SAP announced today that it will offer its ERP solution for SMBs, Business One, as an “on-demand” solution. The announcement follows close on the completion of its acquisition of SaaS provider SuccessFactors, and represents a further important strand in SAP’s evolving Cloud strategy. Business One OnDemand will sit alongside SAP’s Business ByDesign, which is available as a service only and is positioned more for mid-sized businesses.

SAP Business One is SAP’s entry-level ERP solution targeting small enterprises. According to SAP, the system is being used (on-premise) by about 34,000 such organizations today, plus around 1500 subsidiaries of large corporations. The solution, sold through partners, competes with ERP systems from international players like Sage and Microsoft as well as solutions from many small, local ERP specialists in different countries.

With this move, SAP is in good company, keeping abreast of other vendors that have started to offer cloud options of their on premise ERP solutions. For instance, Microsoft is adapting its Dynamics ERP product line (including Dynamics NAV and AX) in that way. Sage is doing the same with its ERP solutions, for instance Sage Office Line 365 is a cloud version of Office Line, Sage’s flagship ERP solution in Germany.

According to SAP, the OnDemand ERP provides the same set of functions as the on-premise version. Also, existing partner add-ons for the on-premise solution can be used on top of the cloud ERP. It is too early to evaluate the technical details of this offering but we do know that it will generally be priced on a pay as you go model in line with standard SaaS practice. It can be offered in a multi- or single-tenanted configuration by the hosting partner.

So far, SAP has been developing from scratch – or buying – cloud-only solutions. Now it has brought an existing on-premise product to the cloud. As it is SAP’s stated aim to generate a third of its revenues from subscription-based services by 2015, we think it highly likely that we will see more such activities from the company.

In PAC’s view, this is a natural step in SAP’s continuing SaaS strategy – but also an interesting test case, as companies have had difficulty bringing SaaS versions of their products to market. However, with SAP Business One being the smallest of all its ERP solutions, this is arguably SAP’s least risky on-premise offering for such treatment. SAP also takes the (reasonable) view that smaller companies are the ones with the biggest desire to move their applications off-premise, for reasons including cost and simpler tech support.

Good technology is important, but not the only factor for market success. SAP Business One OnDemand uptake will critically depend on the partner ecosystem, particularly because hosting and support, as well as the services needed to set up a solution, will all come from partners, not from SAP itself.

In the case of SAP Business ByDesign, SAP provides the operations, while partners provide reselling and services. But in the case of SAP Business One, partners, such as telco operators, hosting or cloud infrastructure providers, will provide the infrastructure and services as a one-stop-shop.  A number of such partners were announced this morning.

Of course, a lot of telcos, cloud and hosting providers in the world are capable of providing the infrastructure to run an ERP like this. But the question for us is: how many of them can also resell an ERP solution and provide the services needed, including implementation, data integration, etc.? They may have established system integration capabilities in recent years. But even then, this does not mean that they can sell to small businesses, or do so profitably.

In our view, the most likely and most successful route to market will be alliances: between telcos/cloud/hosting providers and smaller ERP system integrators who can reach out to small businesses. This strategy also makes sense because system integrators have developed a number of add-on solutions that create added value.

Furthermore, existing partners need to find their role in the cloud business without becoming cloud operators themselves and will welcome an opportunity to consolidate their position as the market evolves around them.

We now look to see how SAP will recruit further partners and if it will encourage the eco-system to develop to support the new offering in this way.