SAP has caught on to this Internet thing a lot faster than the other large traditional software companies it competes with in the business applications space. While it's unlikely to sell software services outside its current installed base for the next couple of years, it's probably going to suffer fewer defection to the likes of Salesforce.com and SuccessFactors (the Siemens defection notwithstanding) than rivals Oracle and Microsoft.
Like Oracle and Microsoft, SAP sells huge software suites used by companies to manage their businesses. Its revenue model is built on multimillion dollar deals and an ongoing stream of hefty maintenance fees, mostly from Fortune 1000 companies, but that business model has come under attack from more nimble vendors selling software as a service (SaaS) over the Internet.
SAP is determined to hold onto its large enterprise customers by offering them on-demand software that complements their existing on-premise SAP implementations. That's something Salesforce.com can't promise, even though such links could be achieved with custom integration work.
It is also developing software intended to make reports delivered to mobile devices like smartphones more legible and useful, and intends to iterate new features as well as new applications at a much faster pace than its on-premise software division. The company still isn't set up to compete for new customers with these services, but hopes that at the very least, they will serve as a firewal against incursions by rivals like Salesforce.com and SuccessFactors.
Indeed, Shailesh Rao, the senior vice president of SAP's large enterprise on-demand software division, admitted that "there's a lot of interest in [software as a service] among our installed base, and a growing comfort." That's an amazing admission for a company that once viewed SaaS as fit only for smaller customers that couldn't afford the bells and whistles of a traditional SAP implementation. But then again, SAP has put its SaaS business in the hands of executives who actually see the value in delivering software as service -- Rao is a former Siebel and Salesforce.com executive, and his boss is former Oracle SaaS guru John Wookey.
Rao told me SAP is relying heavily on the principles of so-called agile development processes, a kind of Six Sigma for developers that espouses collaboration and frequent testing during the development process, leading to fewer errors and bugs. "It's, frankly, a significant change in the way we develop applications," Rao admitted. But the end result should result in quicker development cycles and better software for customers.
SAP is also looking at the importance of mobility in the current business environment, which is why it acquired SkyData last month. Customers are increasingly reliant on smartphones, a device size that makes viewing data in spreadsheets and reports challenging to say the least. SAP is rethinking how it presents data for those devices. According to Rao, SkyData technology provides a "very unique way of aggregating data regardless of what form it's in," and said that SAP will integrate use that technology to change how it delivers software to smartphones.
Rao told me that the on-demand division is run like "a little start-up within SAP." The "little start-up" nonetheless has the benefit of a huge installed base to which it can sell, and that's the plan, at least for the next few years.
Rao admitted that SAP still hasn't gotten its arms around a compensation structure for its on-demand salesforce. If it creates a separate salesforce for its on-demand business, it loses the benefit of long-term relationships between salespeople and customers; on the other hand, veteran salespeople are are accustomed to hefty commissions that the on-demand software model can't support. Rao said SAP will address this in part by introducing the service to customers via the Web, but it nonetheless remains that someone will have to close the deals, particularly if SAP is going to be able to take advantage of those pre-existing relationships. Rao assured me that SAP will figure this out by the time it's ready to go to market early in 2010.
I'll be interested to see what that structure will look like, but I'm convinced that SAP is at long last on the right SaaS track.