As Andrew Clark, director of strategy for IBM’s Venture Capital Group, puts it, “It’s doubtful that a lot of our large customers are going to displace existing investments.”

SAP and Oracle are trying to skirt such enterprise objections by selling their SaaS offerings as part of a suite of options that includes packaged software. In fact, SAP views its new CRM service as an on-ramp to buying and deploying SAP CRM software in the usual manner. “The key difference is that SAP has created this software-as-a-service offering and uses the same lines of code both for an on-premises as well as an on-demand deployment,” says Peter Graf, SAP’s executive vice president of marketing.

Oracle, which has offered hosted versions of its E-Business Suite for years -- and inherited CRM OnDemand as part of its Siebel acquisition -- sees the on-demand model as the centerpiece of its new Fusion initiative, according to Chris Hummel, Oracle’s vice president of services global sales support. Like SAP, Oracle is taking a have-it-your-way approach, offering either hosted or conventional flavors, or a mix of the two, depending on the customer’s preference.

A tale of two architectures
Not surprisingly, the new SAP and Oracle offerings earn little more than scorn from the SaaS pure-plays. Although Salesforce.com CEO Marc Benioff thinks SAP’s entry into hosted CRM helps validate the on-demand model for enterprise customers, he also firmly believes SAP is going about it all wrong.

For Benioff, real SaaS must adhere to an architectural principle known as multitenancy, where a single instance of the software runs on the provider’s servers, and all users log onto that same instance. “I just don’t buy their vision of the future,” says Benioff about SAP. “I don’t buy that there’s going to be all these single-tenant databases everywhere, that everybody’s going to have their own server, that everybody’s going to have their own stack of SAP code, that everybody’s going to have their own version of NetWeaver customized with their schema. I believe that the world in the future is multitenancy.”

Patrick Grady, CEO of Rearden Commerce, puts it more bluntly.

“On-demand is not a hobby,” Grady says. “If you don’t have a single-instance, multitenant, on-demand, pure SOA-based platform, then it’s all crap and the customer will not receive any of the advertised benefits.”

Grady puts equal emphasis on SOA as a technology cornerstone, because that modularized architecture has enabled smart SaaS providers to let users customize their experience safely, so that nothing breaks when the single instance is updated on the fly. Without a true SOA and multitenancy, he says, the provider would have to host an infinite number of highly customized, inflexible applications, processes, and their respective versions across heterogeneous environments.

To be fair, Graf says SAP has conquered the update problem.

“We have pioneered what we call isolated tenancy,” Graf explains. “There is a master copy of the application, which is continuously improved and updated. And we have a mechanism where we can push this new application into existing, running systems so that all the data and all the configurations are preserved and all the user experience is preserved, but we can add new capabilities and we can modify specific processes on the fly.”

Graf maintains, as does Oracle’s Hummel, that large enterprise customers balk at multitenancy. “The feedback from our customers and from our own research suggests that customers prefer the configurability and security of on-demand solutions that leverage a private (single-tenant) infrastructure,” Hummel says. “While multitenancy reduces the resource, cost, and management burden on the supplier … it really adds little value to the customer unless the cost savings for the supplier are passed on to the customer.”