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Apotheker’s 10X Operating Cost Reduction for SaaS Isn’t Enough

Posted by Bob Warfield on May 5, 2008

As I reported earlier, SAP is saying the delays in their SaaS offering are due to problems with operating costs.  Despite charging a very high price of $149 per seat month, Larry Dignan reports they still can’t make money on the offering.  According to Apotheker, they still haven’t achieved the 10x cost reduction they had targeted.

Here’s an unpleasant newsflash: even 10x is not enough to be competitive in the SaaS world.  As I’ve reported here before, the average SaaS player delivers its service more like 16x more cheaply than On-premises software.  If SAP is struggling to get to 10x, it may be quite a while before they’re fully competitive with the SaaS pure plays.

Cost to deliver is a huge competitive advantage for any organization.  Just ask Dell or Wallmart.

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My colleagues at the Enteprrise Irregulars interviewed Henning Kagerman and came away with this:

There’s a very close link between the TCO of Business ByDesign and NetWeaver. The TCO is not so much hardware; There are too many processing steps in our hosting. We can continue to do manual steps when first upgrade Business ByDesign from 1.0 to 1.1, but it’s not predictable in way where every client got it at once and in the same way.

How many ways can I say that the cost reduction to be competitive in SaaS is a function of reducing the requirements for operations headcount and that it ain’t easy.  Real technology has to be purpose built for the SaaS world.  NetWeaver obviously was not.  Hopefully even the On-premises crowd will reap some benefits of these changes.


9 Responses to “Apotheker’s 10X Operating Cost Reduction for SaaS Isn’t Enough”

  1. patrickdlogan said

    I wonder if any old school enterprise development/support organization knows how to get to significant cost reductions? As you pointed out with the MSFT Mesh — 100 developers???

    SAP is a similar organization — how many folks do they have working on this? Could be too many.

    It’s a little ironic — they seem to have good virtualization knowledge at the Linux, virtual machine (ABAP, JVM), and application level. But they probably don’t know how to develop cloud-able applications, especially with small development and support teams.

  2. smoothspan said

    The trouble here is that it requires a fundamental change in the business of how the software is operated. This is goes beyond normal IT support operations. It has to be baked into the DNA of the software. There simply can be no manual steps for anything, but especially for anything remotely common.

    Consider Facebook, which I recently read has an 1 support person per 1800 servers. That’s the sort of thing they’re looking at. Unfortunately, SAP has always been among the most expensive ERP software to install and support. Clearly they have a long long ways to go to get past that, which is a tough place to be if you want to play in the SaaS arena.

  3. Yves said

    I am also wondering what if they can make it for a cheapear price in terms of installation duration, complexity, …

    Having worked in that industry for 7 years (including 2 years of creating an On Premise SAP offer in a major company), I still don’t know if they realize that SaaS is for web native applications and not just another way to resell the same old stuff but in a different package (or maybe that’s the plan).

    SAP has a brilliant back-end, but they have never been able to reduce complexity nor to achieve user friendlyness in their front-end.

  4. […] Dignan, Brian Sommer, Bob Warfield and Vinnie Mirchandani each provide different and nuanced perspectives on the situation. […]

  5. […] Apotheker’s 10X Operating Cost Reduction for SaaS Isn’t Enough « SmoothSpan Blog – If you're thinking about operating costs in the internet cloud then this is one to ponder […]

  6. @patrickdlogan,

    In the recent debate on the future of enterprise software Marc Benioff and Hasso Plattner, Plattner said SAP has 1500 developers working on Business ByDesign.

  7. smoothspan said

    1500 develepors might not even be a bad thing if the software is well modularized so there are few interdependencies. The question is how many are on an individual “module”. That’s where the trouble usually starts on giant software projects.



  8. […] on-demand world is pretending that the road ahead is easy. As Bob Warfield correctly points out, getting the economics right for on-demand requires significant engineering work. Partnerships are always problematic though I’d argue technology partnerships of the kind […]

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