SAP, Oracle and Microsoft solutions will not go away anytime soon. While the SaaS discussion is gaining ground in the last months, we still don’t see massive (or even minor) conversion of enterprises from mission critical systems like SAP to SaaS based applications. Netsuite for example, is reported to go after SAP customers in a competitive conversion offer. I doubt that they will get too many real R/3 customers that are fully deployed converting- the only success they may enjoy is from customers that never deployed SAP or subsidiaries of SAP shops that used something else (say MS-Dynamics) and now want a better solution.

Why is that true? On the surface, SaaS creates huge advantages in cost, flexibility and deployment over the on premise model. In reality, customers made huge investments implementing and tailoring ERP products to their needs, and the risk of switching does not justify the potential future savings. When considering replacements people tend to think less on future value, and much more on past investments.

Just like in the last downturn, the winners will not be the replacers. Salesforce.com was not in the business of replacing Siebel in 2001-2004. Salesforce won SMB accounts and rogue salespeople (or teams) in larger organizations that didn’t like the CRM solution provided by the enterprise. It was not a replacement game but rather an addition to the current IT infrastructure provided by the organization, small enough to digest without making waves. Only later did Salesforce came back in and tried to convert them to corporate deals- and when did they have most of the success? The 2005-2007 timeframe, when IT investments beefed up significantly and people felt like being strategic again.

What does it all mean? I predict that successful SaaS players will not be the ones offering enterprise applications as a service (with long implementation cycle, high setup fees etc) attempting to replace current systems, but rather players that innovate on the edge of the enterprise, improving existing systems rather than replacing them.  Yes- best of breed is back and until the infant SaaS industry will start consolidating around a major player, it may well be a dominant force.

Replacement of an existing system is usually perceived as high risk for enterprises and they will try to avoid it in bad times. Solutions that improve the edge of the IT process (e-signature, lead management, marketing, communication…) and do not replace existing investments will be perceived as low risk and can get much better traction in a down market.