Applications

SAP says it won't join the on-demand crowd

"With on-demand," CEO says, "the customer hands his destiny to someone else and then he finds...he cannot get his destiny back."

As more companies toy with the idea of having their software applications run by on-demand hosting companies, applications giant SAP has no plans to enter the hosting market, the company's chief executive said Thursday.

SAP's directors discussed their views on everything from the hosting of applications to merger strategies to competitors Microsoft and Oracle during a press briefing at their Palo Alto, Calif., office. SAP faces increased competition these days following Oracle's acquisition of former rival PeopleSoft and an increasingly heated battleground for dominance in the North American market.

"When on-demand came up, we at SAP felt we should be careful...that on-demand is not the next locked-in strategy," said Henning Kagermann, SAP's chief executive. "With on-demand, the customer hands his destiny to someone else and then he finds out after two or three years he cannot get his destiny back."

SAP executives noted that on-demand customers may find they're restricted in their ability to change and innovate their business practices, should the on-demand applications service provider prohibit such changes. SAP wants to give customers the ability to own the structure that will hold the applications and the opportunity to pick which applications they will have hosted by an on-demand service and which ones will remain under their control.

"We don't want to become a hosting company," Kagermann said.

The executives' comments contradict a Prudential Financial report released Thursday. The report, written by Prudential analyst Brent Thill, says SAP is readying a subscription software service that would be SAP's direct answer to Salesforce.com.

"We believe SAP is close to announcing a new hosted CRM (customer relationship management) application that is priced on a subscription basis--possibly as early as April 27 during the Sapphire '05 Copenhagen conference," Thill said in his research note.

According to Thill, the new SAP service is designed to help businesses track sales leads and customer profiles. He noted, however, that SAP would not confirm the rumored plan.

"Over time, we believe, SAP's hosted CRM offering could hamper Siebel Systems' fledgling CRM OnDemand business and interfere with Salesforce.com's upward inroads into the enterprise segment," Thill added in the note.

SAP's last move in this direction was an agreement with longtime partner Hewlett-Packard, under which the two companies planned to jointly sell SAP's small-business software for a monthly fee of $325 per user. As part of the agreement, announced in October, HP planned to host the applications at its data centers.

Though rumors of Siebel being an acquisition target have intensified in the past several weeks, spurred by its first-quarter warning, the termination of its chief executive and loud protests by its investors, SAP is not a likely candidate to acquire the company.

SAP directors noted the company overtook Siebel in CRM software sales during the second quarter of 2003 and now is the largest CRM vendor worldwide and in North America.

SAP is not interested in acquiring companies with technologies that overlap its own, Kagermann said. He and other SAP directors noted that the same applies even if a small portion of a potential target company doesn't overlap.

"There is something that happens after an acquisition, and that's integration. People seem to have glossed over that," said Shai Agassi, who oversees SAP's product development. "If you have a small hole somewhere, it's easier to develop it, rather than integrate the other 95 percent."

SAP does not look for strategic acquisitions, but rather considers doing deals where it would speed its time to market or accelerate entry into a new market, Kagermann said. He added that the company would also consider an acquisition if the buy made sense to fill out its product portfolio.

Areas within the financial services and public sector industries are where some potential holes exist, SAP directors said.

"We provide the main building blocks for banks. But, for example, there is a simple problem that banks are trying to solve: They don't have a single view of their customer," said Leo Apotheker, who oversees the company's global field operations.

The applications giant also recently tried to bolster its presence in the retail industry with an acquisition of Retek. That attempt was buffeted by Oracle, which launched a competing bid once SAP put its offer on the table.

After a couple rounds of the companies exchanging competing bids, Oracle acquired the company with a higher price. Hagermann noted Oracle's acquisition was a strategic one for the company, given it had said it had no retail applications.

"I thought they had a solution in the retail market. We have a solution. Our move was just to accelerate our market penetration," Hagermann said, characterizing Oracle's aggressive bidding as a sign of how much they desperately wanted Retek's technology.

"We were just being polite. If they were willing to pay so much, they should have it," Hagermann said.

SAP was also once a potential acquisition target of Microsoft. The companies, which compete in the midmarket applications arena and largely partner in the enterprise applications market, had discussed the potential of a Microsoft buyout of SAP.

"As a CEO, you have to listen at least once to every proposal," Hagermann explained.

For Microsoft, an SAP acquisition would have given it an overnight presence in the applications market to large corporate customers. Currently, SAP does not come across Microsoft in any large fashion when it's making its sales calls to potential enterprise customers, Apotheker said.