Can SaaS ERP be profitable?

Businesses are ready for SaaS ERP, but can anyone make money building it for them?

In the last few weeks, the question of whether Software as a Service (SaaS) ERP is profitable, and therefore viable, has been brought back into the spotlight.

SAP CEO Henning Kagermann and Deputy CEO Leo Apotheker told the Wall Street Journal last week that SAP has delayed the release of Business ByDesign, its on-demand ERP application, because the company is still struggling to find a way to make it profitable.

Three days later, Lawson CEO Harry Debes told ZDnet that the SaaS industry will collapse in the next two years because it won't make money.

"Profitability is the billion-dollar question," said analyst Josh Greenbaum of Berkeley, Calif.-based Enterprise Applications Consulting. "You look at or NetSuite, and there's not a lot of excitement -- the profitability isn't that great. It's very hard for existing companies to envision breaking the sales model they have in order to accommodate on-demand."

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It's a question Oracle CEO Larry Ellison has been raising for years.

"I'm not sure how big that market is; you count a lot of companies [as potential customers], but you look at their total IT spend and how they implement these ERP systems, and we think there's a significant cost of sales, a significant cost of implementation and a limited amount of money you can charge," Ellison told reporters back in 2007.

Nonetheless, SAP continues to push ahead with Business ByDesign, its on-demand ERP, development of which was scaled back last May because SAP claimed it needed more work. Although SAP reduced funding for the project by 100 million euros (about $150 million) this year, analysts maintain that the software giant is committed to the project and will figure out how to make money from it.

"I have been told by people up and down the command chain that there's no way they will abandon it," Greenbaum said. "The software works fine. It just doesn't work efficiently enough."

Cambridge, Mass.-based Forrester Research analyst Paul Hamerman agreed: "This is not some pure-play. This is SAP."

And just because Oracle isn't pouring money into an SaaS ERP doesn't mean the acquisition machine isn't closely watching NetSuite – in which Ellison owns a majority stake -- Hamerman said.

"SaaS in some form is inevitable, and SAP and Oracle and Microsoft are all realizing they have to go there," added Warren Wilson, research director with London-based Ovum Research. "[SAP] invested a lot of money in Business ByDesign. It is a model they have to support over time."

SaaS revenue is very significant in certain application segments, such as HCM and CRM, but it remains an insignificant factor in ERP revenue, according to a recent Forrester Research report on the ERP market.

Companies reluctant to deploy a Web-based ERP system are primarily concerned with integration, according to Hamerman.

Another fundamental issue is how much customization and specialization can be packaged in the SaaS model, Greenbaum said.

"As long as ERP is there to support specific competitive advantages, it's the question of whether you're going to be able to package that competitive advantage in an SaaS model," he said.

But there are situations in which the model could work.

SaaS ERP is being taken up in much larger enterprises than previously thought -- between 100 and 500 employees -- Wilson said. Companies want to deploy it in a remote office and tie it back to the major ERP system.

"It's one model the big vendors can pursue," he said. "How can SaaS augment those traditional deployments?"

Not only that, but -- with financial management and accounting, HR, CRM, SCM and SRM, compliance and project management -- analysts see promise in Business ByDesign simply because it will be the first true SaaS ERP.

Workday has human resources but doesn't plan to build out a manufacturing ERP system, Hamerman said. GSInnovate is geared to small and midsized manufacturers, but it doesn't have an HR component. NetSuite has financials, CRM, wholesale distribution and manufacturing, but no HR.

"SAP has an opportunity here with this solution," Hamerman said. "It's sort of breaking new ground."

What's holding Business ByDesign back, he said, is that unlike most SaaS ERP vendors, SAP wants to give each customer its own database, even though there's only one version of the software. SAP claims customers don't want to run the risk of their data being in a mixed environment.

But SAP can't figure out a way to propagate software updates across the individual customer instances, Hamerman said, and needs to figure out how to automate that process.

"For them, currently, to support many customers, hundreds or even thousands of customers, it's a very labor-intensive process," he said. "They can't scale it without adding a lot of people."

Hamerman still thinks Business ByDesign is worth looking at.

"[People should] look at this product," he said. "The product concept is right; it's just not fully ready to scale up. Be patient with it."

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