SAP Readies Software-As-A-Service Offering In 2008SAP Readies Software-As-A-Service Offering In 2008

In January, Hans-Peter Klaey was pulled from his job as president of SAP's Asia-Pacific region and tapped to head a new business unit focused specifically on selling to small and midsize businesses. Why did SAP pick him for job? "I'm Swiss, so I'm neutral," he jokes.

Yet it's an apropos statement, considering SAP will try to walk a fine line between launching a new offering that lets small and midsize businesses save money by subscribing to software as a service, without cannibalizing the growth potential of its traditional software licenses to those same types of businesses.

SAP knows it has to do something to grow that market segment. SAP -- just like Oracle and other companies selling enterprise software to big businesses -- is looking to counter slowing growth among its traditional customer base. Almost all large companies already have technology infrastructures in place to automate their businesses, including ERP software, so the opportunities for big wins there are dwindling.

The pressure is on Klaey, who was named president of the unit, called SME (small and midsize enterprises). Since January, the unit has been running with its own profit and loss center, so SAP can track its performance like a business.

Currently, small and midsize businesses spend about $1 billion a year on SAP software licenses, which makes up about 30% of SAP's total licensing revenue. Klaey's directive is to increase that to 40% of software revenue by 2010. SAP also has declared an ambitious goal to increase its customer base from 39,000 to 100,000 in 2010, and most of that growth will come from signing on new small and midsize businesses, says Klaey.

Key to that strategy is what SAP calls A1S, which will be some form of a software-as-a-service offering; the details are being worked out, Klaey says. But it's going to take until 2008, as SAP needs more time before it can describe A1S. "We're looking at a new go-to-market model, a whole new business model," he says. "What's important to us is we get it right for a volume model, from a product side to a service and support side."

Although Klaey insists that A1S won't cannibalize SAP's software licensing business, it seems a forgone conclusion that a big part of the planning process will, in fact, be trying to figure out how to bring A1S to market without hurting software license sales. Some businesses that have moved to software-as-a-service offerings from Salesforce.com, Workday, RightNow Technologies, and others are reporting software deployments that are considerably less costly and complex than traditional software implementations. And for SAP, Oracle, Microsoft's Dynamics, and other traditional ERP vendors trying to figure out how they're going to do software as a service, the potential for lower revenue is perhaps the biggest threat of all.