SAP Gets On-Demand Religion

At last, Europe's biggest software maker is making a tentative -- too tentative? -- push into the on-demand CRM market occupied by rivals

Marc Benioff, the boisterous boss of (CRM), has been heralding the end of software as we know it ever since he co-founded the San Francisco software outfit seven years ago. Sooner or later, he predicts, most businesses will hand off the task of managing their own server computers and software applications to companies like his that deliver software on demand over the Internet.'s rapid growth has made it a Wall Street darling, but so far, the big industrywide shift Benioff predicts has been slow in coming.

That may be changing. And the signal comes from a surprising source -- the leader in sales of traditional corporate applications, SAP (SAP). On Feb. 2, the German software giant announced its first on-demand offering, a service that manages sales, service, and marketing for large and midsize businesses. Like, SAP's customer-relationship management (CRM) service will be sold as a subscription. SAP's prices start at $75 per month per user, compared with's $65 per user.


  SAP calls the new application a "hybrid." It's designed to work as a service or on a customer's own computers. "This is not the end of software," says Shai Agassi, president of SAP's product and technology group. "It's just another way of deploying it."

Analysts praise SAP's strategy as a pragmatic way of dealing with a looming challenge to its primary way of doing business. While market researcher IDC estimates that on-demand sales made up only about 6% of the roughly $9 billion CRM market last year, it says that percentage could rise to as much as 25% in five years. "It's a new day for software," says Mary Wardley, CRM analyst at IDC, who had been briefed by SAP. "Now, this ceases to be a limitation for SAP."

SAP's message was carefully scripted. While this product introduction endorses the on-demand approach, it does so tepidly. SAP says it believes most large corporations that buy CRM as a service will use it only temporarily and eventually move the applications on-premises. "Most customers are hitting a wall in terms of flexibility and the ability to integrate with other programs," says Peter Graf, SAP's executive vice-president for solution marketing.


  By approaching the market in this carefully calibrated way, SAP gets to have the on-demand option, but without giving it a big boost. "They're positioning on-demand as a niche offer," says analyst Jason Maynard of Credit Suisse First Boston. "That's smart. If I was SAP, the last thing I'd do is validate on-demand as the biggest trend in the software industry. They'd be crazy to do that."

Will the new service be a winner in the marketplace? Analysts warn that the tentative tenor of SAP's marketing could dampen its sales prospects. But SAP says it expects a lot of corporations that already own its traditional software for accounting, manufacturing planning, and supply-chain management will switch to the CRM on-demand offering. One of them, DuPont (DD), says it will stick with for now in the departments where it's in use, but will also buy SAP CRM on-demand for other departments.

In the future, it plans on standardizing on one CRM application -- but hasn't decided which. Mike Michlovich, director of marketing and sales in the DuPont info-tech department, says the company wants an enterprisewide system that integrates well with customer and order data kept in its back-end SAP software packages. That would seem to indicate SAP has the upper hand.


  If Benioff is worried, he doesn't act it. "This is very much a defensive move by SAP," he says. "We're penetrating their customer base. Customers realize they're not getting what they need from SAP." now has 18,700 customers with 351,000 individual users, and it's not just for small businesses and small corporate departments, either. More than 50 of its customers have at least 600 users, and a handful have thousands of users.

Benioff acknowledges that is vulnerable in companies that already own a lot of SAP software. Those include DeutscheBank, DeutschePost, and Vodafone (VOD). But he predicts, "Even if we lose out initially because of customer politics, we'll eventually win. The SAP stuff won't be deployed and they'll come back to us."

One customer that also owns a lot of SAP software says it will continue to subscribe to Benioff's service. Fred Rosenzweig, president of Electronics for Imaging (EFII), says his technical people have examined the SAP CRM on-demand offering and decided they were better off sticking with what they have. "There's different DNA for a traditional software company and on-demand software company," Rosenzweig says. " has a very nice easy-to-use interface. They're good at listening to their customers."


  While SAP's battle with is lively, its most ferocious competition is with Oracle (ORCL), the No. 2 corporate applications company. With the completion of its $5.58 billion takeover of Siebel Systems on Feb. 1, Oracle overtook SAP to become the leading traditional CRM software supplier.

Oracle already has both traditional and on-demand CRM products, as does Siebel. Now, with the combination, it expects to make headway against SAP in both spheres. That's partly because the uncertainty about Siebel's future has been resolved and customers are feeling more comfortable about buying its software again. Juergen Rottler, executive vice-president of Oracle On Demand, says Oracle will be much more aggressive about pushing on-demand services than SAP. "We believe that on-demand is the future of our business," he says.

When SAP peers into the crystal ball, the future is a bit cloudy. "I don't know what happens 5 or 10 years down the road," says Agassi. But by hedging its bets, SAP is looking sharper now than it was when it had only traditional software to sell.

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE