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SAP’s A1S Brings Competition to SaaS for the First Time

Posted by Bob Warfield on September 15, 2007

On September 19, SAP will bring competition to the SaaS world for the first time.  Everyone else in Enterprise Software will be affected. 

Seasoned SaaS executives will dislike my conjecture that there’s been little competition prior to A1S, but I don’t think its far from the truth.  There has been some choice in the SaaS market, but its largely been a green field opportunity where choice between SaaS offerings didn’t matter as much as choosing SaaS over On-Premises.  Just to underscore the point that A1S is all about competition, SAP has chosen to launch their product during’s Dreamforce week.  Nothing like the stranger walking out onto the street at high noon to call the hometown guy out!

What does it mean?  Well for starters, it means SaaS has come of age and its here to stay.  SAP doesn’t choose its moves at random.  It’s an extremely deliberate company that puts a lot of power behind each stroke.  It will execute relentlessly until it achieves its goals, which may take quite some time.  That’s okay, because SAP has been a very patient company in the past.  Having this stamp of approval on the market, not to mention having a big player begin to invest in growing the market further should accelerate the SaaS market’s growth.  More importantly, it means that the chasm has shifted.  SaaS is mainstream, and that means this announcement affects everyone involved with Enterprise Software.

At the 800lb gorilla end of the market, SAP has stolen a march on arch-rival Oracle’s Fusion efforts, which has got to feel good to SAP loyalists.  The description of Fusion as being heavily SOA and SaaS enabled sounds much like A1S.  Oracle can’t be counted out, but it is interesting to watch the pendulum swing back and forth between these two companies as they struggle for dominance at the top of the heap.  Time will tell whether A1S and more importantly SaaS form the next major competitive axis for the pendulum to swing on.

For those Enterprise vendors that still haven’t figured out the SaaS conundrum, the window where you could bury your heads in the sand has just officially closed.  You need to have a SaaS strategy now.  There’s no more time for stalling.  If you’re public, the pain of a switch will be massive.  Lack of a SaaS game plan will start to show up in the form of pointed questions from analysts and investors.  You will need a good story, and they’ll be monitoring closely how well you execute on it.  If you’re private, perhaps part of a leveraged buyout consortium, you’d better be reinventing yourself as SaaS and not just fiddling with the numbers.  If you’re planning on being acquired, you would do well to have a story about how you help the acquirer’s SaaS strategy.

The A1S launch and subsequent scrambling affects the technology landscape as well.  It puts considerably more teeth into the whole SOA thing than we’ve seen in the past.  It’s more urgent to implement it, rather than just talk about it because it is the central nervous system behind A1S and a critical enabler for SaaS.  This opens the door to a domino scenario:  as more and more companies open their Enterprise fabric with SOA, it becomes easier to contemplate more SaaS projects.  This is a spiralling positive feedback loop that will help accelerate SaaS adoption further.

Adoption of SaaS overseas has been slow.  But this will change, particularly in Europe where SAP is very strong.  If a European company blesses the trend, it can accelerate in Europe.  Europe and the rest of the world represent incredible market growth opportunity for the SaaS world if it starts firing on all cylinders, as well as insulation from short term economy woes that may only affect the US.

As more and more computing moves into the cloud, the industry that serves hosting and data centers will have to look on that trend and decide how to succeed.  SaaS needs a different offering than a lot of hosting providers are used to.  Investments in complex data center management such as HP’s Opsware acquisition are likely a good move.  Products aimed at IT’s internal data centers or departmental data centers are moving into difficult territory.  Internet technology will stay hot or get hotter.  Cisco can regard all of this as good news.

These developments are extremely positive for the SaaS world, but there will be pitfalls and pain for both SAP and the other old school players as they try to execute a move to SaaS.  Some of it will be real, some just positioning games spun by the new kids on the block.  I’ve written a two-part series on the problems SaaS brings for On-Premises companies.  It’s an extremely disruptive game for the Old School because it forces them to choose which way a customer will be sold up front, and it sharply defines short term and long term benefits in a way that brings short term pain to the On-premises company in exchange for long term benefits.  As if to underscore how touch this tension between models can be, Hasso Platner had to backpedal a bit on whether A1S would cannibalize the installed base recently because of exactly these concerns.  SAP is heavily positioning A1S as a mid-market solution.  Part of that may be the reality of whether Big Enterprise is quite ready to embrace SaaS yet, and part of that may be SAP trying to construct a Protected Game Preserve for their SaaS offering that protects the core business.

It’s interesting to contemplate just how much new business SAP is getting anyway.  Like Oracle, they’ve got a raft of maintenance and professional services engagements that make up the bulk of their revenues.  It’s unlikely an existing customer would rip out a successful solution in order to switch it over to SaaS.  Therefore, swapping an increasing percentage of their new business to SaaS may not have quite the same negative effects on revenue deferral as it would for a less mature company.  It seems that even when it comes to something as disruptive as SaaS, scale still makes it easier for the big guys.

The SaaS world will be watching carefully how well A1S delivers on the SaaS formula.  As ZDNet puts it, SAP is known for being liquid concrete poured into the organization.  That doesn’t sound too much like the nimble experience we’ve come to expect from SaaS vendors.  Oracle has had a SaaS-like offering of its products for a long time, and they’d tell you they’re in the SaaS business, but they aren’t really according to folks like NetSuite and others I’ve heard from.  If A1S turns out to be almost-SaaS, it won’t make much more of a difference than Oracle has, other than to futher legitimize the markets.  As so many have pointed out, SaaS is about Service, but more importantly, it’s about an experience that can only be achieved by a thorough combination of the right software and service.  Otherwise hosting would’ve succeeded.  SaaS is a lot more than just hosting.

This move by SAP also represents a big splash in the partner world.  As I look over the Google Blog Search results for “A1S” in the last week, a lot of it is focused around discussions on the impact it will have on partners and the SAP job market for consultants.  Barbara Darrow puts it well when she says, “SaaS is still viewed by many in the channel as the ultimate in disintermediation.”  This is one of those deep dark secrets that shows another disruptive nature of SaaS.  I’ve written about it on a couple of occassions starting with my post Is SaaS Toxic for Partners

To a large extent, partners are in just as bad or a worse position than On-premises ISV’s.  They are a part of the shrinking trailing edge that is the province of very late adotpers.  The problem for partners, VARs, SI’s, and consultants with SaaS is twofold.  First, SaaS commoditizes a lot of the heavy lifting partners used to do around deploying a new On-premises application.  A properly delivered SaaS application radically reduces the workload there and has historically shifted a lot of the work to the SaaS vendor inside their data center.  That’s probably not going to change with A1S if its a first class SaaS offering.

Second, SaaS doesn’t afford partners a lot of opportunity to create IP.  SaaS tends to be a set of isolated islands in the big sea that is the Cloud.  Traditionally, IT has had a large arsenal of tools they could bring in to augment their On-premises software.  Call them bandaids or extensions, but they formed an ecosystem around the Enterprise Software.  Business Intelligence, ETL tools, security products, and a whole raft of other businesses were built on this promise.  For the most part, it was the promise of being able to tie directly into the fabric underlying the Enterprise Software.  Direct access to database tables was one of the most common mechanisms this ecosystem operated on.  That’s no longer possible as computing moves to the cloud.  It will affect those secondary ISV’s that live around the databases of these big Enterprise apps, and it will also affect partners who often created IP around their access to the rich soup of that ecosystem.  

All of these partner/ecosystem businesses now have to reinvent themselves.  They need to find new ways of differentiating and providing value within the confines of what the cloud has to offer.  Several writers chide Salesforce that their announcement of minor repositioning and small extensions to their application platform business can’t compete with the A1S announcement.  And yet, Salesforce is struggling to show us what a viable ecosystem in the SaaS world might look like.

It’s going to be exciting to watch all of this unfold.  Every Enterprise software company should be assembling their best and brightest to map out their position and strategy with respect to SaaS and A1S.  SaaS is here today and if you don’t heed that, you’ll be gone tomorrow.

Related Articles:

Great post over on the Lucid Era blog about the challenges conventional ISV’s face in moving to SaaS.  I’ve written about the same challenges before and suggested a “protected game preserve” strategy to help overcome them.

Zoli echoes many of the same sentiments over at his blog.

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10 Responses to “SAP’s A1S Brings Competition to SaaS for the First Time”

  1. […] this in mind I rad an intersting post over on Bob’s blog regarding the September 19 launch of SAP’s A1S, SAP’s SaaS […]

  2. Uptake of the product will depend on how well SAP’s strategy supports the growth strategy of the mid-market space. Customers will convert if the product simplifies business operations.

    Cornel Schoeman
    Britton Solutions

  3. smoothspan said

    Cornel, very true.

    I have to believe SAP is trying to move away from their “Liquid Concrete” reputation, but the proof will be in reports of user experiences.



  4. Carel said

    Nicely written article. You provided a few angles that I didn’t think of.
    One quick note: One of my SAP friends told me that A1S is built with micro verticals in mind, i.e., a partner can change the UI and the underlying processing of the models. Interesting idea. I’m not sure how SAP will execute on this in a SaaS world.

    Keep up the good work.

  5. smoothspan said

    Carel, thanks for stopping in. Being able to change UI and underlying processing is a powerful function to bring to the table. is just getting there arguably this week with the ability to change UI in their new VisualForce offering. It’s essential to verticalization, if nothing else, for businesses to be able to think in the terms they’re used to.



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  7. wosid said

    SAP has been involved for the last 5 years with a SMB product called Business One. For the first time they had a new product on a new market. Is it successful today? YES. I therefore believe that SAP will be successful with the A1S offer, as long as they offer a first class SaaS product as correctly underligned in this article.

    Frederic Bada
    Britton Solutions

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