SmoothSpan Blog

For Executives, Entrepreneurs, and other Digerati who need to know about SaaS and Web 2.0.

SAP Admits that SaaS is Cheaper for You Too

Posted by Bob Warfield on November 10, 2008

By now you’ve probably heard that SAP is delaying their SaaS offering (called Business By Design) for 12 to 18 months.  It’s a heck of a time to announce be talking about such a thing right in the teeth of Dreamforce.  As Vinnie Mirchandani reports, both Marc Benioff and Netsuite’s Zach Nelson wasted no time in suggesting SAP’s could fix their problems most expeditiously by moving onto Salesforce or (respectively) Netsuite’s platform instead.  Dennis Howlett speaks favorably of the product, but questions SAP’s executive commitment to the whole thing.  The selling has apparently been a bit understated, to say the least.  And, Phil Wainewright notes that by first putting the stamp of approval on the SaaS model and then delaying SAP is only helping SaaS competitors to take share.

This was really not unexpected news.  SaaS is a disruptive business model that’s hard for any On-premises software vendor to embrace.  it is especially tough in hard times.  The reason is that it forces the software vendor to push out revenues and bring in costs.  That’s a nasty combination even in the best of times.  However, if the vendor can stomach a couple of years of really terrible performance, it can emerge at the other end transformed into a much healthier business.

But here is the real irony of the SAP announcement, and it’s a doozy that benefits the SaaS world even more if the news gets out very widely.  It seems that Joshua Greenbaum spoke to the two men at SAP responsible for bringing BBD to market.  They would be Hans-Peter Klaey and Jeff Stiles.  What these two gentlemen had to say boggles my mind that they would admit it publicly, but it does not surprise me.  Essentially they’ve said that the existing release of BBD, which is in use by about 150 customers, cannot be scaled up to handle thousands of customers in a cost-effective way.  The italics are all mine, and let’s examine them carefully.

Can’t scale up to handle customers in a cost-effective way.  What do you suppose are the chances that it isn’t scalability that is the issue, but cost?  What are the chances that BBD is not cost effective for even the 150 odd trial customers who are using it?  Or put another way, it is cost effective for the customers at the price SAP is offering, but costs SAP so much to run that they can’t make a profit. 

Think about that for a minute.  SAP can’t sell it’s software at competitive SaaS prices and make money.  Now let’s turn the math around the other way.  What are the chances you can run SAP in your own data center as cheaply and efficiently as SAP can run it in their data center?  After all, they wrote the software.  Do you see where I’m going with this?  SAP has essentially proven SaaS is cheaper than On-premises software for the customer.  They’ve done so by taking their own On-premise software and incompletely moving it in the direction of SaaS and then stumbling because they can’t even run it cheaply enough to be competitive.

Just to underscore how much cheaper SaaS can be, Zoli Erdos reports that NetSuite is offering a program called Business ByNetsuite (cute name, BTW) that offers their SaaS ERP solution for 50% off what customers would pay SAP just for maintenance.  If they can make money at that price point and SAP can’t make money at full SaaS pricing that’s telling you something right there.

This at a time when customers are screaming as On-premises vendors including SAP are raising maintenance fees.  I am not about to say SaaS is recession proof here, but in this economy, why wouldn’t you want to get the cost savings that SaaS so clearly offers?

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Meanwhile, SAP is bringing John Wookey in to be the EVP of On-demand for Large Enterprise, but he’ll have nothing to do with BBD.  It never ceases to amaze me how much confusion large organizations are willing to deal with both externally and internally.

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9 Responses to “SAP Admits that SaaS is Cheaper for You Too”

  1. botchagalupe said

    Excellent post…

    John
    johnmwillis.com

  2. CloudAve said

    NetSuite Goes After SAP – But Where is Business ByDesign?…

  3. [...] SAP and the BBD SaaS [...]

  4. [...] is amongst those reopening the self-inflicted wounds of European software behemoth SAP AG with his latest post on the SmoothSpan blog this week. The central question, though, isn’t whether they messed up; [...]

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  6. [...] SAP Admits that SaaS is Cheaper for You Too [...]

  7. [...] all answers lead to questions about its ability to understand the saas/on-demand market. Last year, Bob Warfield opened the can of worms by asking: SAP can’t sell it’s software at competitive SaaS prices and make money.  Now let’s turn the [...]

  8. [...] Comments Irregular Enterprise… on SAP Admits that SaaS is Cheape…marcospolanco on Why Do So Many Big Companies S…bunreasonable on Provocation is Pragmatic, [...]

  9. [...] on-premises software because the expenses are front loaded and the costs are back loaded.  SAP learned this the hard way with its Business By Design product, for example.  If you run the numbers, there is a high degree [...]

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