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Special Report: when two tribes go to war...

22nd Sep 2007
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The contrast between and SAP is stark. SAP is the world's largest business application vendor - Salesforce is tiny by comparison, but growing at 49 percent a year. With SAP entering the Software as a Service sector, they now go head to head...

By Stuart Lauchlan, news and analysis editor

It should have been a potentially titanic clash. On the West Coast of America, – the market leader in Software as a Service (SaaS) was winding up its most successful Dreamforce user conference; on the East Coast, heavyweight newcomer SAP was parking its tanks on the SaaS lawn, stating its intention to create a volume business in a sector in which it has little or no track record.

In the event, the SAP announcement sparked what might best be described as ‘the phoney war’ in SaaS circles and was certainly not the industry-changing event that SAP CEO Henning Kagermann appeared to think it was. "I'm now 25 years in this company, and I can say it's the most important announcement I've made in my career," he declared at the Manhattan launch of Business ByDesign – formerly known as A1S.

Other voices were less overwhelmed. "SAP doesn't understand on-demand and has missed the opportunity,” said Rebecca Wetterman, vice president at Nucleus Research. Elsewhere, Ray Wang, senior analyst for enterprise applications Forrester Research, noted of the new SAP offering: "Key features like easy access to reporting, quick portal construction, and easy integration to Office remain missing."


"SAP doesn't understand on-demand and has missed the opportunity." Rebecca Wetterman, vice president, Nucleus Research

SAP has been slow to the SaaS market. Despite a somewhat revisionist view of what its previous policy was, the firm has never shown more than a grudging enthusiasm for the sector – until it woke up to the fact that to meet its growth target ambitions it needed to crack the mid-market, an area that SAP has singularly failed to conquer to date with its on premises solutions.

SAP aims to grow its total customer base from 39,000 to more than 100,000 by 2010. Much of that growth has to come from small- and mid-sized enterprises (SMEs). SAP estimates there's a potential $15 billion market of small companies looking to automate their business processes for the first time, and its goal is to have 10,000 companies signed up for Business ByDesign by 2010.

But it’s clearly going to be a slow process. SAP executives claim to be working through a pipeline of 20 and 300 customers on an invitation-only basis, and once this is completed, they will look at volume deployments. "At the end of the first quarter next year we want the product to be volume-ready," Kagermann said. "That means is the product stable, scalable, functional, rich enough to meet all requirements of all these customers in the countries? That's the first phase.

"The second is... you now ask yourself: do we open it up to certain industries, to certain markets, or for everybody? It could be that we say in the US and Germany we open it up for certain customers in component manufacturing but we are not opening up for customers in aerospace and defence. In 2008, I want to prove that the business model is to some extent volume-ready."

That's a point of some contention among analysts. "While I like the user interface and broad set of functionality, I wouldn’t sign up to meet SAP’s pledge to add 10,000 SAP Business ByDesign customers by 2010 and another 10,000 annually after that," said Bruce Richardson of AMR Research. "I say that for two reasons. For starters, I’m not convinced a channel exists to reach and begin sales cycles with that many prospects, no matter how clever you are with the web, telesales, and other tools. As NetSuite’s Zach Nelson pointed out in The Wall Street Journal, even with free trials, it takes two months and three to five product demonstrations to close a sale. He was quoted as saying, 'It isn’t easy to figure out how to acquire customers and keep them happy at a low enough cost that you still earn healthy margins.'.

"I also want to know more about channel economics. If I’m a reseller, how do I make money? At this point, there is minimal configuration needed, with the product designed to walk the user through the set up. There is no near-term opportunity for customisation and little support for integration beyond ADP. Sure, a reseller can generate some money from data migration and conversion, but is it enough to build a profitable business? The only solution is to build massive volumes.

"Getting to volume is not guaranteed, and it’s expensive too. High customer acquisition costs have been the bane of SaaS providers, particularly during the early years. Over the last six quarters, has spent between 49.7 percent and 51.1 percent of revenue on sales and marketing."

Similar sentiments were expressed by Ovum where analyst Warren Wilson commented: "The success of Business ByDesign is far from assured. It faces a number of challenges. Some, such as pricing and partner recruitment, are mostly within SAP's control. Others, including its competitors' moves in the on-demand market, clearly are not, and still others - in particular the threat that Business ByDesign will cannibalise SAP's traditional offerings - may prove difficult to manage.

"Two key questions for all software vendors, not just SAP, relate to factors they can merely influence, but not control: how quickly will the SaaS market grow, and how quickly will mid-sized and even large enterprises embrace the new model? After all, the appeal of SaaS (ease of use, lower cost, flexibility) isn't limited to the lower end of the mid-market (companies of 100-500 employees) where Business ByDesign is aimed. SAP must hope that SaaS will be adopted quickly in that market, but less quickly in larger companies, where Business ByDesign could eat into sales of competing products such as All-in-One (for companies up to 2,500 employees) and perhaps even threaten those aimed at large enterprises."

The enterprise question

The contrast between and SAP is stark. SAP is the world's largest business application vendor, with annual revenue of about $13 billion and a massive worldwide developer ecosystem. Salesforce is tiny by comparison, but growing at 49 percent a year, projecting revenue this year of more than $700 million, most of it from on-demand CRM software although it has repositioning as a platform provider to expand beyond that and up into the enterprise through its own third party applications ecosystem.


"Salesforce has a CRM application. It happens to be that the vast majority of businesses on this planet do a little more than just CRM…You don't need CRM from Salesforce any more." Leo Apotheker, deputy CEO, SAP

The ‘enterprise question’ is the area that perhaps divides the two firms strategies the most. SAP – in common with other traditional, big-ticket on premises providers – is concerned that it does not cannibalise its own installed base with its new SaaS offering. SaaS – through its subscription pricing model – is an entirely different business model where customers are not expected to pay millions up front.

So SAP is keen to insist that, despite its Pauline conversion to the cause of SaaS, there’s a time and a place for everything – and as far as SaaS is concerned, that place is nowhere near the enterprise. Kagermann was at pains to insist that Business ByDesign is not for heavy lifting. "It's not a solution for larger enterprises," he said. "It's not a solution for midmarket companies who have high demand, deep demand for vertical solutions."

Over at on the other hand, CEO Marc Benioff wants to talk about the enterprise customers that are signing up for large implementations of his company’s offering, firms such as Merrill Lynch, Dell Computer and Japan Post. So far he’s been relatively coy on commenting directly on the SAP announcement beyond saying that it leaves a lot of questions unanswered. It’s a good strategy – why lend the enemy the oxygen of publicity? Benioff of all people should understand that, as it’s precisely the mistake that he postioned Tom Siebel into making when was first on the up and up.

That said, there were certainly a few bellicose noises that point to the promise of increasing hostilities between the two firms. "It is comparing a little hors d'oeuvre, an appetiser, and a complete three-star meal," SAP deputy CEO Leo Apotheker said in a US interview. "Salesforce has a CRM application. It happens to be that the vast majority of businesses on this planet do a little more than just CRM…You don't need CRM from Salesforce any more. It's superfluous. No wonder Marc Benioff is worried. It is disconcerting. He has every right to be concerned."

For her part,’s EMEA co-President Lindsey Armstrong retorts: “It’s taken them millions of dollars and eight years to where we were at eight years ago! They've been dragged to this kicking and screaming!”

The end of the beginning

Perhaps the most surprising comments of the week came from SAP’s bete noir, Oracle CEO Larry Ellison who was clearly not about to miss out on the chance for a bit of SAP-baiting, but also revealed a controversial attitude to the wider SaaS movement – an attitude particularly surprising given his personal stake in rival NetSuite.


"We'll watch and see how SAP does going after small companies, especially with SaaS, which we think is very interesting, but so far no one has figured out how to make any money at it." Larry Ellison, CEO, Oracle

“What I'd like to highlight is the radically different strategies of the two companies for growth,” he said. “Our strategy for growth is to find a way to add more value to the same customers we already serve, which are the large end of the mid-market and large companies. What we're doing is moving beyond ERP to industry-specific software. We already sell databases to these companies, we sell middleware to these companies. We sell ERP and CRM to these companies, and now we want to sell this industry-specific software.

“It's very different than SAP's strategy which is to go after small companies with Business ByDesign. Now, we see the problem in that because we've looked at going down market. We've looked very closely at it, and we think it's very hard to make money because there is no synergy. To go down market you need a new product and new product development teams. You spend a lot of money developing a whole new product for the low end. But you also need an all new sales force because we don't call on those customers. We don't call on small businesses, and it's very expensive to call on small businesses. It's very expensive to do ERP implementations in small businesses. The cost of sales is high. The cost of implementation is high. There are virtually no synergies in sales, marketing, and product development and support.

“So while we think it's an interesting market - the small market - because it's large, we just haven't figured out a way to make a substantial profit in that market. We think it's hard to make money. Our strategy: add more value, go upstream, sell industry-specific software to our existing customers, and we'll watch and see how SAP does going after small companies, especially with SaaS which we think is very interesting, but so far no one has figured out how to make any money at it.”

Of course, has made money - maybe not the kind of numbers that Oracle reported last week for its first quarter, but it has been making money. Whether SAP can turn its investment in SaaS into a significant revenue generator remains to be seen. Last week's announcement was not the end or even the beginning of the end, but it was at least the end of the beginning. Now the SaaS war can really get underway...

Additional reporting by Chris Middleton.

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