Will SAP sample hosted recipe?

The business software maker has been particularly guarded about its plans for a new, on-demand version of its customer relationship management, or CRM, software.

So far, despite several strong hints and a wealth of industry speculation, SAP hasn't committed to a plan. Regardless, Salesforce.com--which pioneered hosted CRM--and other competitors are keeping a close eye on SAP and its intentions.

If SAP does jump into the on-demand CRM market, it will instantly change the balance of power in the industry. Salesforce has grown rapidly in recent years--it reported just more than $176 million in revenue for fiscal 2005--and it has become nearly synonymous with on-demand business applications.

But it has done so in the absence of a rival product from SAP, the overwhelming giant of the business software market with more than $1.7 billion in sales.

Few observers expect SAP to sit by idly as others continue to win on-demand CRM deals.

"SAP has put a bull's-eye on Siebel, Salesforce.com and other CRM leaders as it wants to make sure it has every deployment model that customers want to buy or rent," said AMR Research analyst Bruce Richardson.

SAP's official comment is that it continues to evaluate market opportunities but has no plans to introduce new hosted CRM applications anytime soon. At the company's Sapphire customer conference in Boston in May, Bill McDermott, the chief executive of SAP America, attempted to downplay the need for SAP to launch a new product.

"Hosted is really only relevant in the small-business space, and Salesforce isn't delivering the same sort of integrated products we already offer," McDermott said. "The question for Salesforce is, when these newer CRM users they have attracted need more capabilities, will they move to SAP?"

Though SAP already offers its customers the option of having their CRM applications hosted and managed off-site, the company has yet to introduce a ground-up rewrite of its enterprise software applications specifically for hosted use.

Market watchers have said it is likely inevitable that SAP will move more aggressively into the hosted arena. The company has also repeatedly pledged to increase its focus on winning deals in the small and medium-size, or SMB, business space, the very market where Salesforce has won a majority of its deals.

Marc Benioff, chief executive of Salesforce, said it's inevitable that SAP will want to compete more closely against his company as Salesforce adds users and lures some of its rivals' customers.

"We have added over 100,000 new subscribers in the last year. I am sure SAP asks, why are those not our users?" Benioff said. "The reality is that we have not met that many happy SAP (sales-force automation) or CRM users. We believe that is because we have superior technology."

Turn up the volume
SAP has itself fueled speculation over its plans by demonstrating what it called a "slim" online sales-force automation application at a customer conference in Europe in April. The product closely resembled the online applications marketed by Salesforce.

On-demand applications, or software hosted away from an organization's physical premises by a vendor who maintains the data and programs, can offer a number of advantages over traditional enterprise software, proponents say. Those benefits include faster installation, lower overall costs and increased ease of use.

In addition, hosted-applications companies such as Salesforce offer their customers the ability to pay for a subscription to their "software as services" for a monthly fee not unlike rent, rather than pay upfront for software licenses that usually stretch for several years.

The approach has proved to be popular with many customers. In mid-May, Salesforce reported revenue of $64.2 million for its first quarter, an 84 percent gain over the same period last year.

Perhaps even more impressive, the company said it added over 40,000 new subscribers during the quarter, which represents more than an 80 percent increase compared with the same period in 2004.

A recent survey of 200 companies in various industries found that some 40 percent of the businesses are already using hosted CRM applications. Additionally, AMR's findings challenged assumptions that small and medium-size businesses, the SMBs, represent the vast majority of hosted-application customers. According to the report, 28 percent of companies with more than 5,000 employees use the tools, while 39 percent of companies with between 1,000 and 5,000 employees have purchased hosted CRM licenses.

Earlier this year, Salesforce also announced a deal to provide its software to 5,000 employees at financial services giant Merrill Lynch, defying perceptions--and SAP's claims--that the hosted specialist's offerings appeal only to smaller companies.

Yet, a recent report published by investment bankers JMP Securities claims that Salesforce has struggled with at least one of its larger accounts, a 10,000-subscriber deal with Cisco Systems. JMP reported that Cisco scaled back its plans to adopt Salesforce's tools based on integration and employee-adoption problems.

In June, another of SAP's closest competitors, Siebel Systems--a rival the company has battled since long before Salesforce and hosted applications came to market--introduced the eighth version of its own hosted offering to be released in the last 18 months.

As Siebel has fought back against analyst and investor criticisms of its short-term prospects, company executives have repeatedly pointed to on-demand CRM as the company's best bet for recruiting new business.

SAP's ace in the hole
So why would an SAP-hosted product matter? Salesforce has attributed much of its success with customers to people's disenchantment with the complexity and high cost of applications made by companies such as SAP, Siebel and Oracle.

The flip side is that Salesforce critics claim the company's tools can't offer the same breadth and power of applications such as SAP's, potentially giving the larger company a chance to compete for the hosted market with some version of its more sophisticated software.

For Don Devost, director of finance and operations for worldwide sales at chipmaker Analog Devices, the answer for now is to use both Salesforce and SAP software. Analog is using the hosted company's applications to help manage its direct sales force, while its e-commerce operations use SAP's CRM tools.

The company also uses SAP's flagship enterprise resource planning, or ERP, software to manage a number of so-called back-end operations, such as financial and manufacturing systems.

Devost said that despite the fact that he is happy with the way Salesforce.com's hosted tools have integrated with SAP's systems, he would have to take a hard look at any new product from SAP.

"For us to consider (an SAP replacement for Salesforce), the question would become, what type of integration are we trying to do?" said Devost. "If we were trying to look at order lead times on SAP and see where inventory is in Salesforce, the real-time and in-depth integration that would require might make us consider a change."

But Devost said there would be other questions to consider before making any switch. "With SAP it seems like even the smallest (systems) change turns into a six-month project, and in the areas we're using Salesforce, for fast-moving sales efforts, that wouldn't cut it," Devost said. "Salesforce was designed from ground-up as hosted, throughout its architecture, and that shows in its functionality. SAP would have to deliver something like that for us to move, and they haven't approached us with any product like that thus far."

Other industry watchers said SAP is taking the same measured approach it's applied to other markets over the years as its business has grown.

"SAP won't ignore the potential of a hosted offering, but I believe they're looking very carefully at how large of a foray they need to make into that space," said Mary Wardley, analyst with market researcher IDC. "It's very consistent of them to stay quiet, move slowly and devise an intelligent plan."

Executives at Salesforce said any larger move by SAP into the hosted market will only serve to validate what their company has been doing all along.

"We've all heard the rumors, but for someone like SAP to push further into (hosted CRM) is a very powerful thing that can only help us grow our business," said Phill Robinson, senior vice president of global marketing at Salesforce. "But if you look at the challenges (that SAP faces) we don't think we have anything to worry about."