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Archive for May 2nd, 2008

SAP’s ByDesign SaaS Woes are Operational Costs

Posted by Bob Warfield on May 2, 2008

Interesting post just in from Joshua Greenbaum.  The world has been speculating on why SAP recently cut the budget for the Business By Design SaaS Product and delayed revenue targets for a year.  The answer, at least according to SaaS execs Hans-Peter Klaey and Jeff Stiles, is operational costs.

This is a classic because the inability to operate it cost effectively is a classical issue with those who stray from true multitenancy which SAP has.  It can be done, but you really need to think about how it’s going to work.

Shame on SAP for not thinking that far ahead.  It’s pretty basic to the SaaS equation.   Still, the ratios of Cost of Services are all over the map for SaaS companies.  If we look at Salesforce, NetSuite, Concur, Teleo, RightNow, and SuccessFactors, their numbers run in that order from 22%  (Salesforce delivers their service at the lowest cost) to 41% (SuccessFactors is the most expensive).

I’ve written about this in the past.  Given the typical $4 of annual IT cost per $1 of license on the perpetual model, SaaS companies need to gear up to operate their software 16X more efficiently than in-house IT.  Two observations:

–  That’s very hard to do.  Companies that keep telling themselves they’ll make it up in scale are kidding themselves.

–  It’s a big part of why companies buy SaaS.  IT simply can’t compete with a 16:1 cost advantage so most companies can save substantially with a switch to SaaS.

There are a lot of technological challenges to SaaS.  You won’t deliver a 16:1 advantage without building some real technology to automate the operations component of the software.  It simply can’t be done off the shelf.  It shows SAP is overly self-absorbed and not paying attention to what those ahead of them learned a long time ago.

This is just one more example of why it’s so hard for a big perpetual license behemoth like SAP to successfully sail into the shallow draft waters of the new SaaS world.  As Phil Wainewright points out, more nimble Native-SaaS competitors are well positioned to take advantage of SAP’s stumble.

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