ANALYSIS
Fork in the Road

Just a couple of weeks ago, two terms, on-demand and Software as a Service (SaaS), were used interchangeably -- it was truly a difference without a distinction -- but a lot has changed in a short time.

First, Salesforce.com (NYSE: CRM) introduced Force.com, and a day later SAP (NYSE: SAP) announced a long awaited on-demand product, SAP Business By Design. The difference between the companies' approaches says a great deal about their designs, directions and, ultimately, who they target for customers.

Conventional Software

SAP Business By Design is an on-demand service that will appeal to many mid-market companies looking for the advantages of utility computing, such as lower initial costs, pay-as-you-go pricing and the benefits of buying from an experienced full suite vendor.

Although the SAP offering is delivered on-demand, it is architected in much the same way as earlier ASP (Active Server Pages)-based applications. It is conventional software hosted and maintained at a remote location to give the customer the relative freedom and cost effectiveness of on-demand computing, but without forcing the vendor to significantly alter the technology architecture.

SAP's approach enables it to play in the on-demand market, much as Callidus' solution enables the same business model. What's missing, though, is the next level of capability provided by the multi-tenant architecture, which, if you don't need it, isn't important.

The Multi-Tenant Crowd

The next level is supplied by companies like NetSuite, RightNow (Nasdaq: RNOW) and, yes, Salesforce.com. These companies and others have gone the distance to provide multi-tenant architectures and the difference is important because multi-tenancy is the heart of utility computing -- making it possible to treat software service like electricity coming into your building. Software needs to be as ubiquitous as electricity to fuel the economy of the 21st century, and that is the distinction I am seeing in these two announcements.

Today, the two types of utility computing look very similar to the naked eye. However, over time, I expect economics to take over and create a chasm between the two. Here's how: While the economics of the two styles are close today, I expect that time will accelerate cost reductions for SaaS -- Salesforce.com and company -- much more than for on-demand, such as SAP and many others.

The result will be that on-demand vendors will be confined to their customer bases and to late adopters who would like the advantages of utility computing but shy away from the perceived risks. If you are a company with a large installed base, an on-demand strategy might be pretty smart in that it corrals customers.

The key for the multi-tenant crowd is growth and Salesforce.com demonstrated that it understands this very well. Growth is all about new applications, and Salesforce.com has positioned itself to take advantage of new application development with Force.com, which enables developers and business users to build new applications with SaaS technology.

There Is a Difference

I don't think you can overstate the importance of the decisions that back these two approaches. Despite the on-demand delivery model, SAP is clinging to a technology and business model that was old when they started building their product.

I think SAP will run into many of the same problems that made it impossible for the early ASP vendors to build a profitable niche. Offering an on-demand approach might just deliver enough of the benefits of utility computing to satisfy a chunk of the market. How long the economics will work for SAP is hard to say, but considering the savings customers will realize compared to a standard on-premise solution, the economics could work for a while.

It should also be pointed out that this strategy could be a half step towards a more comprehensive SaaS future and that SAP is bringing its customers along in an incremental way. I like that interpretation because back office systems are inherently more complicated than the front office and a step-by-step path might be in everyone's best interest.

On the other hand, Salesforce.com is focusing less and less on applications per se and more on its platform -- a larger market and one where more new ideas are percolating every day. They've even built the IdeaExchange to promote good ideas. From a purely evolutionary perspective, I think Salesforce.com is poised to go further because the company has effectively built change and innovation into the service.

Within all this, I think it is becoming increasingly clear that when we refer to on-demand software we might actually be using a more generic term that can refer to software services delivered across the Internet, regardless of the architecture involved. So, if there's a difference, and I think there is, it's a big one, and two terms -- on-demand and SaaS -- now officially have different meanings.