SAP has unveiled a new strategy of selling additional functionality to users of its enterprise-class Business Suite ERP software as on-demand web services.
The applications maker hopes that these services will help it get around an awkward conundrum currently facing traditional software vendors with large installed bases.
The recession has intensified the appetite for software-as-a-service offerings among businesses of all sizes, as SaaS deployments typically require less (although some) capital expenditure.
But making the switch from a traditional vendor to a SaaS provider is no mean feat. Perhaps even greater than the challenge of building a viable SaaS infrastructure is that of moving from a high-margin, licence-based business model to a low-margin subscription business.
Using services to provide new functionality but keeping the heavyweight core of the ERP package on site offers SAP a compromise. A similar approach has been described as ‘software plus services’ by Microsoft, another company with a lot to lose in the SaaS revolution.
There are arguably benefits of this approach for the user, such as the ability to work offline and the fact that it retains possession of the data.
SAP will host the services itself. Unlike the infrastructure that supports its mid-market software-as-a-service ERP offering, Business ByDesign, the architecture supporting these add-ons will be multi-tenant, meaning that it will be one giant system with many partitioned users, rather than separate systems for each customer.
As proven by SaaS pioneer Salesforce.com’s ability to succeed where application service providers (ASP) before it failed, multi-tenancy is key to making SaaS a viable business, as it allows the provider to benefit from economies of scale. However, that company’s profit margins are minuscule compared to what companies such as Microsoft and SAP are used to.
All eyes are now on Oracle. It has made limited use of SaaS to date, but its recent acquisition of Sun Microsystems – which brings with it both a hardware business and a cloud computing practice in development – may change the economics of SaaS for the computing giant.