Rather than hosting an entire SAP application, such as SAP ERP Human Capital Management, off-site, SAP will offer Internet-based enterprise applications by subscription. Wookey said these applications will be aimed at solving specific business issues.

SAP’s on-demand applications would connect directly to a customer’s SAP ERP system in order to share data and processes with the full range of a company’s on-site SAP landscape. The strategy is based on a “single solution architecture,” in which multiple SAP and partner on-demand offerings can be managed from a single Web-based entry point (Figure 1).

Figure 1

How the pieces fit together

Wookey also emphasized SAP’s commitment to SaaS applications, calling them “the next stage in the evolution of application development,” and promised to release several function-specific applications over the next few years in areas such as s trategic sourcing, contract life cycle management, and expense management.

SAP already features a handful of on-demand offerings for enterprise customers. The SAP Customer Relationship Management (SAP CRM) on-demand solution has been on the market for more than a year, and SAP recently acquired Clear Standards, a carbon management software company that provides on-demand solutions for cap and trade and other sustainability solutions.

Additionally, the SAP BusinessObjects portfolio includes SAP BusinessObjects BI OnDemand, the SAP BusinessObjects Information OnDemand portal, and hosted reporting capabilities from crystalreports.com.

What the Experts Say

Wookey’s keynote generated a storm of interest reflected in coverage of the topic in the IT media and SAP professionals on Twitter, blogs, and other social media sites. While some criticized SAP for being late to the SaaS game (SalesForce.com has already built a network of 52,000 CRM on-demand customers), some experts say the SAP strategy makes perfect sense.

“SAP is doing this in a very smart way,” says Josh Greenbaum, founder of Enterprise Applications Consulting. “SAP can have the greatest impact by leapfrogging the industry’s first forays into on-demand, which are focused on cost reduction. That’s what SalesForce.com does. SAP could do that, but then they start toiling in a low-margin commodity.”

SAP benefits from this approach, Greenbaum says, because it enables SAP to build on growing trust of on-demand applications to create superior applications using the full reach of its partner network and technology expertise. SAP has an opportunity to use the intrinsic capabilities of SaaS to deliver more innovative solutions ? not just save customers money on their hardware or software costs.

“The model you want to look at is the old online marketplace model of the dotcom era. In a cloud environment, you can aggregate supply and demand and leverage scale by putting most of your commerce in that environment and knocking out huge costs using the efficiency of the Web. SAP can apply that concept to the B2B world and do it on demand and add value rather than just reduce cost,” says Greenbaum.

Bruce Richardson, chief research officer at AMR, says SAP likely resisted moving into the SaaS space because of the difficulty of earning a profit from on-demand applications. The licensing costs are not enough to cover the cost of marketing and implementing an enterprise SaaS application quickly, and many customers are still wary of connecting sensitive data to the Internet. However, he says, the global economic slowdown has many companies looking for a new answer.

“Given the depth of this recession, people are looking to cut IT costs wherever they can ? and SaaS is a good solution for that,” says Richardson.

If SAP believes SaaS is an increasingly viable option for enterprise applications, as Wookey says, the company will almost certainly benefit in the long term, according to Richardson. That’s because SaaS applications have proven effective at entrenching themselves in a company’s overall infrastructure as deeply as any on-site application.

“You hear individual stories of customers ripping out a SaaS vendor and replacing it with another one, but not many,” says Richardson. “A lot of the SalesForce.com implementations got started because a rogue department bought five licenses that they expensed on a credit card, and then it started to grow from there.”

One of the largest obstacles to SAP’s SaaS strategy may be its perception as a provider only of large, enterprise-wide implementations. The most successful SaaS vendors at present are smaller companies like Ariba and Concur that offer niche software solutions hosted off-site, says Richardson.

“The mindset of most people is that SAP is a provider of software for large enterprises. A lot of companies don’t perceive SAP as the right company to provide on-demand solutions,” says Chrisian Matz, managing director of ecenta America.

What’s Next

SAP has already announced plans to add an expense management solution to its on-demand portfolio by the middle of 2010, and says it plans to release new on-demand applications regularly throughout the coming years.

Greenbaum says supply chain applications are a likely candidate for expansion in the SaaS portfolio, because of the nature and requirements of companies that rely on supply chain software.

“Supply chain is a perfect area for SaaS, and there are several companies already doing it in the cloud,” he says. “Companies in the same industry have similar business processes and requirements. They deal with a finite and well-known pool of suppliers and even buyers. Putting visibility in the cloud would make it very easy to see the top 10 contract manufacturers, the top suppliers, and the top retailers. Now they can use the efficiencies of SaaS to integrate their purchase orders and other transactions, and make that integration simple.”

SAP partners may be able to capitalize on SAP’s SaaS strategy, which relies heavily on integration with existing technologies. This may open the door for increased collaboration between SAP and niche vendors as SAP creates more solutions aimed at specific functions.

“Once you start aggregating business relationships, you now have a single marketplace where you can bring in other vendors and partners and offer more services. It becomes its own mini-economy. If SAP is the owner or developer of it, they can benefit and customers can benefit,” says Greenbaum.

Specific industry solutions may be another logical step, according to Richardson.

“I think it’s possible that SAP would provide a platform and allow people to create their own SaaS application for life sciences or high tech or another vertical, and work out some sort of revenue relationship,” he says.

SaaS applications are often sold as a cost-saving option. And while that is true in many cases ? the cost of buying and maintaining new servers to support a new application, for example ? experts warn against planning on huge savings right away. The cost of cleaning, uploading, and maintaining data in the cloud is often no different than the same processes in an on-site environment.

“The fundamental physics of software still apply. You still have to implement it and maintain the data,” says Richardson.

SaaS applications may also require the same kinds of customization as on-site applications, says Matz. As a consultant, he says customers end up spending the bulk of their money not on a license to a SaaS application, but on the adjustments needed to fit that solution to the company’s needs.

“This doesn’t go away with a hosted solution,” he says.

Still, Greenbaum says the next generation of SaaS applications may offer enough innovation and functionality to make them worth the effort. He urges SAP customers to keep a close eye on new releases from SAP and to be creative when assessing their potential value to the business.

“It’s a good time for companies to start thinking a little out of the SaaS 1.0 box, in terms of what they need and expect from their vendors,” he says.

Davin Wilfrid

Davin Wilfrid was a writer and editor for SAPinsider and SAP Experts. He contributed case studies and research projects aimed at helping the SAP ecosystem get the most out of their existing technology investments.

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