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.
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.
To make up for lost time, SAP now may need to look to smaller companies who have made more progress in developing and marketing the technology.
“If you ask me, they will look for an acquisition candidate in this space and trash everything they’ve done on their own,” Ried said.
Outsourcing the hosting and processing of data to outside providers such as Salesforce, Netsuite N.N, RightNow RNOW.O or Google (GOOG.O) saves companies the expense of buying more servers and costly software licenses with associated years of maintenance charges.
But while growth is much faster than for traditional software, margins are far slimmer. Salesforce had 44 percent revenue growth but an operating margin of 6 percent last year, compared with SAP’s 19 percent growth and 28.2 percent margin.
SAP has said it would need to reach 10,000 customers with Business ByDesign before it would achieve sufficient economies of scale to boost the company’s overall profitability.
It said a year ago it would reach this target, and the associated $1 billion planned revenues from the product, about 12 to 18 months later than its original goal of 2010. SAP has spent several hundred million euros on the project so far.
Currently, SAP has 80 customers using the product for parts of their business and providing intense feedback to SAP.
UniCredit software analyst Knut Woller reckons it is too early to write off SAP’s efforts.
“If SAP’s own product functions, there’d be no reason for SAP to be a buyer. If the product doesn’t meet SAP’s own expectations, it’s then a question of how it will occupy this space,” he said.
“I’d be prepared to bet that in four to five years there’ll be no leading standalone software-as-a-service vendors left. If the business model is so attractive, the big players will try to buy them,” he says.
Asked this week about Business ByDesign’s faltering steps to market, SAP’s co-Chief Executive Leo Apotheker told reporters in New York he believed in the viability of the business model but it was too early to tell how big a part of SAP it would be.
Additional reporting by Nicola Leske in Frankfurt and Anupreeta Das in New York; Editing by Hans Peters