SAP and SaaS

There has been a lot of chatter about SAP’s moves in the SaaS world, so I thought I’d chime in with my €0.02. I’ll leave off most attributions/references below, as you can google the citations yourself with Bing. :) Nothing below is based on any insider or proprietary knowledge I may have or have had in the past (after working for SAP from 2001 to 2007).

  1. SAP does not have a strong history in SaaS, and it does not have a great track record with its flagship effort there (Business By Design, or BbD). Nonetheless, SAP has some experience with SaaS via acquisitions of products/companies like Coghead and Frictionless Commerce.
  2. Traditionally, SAP has held that SaaS was for small enterprises (“small” is what SAP calls anything below €500M per year in revenue or budget), and that large enterprises would not stand for off-premise software due to its difficulties in customization, integration, and security.
  3. SAP has also held that SaaS and hosted are pretty much the same, and SAP has claimed that multi-tenancy is a red herring. Hard to believe, but SAP invented a convoluted architectural distinction called “mega-tenancy,” which was basically single tenant in nature. Opponents argued that multi-tenancy was the only way to scale SaaS, at least in a way that was economically viable. Currently, SAP contends that BbD is ready to ship except that it is not yet profitable enough (aka not yet economically viable); SAP has yet to reveal publicly whether it still holds that multi-tenancy is not needed for SaaS viability. Incidentally, SAP’s on-premise architecture is not multi-tenant (for most SAP products). It is no easy task to take a huge product and rearchitect it from single- to multi-tenancy.
  4. For a long time, SAP called BbD the “business process platform,” indicating that it was a good environment for building and deploying new processes not included in SAP’s software. SAP also had a “technology platform” in NetWeaver (NW). John Wookey’s new effort has been publicly stated as being based on the Frictionless Commerce code, not on BbD (but I believe Frictionless is based on NW), so SAP has chosen a different “business process platform” from the one the company has put so much effort and investment into. What does that say about BbD? Incidentally, Frictionless: multi-tenant.
  5. Lest it seem I am all “gloom and doom” about SAP and SaaS, let me dispel that perception. John Wookey’s strategy is quite brilliant. SAP’s detractors claim that SAP cannot afford to move to the subscription pricing business model frequently associated with SaaS. Nothing could be further from the truth. Today, SAP’s revenues are primarily NOT from software licenses. In fact, it is common for customers to get large discounts (say 80%) off license, followed by approximately 20% per year (based on list price) annual maintenance beginning in the second year of the agreement. This is equivalent to a 20% per year (every year, including the first) pricing for the customer, which is more or less a subscription model. With an enterprise license, it is not possible to recognize all the revenue up front if the customer pays SAP for any implementation services (not sure if SAP is not involved in the implementation, and not sure of the percentage of implementations in which SAP is involved), so SAP ends up recognizing over more than a one year period in many cases already. With SaaS, there would be no appreciable change in revenue recognition for SAP. However, for customers, there would be the potential of a much lower up front cost (less customization, less hardware and non-SAP software licenses), with much higher ROI, so presumably customers would adopt more software faster with SaaS than with only an on-premise option. And SAP is targeting large enterprise SaaS at “edge” applications, many of which customers were not buying from SAP in any case, so this gives the potential for additional revenue for SAP. Especially since customers are not buying SAP’s on-premise software in droves anymore (down 40% year over year last quarter, I believe).

Just some Monday morning thoughts. Anything I missed, got wrong, totally blew? Let me know … thanks!

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