Cloud clout

For most of its existence, SAP has taken pride in developing its own business software products that companies buy, install and run on their computers. But in recent years the software maker has struggled to meet growing demand for software that operates online - or in the "cloud," to use industry parlance.

That could change with SAP's acquisition of SuccessFactors, a vendor of Web-based employee management software.

Online products that run on central computers managed by vendors like SuccessFactors allow enterprises to avoid the cost of installing and maintaining software on their own computer systems. The products offer functions that employees use "on demand" in their Web browsers.

Software as a service

The shift to cloud computing in the business computer sector has been a slow but steady process that is now gaining steam. Initially, corporate IT departments shunned online software, worried about allowing others to manage business-critical data. Vendors, too, weren't excited about the so-called "software-as-a-service" development, concerned they would make less money.

Now both users and makers of business software appear to see online software as the way forward.

Oracle of the United States - SAP's biggest and some would say only serious rival - announced in October plans to make new versions of its business software available online. Last month, it also paid $1.4 billion (1 billion euros) for online customer-management software vendor RightNow Technologies.

Those moves mark an about-face for Oracle whose CEO, Larry Ellison, just a few years ago dismissed the need to embrace the online software trend.

One of the reasons why Oracle, SAP and other software makers have not pushed heavily into this area lies in the way revenue is generated. Revenue from Web-based software flows over time through a subscription model, whereas revenue from installed software is collected up front through licensing fees.

However, the ongoing drive to lower IT costs, coupled with growing demand to put applications on mobile devices, has finally prompted vendors to give in and embrace the shift to cloud computing. And now each is positioning itself to grab a piece of the action.

More acquisitions likely

For SAP, which has reaped billions of euros of revenue from conventional software, looking up to the cloud for long-term growth will mean new products and possibly more acquisitions.

Although SAP has offered a Web version of its business application, the product has not been a big seller, in part because of it being a slimmed down version targeted mainly at small companies. Along the way, the company also faced some development problems, resulting in a delayed rollout.

Stronger competitive position

"SAP's cloud strategy has been struggling with time-to-market issues," Paul Hamerman, an analyst with the industry market research and consulting firm Forrester, wrote in a blog. "By acquiring SuccessFactors, SAP puts itself into a much stronger competitive position in human resources applications and reaffirms its commitment to software-as-a-service as a key business model."

Admitting the need to change track, SAP co-CEO Bill McDermott said in a statement: "The cloud is a core of SAP's future growth."

And there's money to be made. Market research firm IDC expects businesses worldwide to spend $28.2 billon on cloud services this year, up from $21.5 billion in 2010, with spending more to double to $57.4 billion by 2014.

Author: John Blau
Editor: Andreas Illmer