SAP's isolated tenancy on-demand model

Isolated tenancy - that's the spin SAP put on their on-demand CRM service they launched last week. Sounds like a fancy term for delivering software updates to on-premise installations via web services. Their 'isolated tenants' are still expected to run their software and infrastructure on-premise. There is ofcourse subscription pricing for the service.

My take - what SAP touts as the '3rd generation' of on-demand is really just them trying to sound like they're pushing the envelope. In reality, its simply the old guard taking a step closer to where the future's going to be and where those who're not of SAP's vintage are already playing. If Corio was ver 1.0 of on-demand (single tenant hosted, ASP model) and salesforce.com circa 2001-2004 was 2.0 (multi-tenant on-demand with subscription pricing), SAP on-demand is more like 1.5. And to be sure, 1.0 and 1.5 are still derivatives of the on-premise model.

But now, I would'nt heckle too much. Microsoft only just came out with a 1.0 on-demand flavor with their partner hosting program for the latest MS CRM release. And while Oracle On-Demand, another 1.0 offering, has been around a while, it surely needs an upgrade. Oracle does have newly acquired 2.0 assets in its possession via Siebel OnDemand, but as the erstwhile Siebel's experience with On-demand shows, blending 1.0 and 2.0 business models is not without its own challenges. Going from 1.0 to 2.0 is such a leap in terms of the technical architecture and more critically, the business model, that I think none of the old guard companies are going to get there without a few interim versions and a good deal of pain.

To be sure, ver 2.0 is not without its own set of growing pains - reliability issues, deep customization, integration, and integration security most notable. Some of these are getting better addressed with ver 2.5 (salesforce.com circa 2005-2006, RightNow, NetSuite, Intacct) now doing the rounds.

Getting back to SAP's 1.5 flavor, it does offer some of the benefits of pure bred 2.0 - primarily subscription pricing and remote software updates (hopefully SAP keeps this simple enough). Most likely, I'd guess SAP is also going to mandate the specs for the on-premise application infrastructure, which in turn means 2.0 type operational efficiency in product development due to a single code base. SAP marketing also found a clever, opportunistic way to exploit the reliability pains salesforce.com is facing these days with its big iron stack, and touted their isolated tenancy as the answer to that. I hope they don't believe too much of their own marketing though. Because that's just FUD against salesforce.com's particular situation rather than an industry-wide 2.0 problem.

But here's what SAP's flavor is missing - economies of scale in operations and distribution. Its biggest limitation is that its nowhere near what's required for near consumer scale, lower tier SMB distribution. Not that SAP does'nt know this, or perhaps cares about either. They know (and say so) that it will make sense only for installations with 100+ users. Its a viable option only for existing SAP customers, for larger SMBs and large enterprise divisions that SAP might not like to lose to salesforce.com or RightNow.

And therein, within this apparent threat from SAP is the opportunity for the 2.0 players. Companies like SAP are motivated to serve the larger business and have a distaste for the lower end. It because, as a business, they don't quite know a good way to make money there. If someone can do it, its the likes of Google, Yahoo, eBay. Amazon if they're interested. Salesforce.com certainly, already becoming the best proof point for lower SMB business apps. Microsoft and Intuit, if they set their mind to it. Wild card for Oracle. No way SAP.

For good or for bad, that's splendid isolation indeed.