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It’s been almost two years since SAP first announced its Business ByDesign initiative and by most accounts it has either been a dud, or a non-starter. When the company first announced the service, it said its goal was to have 10,000 clients using the service by 2010. But so far, the company reportedly hasn’t even cracked the 100 customer mark.
Lately SAP has been making a lot of noise about getting serious about offering its enterprise resource planning applications in a software-as-a-service (SaaS) format, but you have to wonder whether the company is really being honest about its intentions.
The question, of course, is why wouldn’t it be serious? If other cloud vendors like Salesforce.com are growing at a rapid pace – and they are – why wouldn’t SAP want to be jumping heavily into this market?
The answer, as many analysts and my CIOZone colleague Tom Hoffman have pointed out is simple: profits. SAP does not want to cannibalize its lucrative installed base, which churns out profits in the form of software licenses and maintenance fees. It’s the very same reason why Oracle, and to some extent other major software players have been treading slowly into the market.
First of all, let’s look at the numbers. Using Salesforce.com as the poster child for cloud or SaaS vendors, there is no denying that when it comes to revenues, it is riding a winning horse. Salesforce’s revenues grew from $176 million in 2005 to just over $1 billion for the fiscal year ended Jan. 31, 2009. In fact, it became the first cloud vendor to crack the billion dollar revenue mark. And despite the recession, it continues to grow revenues.
SAP, by contrast, has been in a holding pattern of late. In its latest earnings roundup, the German-based software giant reported revenues fell 10% in the second quarter, and if the trend holds up it will fall well short of the $11.6 billion in revenue recorded in 2008. So while Salesforce grows, SAP has had to trim its operations.
But here’s the difference. Over the past five years, SAP has maintained a profit margin of 18.1%. Compare that to IBM’s 9.9% five year average or HP’s 5.8% average. Salesforce, on the other hand, has managed a five-year profit margin of just 4%. One of the few software companies to do even better than SAP is the other ERP giant, Oracle, with a 24.1% five year profit margin.
As AMR analyst Bruce Richardson recently pointed out SAP and Oracle appear to be playing a bit of a game of chicken – each seems to prodding the other to jump into the SaaS arena, but neither really wants to go for fear of wrecking a very profitable business.
Make no mistake, SAP and Oracle have to take Salesforce and the other leading cloud vendors seriously, or risk having their foundations slowly chipped away. But as long as Salesforce continues to take away customers that they probably wouldn’t have won in the first place or that they deem to be low-margin wins, they won’t push the panic button.
I suspect SAP’s Business ByDesign on-demand ERP software is ready for prime time – and SAP will want to hold it out as a potential threat to the SaaS upstarts – but for now, it is more profitable to simply keep it in the wings.
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