SAP announced its long-awaited move into the on-demand software business on Thursday, which analysts and competitors said could raise questions about the software company’s business model.

The German software group unveiled a limited version of its customer relationship management software that will be “hosted” on IBM computers and sold on a subscription basis.

Under an on-demand contract, customers use applications that run on centrally managed servers, rather than installing and running them on their own machines.

They pay a simple monthly subscription rather than up-front licence fees and regular annual maintenance contracts.

SAP’s move echoes initiatives announced by Siebel Systems, which has been overtaken by SAP as the leading supplier of CRM software, and Microsoft. Oracle completed its purchase of Siebel this week, setting up a new area of conflict with arch-rival SAP.

The push into selling an on-demand version of CRM reflects the fact that this has become the first corner of the business software market where the new approach has worked on a broad scale.

According to AMR Research, the on-demand CRM market, though worth only $596m last year, is set to grow at a compound rate of 29 per cent between 2004-2009. Sales of traditional software licences, worth $4.2bn, are set to grow at only 6 per cent.

SAP expects many of the customers for the new service to be large companies adopting CRM for the first time, but which eventually switch to running the software in-house instead.

Persuading customers to make that transition could be important to SAP’s long-term revenues, said Rob Bois, an analyst at AMR. “Ultimately, SAP would prefer to move [on-demand] customers over to the licensed model.”

Marc Benioff, chief executive of, which has emerged as the leading stand-alone seller of on-demand software, said traditional software companies faced difficulties in changing their business approach.

“SAP, like Oracle and Microsoft, now risks cannibalising its existing customer base,” he wrote in an e-mail to employees.

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