 percent to $1.1 billion. By contrast, SAP reported 18 percent license revenue growth in its latest quarter. That said, it should be noted that a sizable chunk of Oracle's growth came from vendors it acquired over the course of the last several months. Sales from these vendors—which include Agile, Hyperion, MetaSolv, and Stellent—did not contribute to Oracle's new license revenue one year ago. By themselves, Agile and Hyperion added $87 million in sales to Oracle's coffers during the last quarter. Those sales made up roughly 10 points of Oracle's 35 percent new license revenue growth. This illustrates how much of Oracle's growth versus SAP's is being fueled by acquisitions.

While Oracle may be obsessed with overtaking SAP as the world's number one application vendor, it has no immediate plans to field a competitor to Business ByDesign. During the conference call with financial analysts, Oracle CEO Larry Ellison noted the high costs of developing such a product and the low margins that would be realized from it. He then stated, "We'll 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, it looks like Oracle will let SAP slug it out with the "pure play" SaaS vendors before it decides whether it makes sense to throw its hat into the ring. If SAP Business ByDesign does turn out to be a smashing success, however, all bets are off. Actually, I take that back. If BDD starts stealing prospects from Oracle, my bet is that it buys an SaaS firm. Anyone care to put money on it being NetSuite?

Lee Kroon is a Senior Industry Analyst for Andrews Consulting Group, a firm that helps mid-sized companies manage business transformation through technology.