Boston—To sell its new Business ByDesign on-demand ERP suite to the midmarket, SAP envisions building what it considers the first working on-demand model for partners—a rare commodity in a world where many traditional software partners are trying to figure out the revenue and opportunities in reselling on-demand services.

The downside for partners: They've got to pony up a significant amount of cash—about $250,000 annually, according to one on-demand partner—to be part of SAP's partner channel. However, partners may be willing to pay the money to keep up with the changing software market.

At SAP's Influencer Summit here Dec. 4 and 5, Hans-Peter Klaey, president of SAP's small and midmarket enterprise business, told reporters that his plan is to work with partners in a "shadow" program to get them up to speed on selling and deploying Business ByDesign. Once certified, partners will be able to resell Business ByDesign. To get there, though, partners need to set up a separate business unit that focuses specifically on selling SAP's on-demand software, a request that could have serious cost implications.

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"Partners can sell, resell or deploy Business ByDesign," Klaey said. "Then you can speculate the future of our next steps with partners—it could larger partners or hosting partners. Any investment they have to have is people, so they [need] to get a sizable unit up and running to go after this market. The minimum would be to start with four or five people—minimum. Multiply that with 20 partners, and you already have 100 salespeople out there."

Klaey said SAP is looking for partners, but "not volumes of partners." While that means being selective about who sells Business ByDesign, SAP also has an aggressive goal of adding 10,000 new customers to its on-demand roster by 2010, which will require a significant channel undertaking. Currently, SAP has about 2,500 partners selling its midmarket software to between 25,000 and 29,000 customers. However, that channel, which SAP is tapping to resell its Business ByDesign suite, has built its revenue model around selling on-premise software that brings relatively low volume but high earnings based on annual license and maintenance revenues. By contrast, the on-demand model is one of high volume and relatively low monthly revenues.

Read more here about SAP's Business ByDesign.

SAP might well look to Microsoft for answers, given Microsoft's massive indirect channel methodology for selling its ERP (enterprise resource planning) software and its protracted move into the on-demand world with the December release of Microsoft CRM 4.0. However, Klaey said no one company has gotten the model right.

"The industry does not have a functioning on-demand model for partners," he said. When asked what he will do differently than Microsoft to ease partner pressures, Klaey offered a somewhat obfuscating response: "At the end of the day you have to assume [on-demand] is a different business for customers. It's not just CRM [customer relationship management], it's a comprehensive business suite. It's a different way for SAP and, by definition, different for partners. Partners need to have a separate business unit to … sell Business ByDesign."

To help partners overcome revenue issues with selling on-demand software, Microsoft announced in July that CRM partners will be compensated on a recurring rather than monthly basis; partners selling on-demand services will receive 10 percent of the yearly SAAS (software-as-a-service) subscription revenue for each customer where they are deemed the partner of record.

Mitch Cannady, founder and president of Spinnaker Solutions, a Microsoft CRM reseller, realized early that to sell on-demand software, he would have to be more innovative, particularly with his approach to sales. Almost taking a play out of SAP's book, Cannady has set up a separate business unit to sell Microsoft's on-demand software. Setting up the unit "requires people, requires desktops and computers, training costs and payroll," said Cannady, who estimated it would cost between $200,000 and $300,000 annually to set up a five-person team.

But he said the extra business unit is worth the cash outlay, particularly since he is hiring junior staff to sell into smaller accounts, which he hopes turn into enterprise accounts in the future. "The benefits outweigh the costs. What's going to happen is you are going to see a lot more companies coming into the [on-demand] market and the cost of getting into the market is [going to be] a lot less," Cannady said. "The challenge we've had in the past as partners is companies that supplied hosting environments haven't been too channel-friendly. Microsoft is the first company that really embraces a channel on a hosted [model]. Salesforce.com has not been very friendly."

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