Thursday, January 8, 2009

SAP declares that SaaS will not work

The CEO of SAP, Bill McDermott, predicts that Software as a Service will never be a viable platform for large companies. He cites several common-sense reasons as the basis for this opinion, including the need for control of proprietary information, as well as the challenge of integrating data across multiple platforms.

Stripping away the dramatic use of the word "never", McDermott stakes out a fairly reasonable position on the future of SaaS. The largest global organizations already run their operations in a kind of SaaS environment.

How so?
Think about a centrally located enterprise SAP or Oracle implementation that serves users across multiple locations and P/L centers. The firm doesn't have an individual installation for each business unit; all the business units share a single, large instance of the software. Presumably the costs associated with the software are spread across the business units. Doesn't that sound a lot like a SaaS model? The only difference is that the centralized IT organization typically does not get actual money from the user community the way that does.

So it stands to reason that a SaaS model does not currently make sense for large enterprises.

But, "never" is long, long time. And the economics that justify proprietary investments in enterprise software are certainly subject to change. The SaaS cost-structure does not necessarily work so well for the customers that expect to increase their number of users significantly. However, the in-house installation model does not work so well for firms that expect to decrease their user base in the coming years.

I believe that the Software as a Service is a viable path for small and mid-sized firms. If they grow into large firms, then the ongoing subscription expense will be the impetus for re-examining that strategy. Until then, however, the avoidance of the upfront investment -- in cash -- presents a compelling case for taking advantage of the SaaS offerings.

Oracle Corporate: ORCL (NASDAQ) CRM (NYSE)
InformationWeek Article: SAP CEO: SaaS Won't Work As A Core Platform

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