After reading through the post and various responses, I have some comments that could shed more light on the SaaS vs. on-premise topic and how this relates to SAP’s continued focus on Business ByDesign.
The global ERP market opportunity driven by the large number of SMB/mid-market companies. In the U.S. there are 11 times more mid-market companies and on a worldwide basis the number is 13.5X.
# of U.S. Companies
# of Worldwide companies
Enterprises (1000+ empl.)
Mid-Market (100-1000 empl.)
Ratio – Mid-market/Enterprise
The enterprise market is heavily penetrated by ERP type solutions, mostly on-premise solutions. The U.S. mid-market has less than 42% ERP penetration. This penetration of ERP solutions is much lower outside the U.S. Existing SaaS solution vendors until now have primarily focused on the U.S. market, with less than 15-20% international sales (other than Salesforce.com). SAP being a global company, has the potential of ramping up fast in the international markets which is very under penetrated, where SAP already has established relationships and market presence (significantly more than any of the SaaS vendors). This presents a significant upside revenue opportunity for SAP in the mid-market (especially in the 100-500 employee segment which is outside of the sweet spot of other SAP midmarket solutions – BusinessOne and Business All-in-One).
Considering a 4 year TCO, works in favor of the SaaS ERP solutions when the number of users is less than 400 users. Beyond these numbers of users, the on-premise TCO starts to become better (lower). These would be mostly enterprise companies, who favor on-premise solutions.
When considers a TCO beyond 4 years, on-premise solutions are better (lower). Again, these tend to be larger companies.
Most of the SaaS vendors like Salesforce.com and NetSuite have a much higher sales and marketing expenses ratio (~ 54% of revenue as shown in the smoothspan post Why Do SaaS Companies Lose Money Hand Over Fist?) primarily driven by their direct sales model. For Business ByDesign, for which SAP is promoting a channel driven model, this percentage should be lower.
R&D spending of 16% by SaaS companies – the strategy that needs to be explored by vendors looking to develop SaaS products, they need to seriously consider SaaS platforms like force.com (from Salesforce.com) and QuickBase (from Intuit). The developers that have used these platforms, have significantly reduced both their initial R&D spending and also their product development timeframe, brining SaaS solutions to market in some cases 1-2 years sooner. These SaaS/cloud platforms-as-a-service were not available when SAP embarked on development of ByD (or would they have used one, even if it was available…I am sure they have developed a significant internal expertise with this development experience). It is prudent for SAP to control the roll-out of Business-ByDesign until the product, delivery and channel kinks have been worked out. Prediction – Past experience with German engineering should alert the ERP market that in 2010, SAP will probably deliver a successful mid-market SaaS ERP solution for the core mid-market.
Reviewing the above, including good reviews from the current customers of Business ByDesign, it would be prudent for SAP not to scale back efforts on the roll-out of Business ByDesign – as strategy they have consistently communicating to the market.
A 4-year total cost of ownership (TCO) perspective comparing cloud and on-premise business application deployment
Small and medium businesses (SMBs) face a tricky dilemma in today’s tough economic climate. It’s no longer business as usual; companies need to figure out how to survive through the current downturn, and get on track to capitalize on new opportunities that will emerge as the economy starts to grow again. They need business solutions to help them to manage more efficiently day-to-day, and also the intelligence they need to move the business forward.
As SMBs weather through turbulent economic storms, total cost of ownership (TCO) is often top of mind when evaluating new business applications. Many customers have become interested in how cloud computing or software-as-a-service (SaaS) can help lower their costs by eliminating upfront capital investments and ongoing maintenance costs associated with on-premise solutions.
Hurwitz & Associates recently completed an in-depth study comparing TCO of cloud-based business application and equivalent on-premise solutions.
Cloud computing essentially eliminates the need for customers to buy, deploy and maintain IT infrastructure or application software individually. Regardless of the application, the cloud computing vendor takes responsibility for all of the infrastructure required to run the solution–servers, backup, software, operating systems, databases, updates, migration, power and cooling, facility space, etc., and associated internal and third-party staffing costs. Because cloud computing vendors manage all of their customers on a single instance of the software, they can amortize costs over thousands of customers. This yields substantial economies of scale and skill, and lowers TCO.
Key findings from our analysis include:
Overall TCO for cloud-based integrated solution suite is significantly lower than a comparable on-premise solution. This holds true for both SMB and mid-market firms.
IT Infrastructure costs (hardware, software and maintenance) account for about 10% of the total cost of deploying on-premise business applications.
The cost advantages of cloud computing slowly taper off as the number of users increases beyond mid-market to larger enterprise companies.
Application subscription costs account for two-thirds of the total solution cost in the cloud computing model, where the subscription fee encompasses underlying IT infrastructure and personnel costs required to manage business solution. In comparison, business application costs comprise about 27% of total cost in an on-premise situation.
Costs for internal IT staff and/or value-added reseller (VAR), consultant or systems integrator (SI) resources required for application implementation and support represent a significantly higher percentage of total cost for on-premise solutions than for cloud-based business solutions.
Pre-integrated front and back office functionality in the integrated business application offering contributes to reducing integration complexity and lowers application implementation costs.
Cloud computing and services include any subscription-based service that is delivered over the internet in real time, providing flexibility by extending an enterprises internal IT resources, staff and expertise. It encompasses several of the web-based solutions/services listed below.
A way to add computing, storage and bandwidth capabilities in real-time without investing in additional in-house IT infrastructure or support personnel
The customer has no incremental investment in servers, storage, support and management people and expenses.
Solutions for server, storage, security, high availability/disaster recovery, web contentdelivery
Key Examples:Amazon, IBM, AT&T
The application developer delivers the application supporting a multitenant architecture over the internet that is accessed using a web browser.Includes application platform and ISV applications developedusingthat platform.
The customer has noincremental upfrontinvestment in server or softwarelicenses for these applications.
Solutions for business, collaboration, productivity applications
Provide outsourcing or out-tasking of specific application, network, and systems management functions. Management can mean simply monitoring, or it can include management and performance monitoring of the application, system tuning, corrective actions for systems on customer’s premises.
This service is delivered remotely over the network from the Service Provider or VARs data center, some MSPs provide onsite management/support as required.
The customer has reduced need for IT expertise and support.
Solutions for security, data backup, remote server/ desktop/network management, desktop virtualization.
Hosted Services provider host, service, andupdate the infrastructure systems and/or applications software at their data center. These systems/software is owned and managed by the service provider, and are either dedicated or shared (multitenet).
The value-added services/ applications are delivered remotely over the network from the service provider or VARs data center to the end-user.
The customer has no incremental upfrontinvestment in server, storage, and support people (maybe for software licenses) for these services.
Solutions for business, database, e-commerce, productivity, communication applications
Cloud architectures have the ability to scale to meet customer demand and traffic spikes in real time. Businesses don’t have to constantly re-engineer their environment and add systems to handle peak loads. Businesses don’t have to wrestle with the underlying infrastructure and core technologies or the day-to-day operational, performance and scalability issues of their IT infrastructure. Instead, they can focus their resources on the core business functions.
The primary target market and consumers for the various segments of the external cloud computing services are SMBs, mid-market enterprises and departments of large enterprises. In addition to the cloud services vendors, the VAR channel and Service Providers (network) will play a few role in the cloud computing ecosystem. What is the short-term prognosis for these services? The SMB and mid-market businesses are under severe pressures in the current recessionary economic climate. They are considering all option that help them control costs (both systems and people resources) to get through the current economic conditions and credit crunch. They are open to new and innovative ideas.
Will these market conditions provide the disruption that the cloud initiatives need to drive demand and market uptake?