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SAP A1S faces reluctant SMBs, for now

A1S, SAP's pending Software as a Service offering for smaller organizations, will require market education and flexibility if it is to be successful, according to Forrester Research.

A1S, SAP's upcoming on-demand ERP product for small and medium-sized businesses (SMBs), has some hurdles to overcome if it's going to be successful, according to a new analyst report.

While SAP outsold its chief rival Oracle Corp. in the SMB ERP market by $2.5 billion to $2.3 billion last year, most SMBs aren't ready for A1S's Software as a Service (SaaS) approach just yet, according to the report from Cambridge, Mass.-based Forrester Research Inc.

Forrester surveyed 552 SMBs and found that 60% were "not at all interested" in SaaS for ERP and instead prefer to use on-premise products. Only 11% of respondents said they are currently using SaaS or plan to do so within the next year.

The new report comes as SAP plans to unveil more details about A1S at an event in New York next month.

"SMBs continue to prefer on-premise delivery versus SaaS," the report stated. "Most SMBs remain comfortable adopting a 'wait and see' approach."

The most common reasons for SMBs' aversion to SaaS are not new. They include security and integration concerns, worries about total cost and performance, and a lack of customization options, according to Forrester.

But despite those concerns, the analyst firm expects SMB adoption of SaaS to grow quickly over the next few years as smaller organizations get used to the relatively new technology delivery platform and companies like SAP and Microsoft invest heavily in SaaS marketing campaigns.

Needed: Market education

"The SaaS issues cited [in the report] are due to a lack of familiarity," Ray Wang, a principal analyst for Forrester, said. "Most of those issues are no longer valid."

Therefore, SaaS vendors such as SAP will need to invest in educating the market, according to Forrester. That's a step SAP is prepared for.

"We acknowledge that we need to invest in marketing, and we're going to be smart about how we do it," Jeff Stiles, SAP's senior vice president of solution marketing, said in an interview with last month.

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SaaS providers potentially face higher marketing costs than vendors of on-premise software, as NetSuite's recent IPO filing demonstrated. NetSuite and, two prominent SaaS companies, stated in recent financial reports that marketing costs took up more than 50% of revenue. Traditional software vendors can expect marketing to cost 20% to 25% of revenue.

SAP also acknowledges that SaaS and on-premise software sales are completely different beasts.

"I think you invest more in marketing proportionally in a subscription-based volume model than you would in a traditional, direct sales-driven go to market for large enterprise customers," Stiles said. "It's a fundamentally different investment in the various elements of demand generation and fulfillment."

Needed: Flexibility for customers

But marketing alone is not enough. There are also functionality issues to address if A1S is to be truly successful, according to Wang.

For example, allowing customers to have hybrid installations -- with both on-demand and on-premise software -- will enable them to be more flexible, he said. SAP touted this approach when it released its on-demand CRM product in early 2006.

"Most enterprises of all sizes will not have the luxury of full rip and replace," Wang explained. "Hybrid models help with customers who need to support disconnected and existing functionality."

Wang also indicated that it would be important for SAP to deliver true multi-tenant SaaS and not as a single-instance.

Multi-tenant SaaS uses one operating environment for many customers and is the most cost-effective way for vendors to deliver SaaS, so it can be offered to customers at the lowest price. Single-instance, also known as isolated-tenancy, has one customer per application per server. While this method allows some additional flexibility for customers, it is the least efficient model for vendors.

"For example, if 5,000 customers decide to go on-demand, the provider has to manage all those environments," Wang explained. "At the end of the day, that's more expensive and complicated than deploying changes once, as true SaaS allows, and knowing it will work."

Single-instance can also end up costing customers more down the line because of the ongoing costs for the vendor. Therefore, SMB customers should investigate all types of hosted models to see which fit their needs.

"In the mid-market, everything is complicated. Companies are dealing with the same amount of complexity as large enterprises -- without an IT team," Wang said. "This presents different types of challenges, and all versions of hosting can help."

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