SmoothSpan Blog

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

SAP’s ByDesign SaaS Woes are Operational Costs

Posted by Bob Warfield on May 2, 2008

Interesting post just in from Joshua Greenbaum.  The world has been speculating on why SAP recently cut the budget for the Business By Design SaaS Product and delayed revenue targets for a year.  The answer, at least according to SaaS execs Hans-Peter Klaey and Jeff Stiles, is operational costs.

This is a classic because the inability to operate it cost effectively is a classical issue with those who stray from true multitenancy which SAP has.  It can be done, but you really need to think about how it’s going to work.

Shame on SAP for not thinking that far ahead.  It’s pretty basic to the SaaS equation.   Still, the ratios of Cost of Services are all over the map for SaaS companies.  If we look at Salesforce, NetSuite, Concur, Teleo, RightNow, and SuccessFactors, their numbers run in that order from 22%  (Salesforce delivers their service at the lowest cost) to 41% (SuccessFactors is the most expensive).

I’ve written about this in the past.  Given the typical $4 of annual IT cost per $1 of license on the perpetual model, SaaS companies need to gear up to operate their software 16X more efficiently than in-house IT.  Two observations:

–  That’s very hard to do.  Companies that keep telling themselves they’ll make it up in scale are kidding themselves.

–  It’s a big part of why companies buy SaaS.  IT simply can’t compete with a 16:1 cost advantage so most companies can save substantially with a switch to SaaS.

There are a lot of technological challenges to SaaS.  You won’t deliver a 16:1 advantage without building some real technology to automate the operations component of the software.  It simply can’t be done off the shelf.  It shows SAP is overly self-absorbed and not paying attention to what those ahead of them learned a long time ago.

This is just one more example of why it’s so hard for a big perpetual license behemoth like SAP to successfully sail into the shallow draft waters of the new SaaS world.  As Phil Wainewright points out, more nimble Native-SaaS competitors are well positioned to take advantage of SAP’s stumble.

5 Responses to “SAP’s ByDesign SaaS Woes are Operational Costs”

  1. jurquhart said

    The best part of this is that SAP had an option before Shai Agassi got canned that would have actually competed VERY well from an operational costs perspective. Functionally, it wasn’t perfect, but that team designed and negotiated extensively to keep operational costs down. The technology was deployed in a alpha pilot phase, and was about quarter away from being announced when it got killed.

    The winning approach, on the other hand, was known to be focused on functionality, with very little consideration given to operations, so the result here is not surprising.

    SAP has about 12 months to come up with something better. If they fail to do so, they will stagnate, keeping the customers they have for a little while, but rarely gaining new SMB customers in volume without spending significantly for each sale.

  2. “This is just one more example of why it’s so hard for a big perpetual license behemoth like SAP to successfully sail into the shallow draft waters of the new SaaS world. As Phil Wainewright points out, more nimble Native-SaaS competitors are well positioned to take advantage of SAP’s stumble.”

    Doesn’t bode well for Microsoft either

  3. […] of even trying to sally forth and compete from a conventional software fortress.  Those delays that we hear about for SAP’s Business By Design are no accident.  If you’re into predictions, how about […]

  4. […] –  SAP’s Business By Design will deliver a level of integration to the mid-market they’ve never seen before.  But it has taken 25 years to get there.  (And my own parenthetical note is that it still isn’t delivered)   […]

  5. lincolny said

    I work for http://hubwoo.com/, an SAP BPO partner that offers SaaS subscriptions for SAP SRM and E-Sourcing. We’ve had pretty good success with setting up our environments. For example, we have a single, multi-tenant instance of SAP SRM (our brand name for this is Hubwoo eBuy) handling over 40 enterprise buying companies with 3,000 concurrent users. And, these are huge companies. As noted above, it can be done.

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