SAP's cloud venture fades as rivals gather pace

By Georgina Prodhan - Analysis

LONDON (Reuters) - SAP (SAPG.DE), the world's biggest maker of business software, is being left behind as so-called cloud computing rapidly gains popularity, and may be forced to buy a smaller rival if it cannot fix its own offering.

The German company has been developing software for the past five years that it wants to sell over the Internet to smaller companies, taking over much of their data storage and processing, and charging them a fixed amount per month per user.

The venture, now known as Business ByDesign, was meant to expand SAP's addressable market to include many more small firms who do not need and cannot afford the large, integrated software systems it has sold to many of the world's biggest companies.

But the project, which represents a paradigm shift for SAP, has been beset by delays as the company figured out how to sell the product, how to make it profitable and how to make it easily usable by small companies without IT departments.

"It's been a disaster," said Forrester Research software analyst Stefan Ried, who was responsible for product management of SAP's technology platform Netweaver around the time the company was beginning to develop its on-demand product.

He said SAP's problems have been more to do with the way it tried to sell the software than about the product itself. "Business ByDesign failed by marketing, not by technology."

But SAP says it needed time to get the product right and didn't want to rush it to market -- although it previously said that time to market was critical.

"It's important for us that this whole model is optimized and validated before we scale out significantly," said Markus Schwarz, who is in charge of SAP's market strategy for delivering Business ByDesign to customers.

REINVENTING THE WHEEL

Since SAP began its project, momentum around software hosted via the Web and delivered on demand -- also known as software-as -a-service or cloud computing and pioneered by Salesforce.com (CRM.N) -- has grown significantly.

IT research firm Gartner expects 2009 sales of cloud-based software to grow 22 percent this year to a record $8 billion, as firms look harder for new ways to cut costs in the recession. The total business software market is seen at $223 billion.

Ried said SAP was too ambitious in trying to provide a complete set of enterprise software to manage everything from finances to supply chains, and should have allowed more space for partners to adapt it. "They tried to reinvent the wheel."

SAP chose to do this precisely to differentiate itself from the likes of Salesforce, which began by offering only customer relationship management (CRM), but has since grown to offer a platform on which customers can build their own applications.

"We believe that this market is ready for an integrated suite," said SAP's Schwarz.

Ried also said SAP made a mistake by initially using its traditional partners -- companies such as Accenture (ACN.N), more accustomed to complicated implementations for big customers -- when it took the product to market.