Analysis: Software as a service hits a glitch

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The first quarter results from enterprise software vendor SAP, released last month, confirmed something many industry watchers had expected. The company was delaying the rollout of its Business by Design software, which it was developing for small and mid-sized businesses.

But the news still shocked the wider IT community. Business by Design was not just SAP's newly-crafted offering for small and mid-sized firms. It was also the company's first dedicated venture into the software as a service (SaaS) market. And SaaS was one of the fastest-growing areas of the entire software industry.

Poor initial sales of Business by Design were blamed for an 18 per cent fall in SAP's profits (income), according to the company's US GAAP figures. Operating margins also fell.

"Both the US GAAP and the Non-GAAP operating margins were impacted by accelerated investments of approximately €40 million to build a business around the new SAP Business By Design solution to address new untapped segments in the midmarket as announced by the Company at the beginning of 2007," SAP said in its statement to the US and German stock markets.

The company's guidance went further, predicting that it would take 12 to 18 months longer than expected to build Business by Design into a $1 billion (£500 million), 10,000 customer business. And SAP would be postponing the international roll out of the software. Initially, the software was launched in five markets: the US, Germany, the UK, France and China. Further country roll outs are being delayed until 2009.

"When we launched Business by Design, SAP chief executive Henning Kagermann said we would be learning and that [learning] would be put back into our products and general strategy," said Schalk Viljoen, global director for go-to-market strategies for mid-sized enterprises in an interview with IT PRO. "We started with five countries, and additional countries will hold off until next year. The benefit is that we will be able to devote all our development and support to those countries, rather than spreading resources."

A blow for SAP

The delay was none the less a blow for SAP, which had launched Business by Design with much fanfare in New York last September. The announcement also provided unwelcome publicity for SAP in advance of its Sapphire user events in Orlando and Berlin this month.

None the less, Viljoen remains upbeat about the prospects for the software. "We are getting good traction in the UK," he said. "This is due to a number of factors that customers say is a no brainer: adopting new software can be a catalyst for change, and companies' strategies have been constrained by their [existing] systems. And if they bought software five or 10 years ago they will have to upgrade anyway."

The problem for SAP - and for other enterprise software vendors looking for a share of SaaS revenues - is that there are few guarantees that businesses will turn to the established players for on-demand applications. Part of the attractiveness of software as a service, after all, is that it opens up the door for IT directors to buy in applications from new vendors, often offering specialist functional or industry expertise.

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