SAP CEO Predicts SaaS 'Disillusionment'SAP CEO Predicts SaaS 'Disillusionment'

Conventional wisdom is that the tough economy makes this a good time to subscribe to software as a service as a way of avoiding capital investment in on-premises software. But Bill McDermott, president and CEO of global field operations for SAP, argues that strategy could backfire, and in some cases already has, for companies that take it too far.In a nearly two-hour interview yesterday, McDermott talked about a wide range of issues, including the economy, SAP's Business Objects acquisition, software licensing and maintenance fees, archrival Oracle, and those pesky SaaS vendors that are nipping at SAP's customer base.

McDermott contends that now more than ever companies need a full-featured, integrated applications platform for running global business operations -- mySAP, for example -- not half-baked applications from unproven SaaS upstarts. He points to SAP's 36 years of experience developing a "stable core" of enterprise software and a service-oriented architecture that makes it easy to add on third-party and custom applications. "It will take another 36 years for software-as-a-service vendors to do the same thing in the cloud," he says.

McDermott, of course, has good reason to go on the offensive. He's looking to protect SAP's lucrative enterprise software business, and SAP's own early attempts to break into the SaaS market have been faltering. SAP will try again with a new-and-improved version of its SaaS offering for midsized companies, Business ByDesign, to be introduced at the company's Sapphire conference in May.

Meantime, McDermott says SAP is positioned to gain share in the business applications market as IT departments scrutinize every dollar spent, while predicting that SaaS vendors will have a tough time living up to the high expectations that customers will place on them. SaaS implementations, he says, are "harder, more expensive, and riskier" than businesses anticipated, and he predicts a backlash as "disillusionment sets in."

In particular, SaaS offerings don't measure up in weaving together the complex business processes that cut across a company -- supply chains, billing and financials, order management, "prospect to cash" procedures, and other workflows that have to be managed and analyzed in real time. "You're now seeing software-as-a-service pure plays being driven into complex conversations that they're lousy at," he says.

McDermott isn't down on SaaS completely. He preaches a software-plus-services model similar to what Microsoft advocates (not surprising, given that both companies are deeply entrenched in on-premises software), and he says SAP and its partners will deliver software services that work in conjunction with its on ERP software. What's more, SAP has its own SaaS offerings: CRM On-Demand and Business ByDesign.

Nevertheless, it will be interesting to see if McDermott's words of warning ring true as more companies subscribe to SaaS applications in the months ahead. Will SaaS be the fast, cheap, and easy solution they seek? Or a limited alternative to enterprise software with problems of its own?