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Are SAP and Business Objects on the Wrong Track with SaaS?

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Drawing from years of experience in the field, including time as a consultant and then time working with Salesforce.com, NetSuite, and Siebel, LucidEra CEO Ken Rudin has a lot to say about Software-as-a-Service and the latest developments in the business intelligence field -- including upcoming SaaS efforts by enterprise software giants Business Objects and SAP.

LucidEra offers SaaS-based reporting and analysis tools that can create dynamic, efficient reports that pull data from multiple areas of the business, eliminating the need cut and paste reports from different spreadsheets to bring the data together. Although many companies try to do this themselves, Rudin likens the effort to managing your own nuclear reactor in the basement when all you want is electricity rather than choosing to pay a utility company to manage the reactor for you. He states that by handling this business need through a SaaS approach that rather than paying a team of consultants hundreds of thousands of dollars for a six-month effort, companies could sign up at 9am and be up and running by noon -- clearly an improvement for many types of companies.

Rudin took some time from the Dreamforce conference to share some thoughts on current trends in the SaaS market and the efforts of the giants in the ERP industry to move to the SaaS world.

Concerning the upcoming SaaS offerings of companies like SAP and Business Objects, do you think these SaaS offerings be the panacea that those companies hope it will be as far as penetrating the mid-market?

You cannot do what every enterprise company ends up doing, which is taking their technology that's on premise and then putting it on their own servers with a web front-end then call it SaaS. In most cases, that original software is not designed to be delivered as an on-demand solution. Trying to move from on-premise to on-demand is not just an exercise in relocation of software. On-demand is much more than that. It's about making a solution that is easy to set up and easy to use. If you take Business Objects, for example, which is an incredibly complex piece of software, just physically moving it doesn't make it easier to set up and easier to use. Now you just have a solution over the web that's hard to set up and hard to use. So the on-demand model is not just about relocation of service; it's about a whole mindset that has simplicity and speed as core tenets and you don't get that by just moving the data and taking a traditional product and putting it online.

Every company probably has to do that I'd recommend that every enterprise do that as a first step. No, it doesn't work, but the companies often need to prove to themselves that it doesn't work. They have to go through this process of taking what they've got, hosting it, and then thinking much deeper about what they really need to do as a company. Truly it just doesn't work. It's like taking a car, putting a propeller on it and calling it an airplane.

How do these developments affect the internal environment of the company, and can you comment on whether companies like SAP and Business Objects run the risk of product cannibalization?

The harder issues are the kind of cultural/emotional issues within the company. Probably the most challenging is the fear of cannibalization. You've got these big companies that sell $500,000 licenses and then they start to worry when you talk about instead signing on customers that pay a half million upfront, you're going to sell contracts that charge $70 per user per month. They start saying, "we'll avoid that by taking our traditional enterprise product and we'll target that to large enterprises and so we won't see cannibalization there. What we'll sell to now for on-demand is the mid-market. Then we'll see increased and not cannibalized revenues to the mid-market."

The flaw is that although you may say the above, customers seem to stubbornly resist agreeing to your fairly arbitrary categorization there. You'll eventually get some large company looking at your on-demand product and saying can we use that one? Then you're back to the idea of there goes your million dollar deal to your $70 per user per month deal. Then you also have the issue with on-demand that A) you don't get cash upfront, and B) equally as troubling is if you're a public company, you want to realize revenue. With traditional software you can recognize everything upfront, but if you're selling a subscription-based model, you can only recognize revenue pro-rated over the life of product's contract. You may find your sales guys going, "there goes my commission," and end up creating a civil war inside the company.

Is there a risk that these products are really just a bait-and-switch with these companies having an ultimate goal of migrating customers to more expensive on-premise software packages once they're hooked into the SaaS products?

I've seen this happen again and again. You can't tell enterprise customers that they're not allowed to buy on-demand software. Then you end up having companies say "Why don't we do it this way? Let's sell them on-demand but it doesn't have the same level of features and functions. Then they'll get started wtih that, and then when they're ready to go for the real solution, we sell them the on-premise solution." That gets the customers on the road to lots of consulting dollars that they'll have to spend, lots of implementation and consulting fees. It really is bait and switch; they try to sell the easy thing, then as soon as possible, convert the customers to the traditional solution.

But it doesn't really work. I don't know that I've ever seen a customer start with on-demand then move to on-premise. Actually, there is an on-ramp between on-demand and on-premise, but unfortunately it goes the other way. Most start with on-premise then they like the value they're getting out of it but they prefer value without complexity, so they move from on-premise to getting it on-demand. I don't know any companies that have started on-demand and gone the other way.

For SAP and Business Objects, would you predict that they will ultimately find the SaaS part of the business to be too expensive to run with nominal return as compared to the profit margins of on-premise software?

That's a troubling thing because in the early days they can kind of do it by saying, "this is a hot market so we need to invest." They spend a lot of money on this and the data center and they really treat it as a science project, saying "we'll see what we can learn and we'll do this for a little bit." Then they get minimal recognizable revenue, then they start saying, well this is interesting so how long do we want to keep this little science project going? Should we try to spin this off or sell this to somebody? Then they have a bad quarter and decide we have to really retrench so let's focus on our core business.

Look at Business Objects. Their on-demand division is one of five divisions and it's generating almost no revenue -- so little revenue that they haven't ever reported how much revenue it is. As soon as they see their core query and reporting revenue dry up a bit. Business Objects announced its first on-demand offering in March or April of '06. If you look at the quarterly analyst call they do, initially out of the maybe 30 slides, maybe five or six of them were about the new on-demand initiative. The next quarter, there were about one and a half slides on it. Then they had a bad quarter and went to single bullet item on one slide two quarters later. They were already starting to pull back from it, because all the analysts on the call were saying, "you're seeing some erosion in the core query and reporting business. Is that because on-demand is starting to cannibalize the other business?"

It's a very, very difficult challenge. I think that their having to face these challenges creates great opportunity for companies like LucidEra to take that nuclear reactor out of the basement and let us manage it for you. All we need is access to your data and then we do all the heavy lifting.

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