Despite an increasingly crowded marketplace for Software as a Service (SaaS) offerings -- and not coincidentally, just a day after SAP launched its A1S SaaS product -- Oracle CEO Larry Ellison questioned the profitability of rentable software for enterprise resource planning (ERP) in the small-business market.
"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 said during the company's first-quarter conference call held last Thursday.
Ellison said Oracle's approach is very different from that of rival SAP, which recently announced the launch of Business ByDesign, the SaaS product it had code-named SAP A1S.
Unlike SAP, which touted SAP A1S as part of a renewed focus on small businesses, Ellison said there are no synergies between Oracle small-business customers.
Building an SMB business, he said, would require Oracle to hire or train an all-new sales force to call on customers that it has never approached. Oracle would also need a new marketing and advertising campaign, a new product and a new product development team to address the market, which Ellison described as "enormously challenging."
Oracle does offer small-business versions of many of its applications, however. The company boasts 180,000 small-business customers and hosts an analyst report saying small-business customers prefer Oracle to SAP.
"We knew that any announcement of this magnitude from SAP would be met with some commentary from Oracle," said Simon Jacobson, senior research analyst with Boston-based AMR Research Inc. "Ellison has got a point on the costs of sales and limited charges, but also that's when you're scaling the business up. Once you do that, then you can get a nice revenue stream because you've mastered how to sell this kind of product and then you can cut that sales cycle time down."
SAP execs said at the SAP A1S unveiling last week that the company's goal is to sell its Business ByDesign SaaS product largely through the channel, with 10,000 customers by 2010. The product, which is designed for companies with between 100 and 500 employees, starts at $149 per user per month with a minimum of 25 users to be licensed per customer.
SAP CEO Henning Kagermann told attendees at last week's launch that his company's research indicates a potential customer base of 600,000 midsized companies worldwide.
Analysts aren't quite so sanguine.
"I see hurdles ahead for SAP," Jacobson said. "On-demand pricing for enterprise applications is still a new consideration outside of the confines of Salesforce and NetSuite and other Software as a Service peers. You have to overcome the skepticism of CIOs to have all that enterprise data hosted outside the firewall," Jacobson added.
Other challenges include demonstrating to partners that ERP SaaS is an evolving ecosystem that will become profitable for integrators, and that customers will be willing to change the way they buy critical applications, according to Stuart Williams, analyst with Hampton, N.H.-based Technology Business Research Inc.
Not least among the challenges is the development of a channel program designed to help mainstream integrators and resellers instead of the consultants who typically work on ERP applications.
"The way to the midmarket is through the channel," Williams said. "How will SAP recruit channel partners? How do you screen them? How do you keep them from competing with each other? How do you provide incentives? How do you build your business and their business together in a way that meets the needs of the customers? Those channel programs are very important to SAP."
Williams also said that SAP needs to prove that SAP A1S -- now Business ByDesign -- is a viable product very quickly. "SAP needs to get extremely successful customers early to build the buzz around it and to demonstrate success," Williams said.