Standing before thousands of attendees at the SAP Sapphire conference Tuesday, CEO Leo Apotheker said he was there to "kill a rumor" about the death of the company's software-as-a-service ERP suite, called Business ByDesign. He invited attendees to stop by for a demo of the product at SAP's booth.

But while the suite may not be dead, what Apotheker didn't tell his audience is that Business ByDesign will have to undergo major reconstructive surgery before it can go to market with a product profitable enough to please its shareholders. And that could take another year, or maybe more.

InformationWeek's discussions with various high-level executives at Sapphire reveal that SAP requires a lower total cost of ownership, or TCO, before it can expand the SaaS ERP suite beyond its current test base of 80 customers.

One approach, apparently under serious consideration, is to use an in-memory database, so that all transactions occur within memory -- similar to how SAP's Business Warehouse Accelerator product works. An in-memory approach would require just one-one hundredth of the storage space SAP would need to host the data in a customer's Business ByDesign suite, said Hasso Plattner, SAP co-founder and chairman of its supervisory board, in an InformationWeek interview.

In-memory processing is a new approach in the application-hosting world: SaaS ERP vendor Workday uses it, but Salesforce.com does not. SAP once believed that in-memory technology could not support the number of transactions that take place in an ERP suite, Plattner said, but further work has shown that belief to be untrue.

SAP hopes to figure out the right formula for Business ByDesign by next year, but it has its work cut out. CTO Vishal Sikka even suggested that SAP would retain primarily the interface aspects of the product and could replace approximately 70% of the internal workings of the system to get it to the TCO that SAP needs. Plattner predicted a market-ready product within two years.

Yet CEO Apotheker clearly doesn't want customers to lose interest in the suite, as evidenced by his mention of it in the keynote.

Apotheker and former CEO Henning Kagermann stood upon a stage in a downtown Manhattan theater on a sunny September day in 2007 and declared Business ByDesign as the company's first big foray into the world of SaaS, citing a market potential of $15 billion.

Before hundreds of people, Kagermann even called it "the most important announcement I've made in my career." Executives said they planned to sign up 1,000 customers for the product in 2008. By April 2008, however, it was clear there were problems with the suite and that SAP shareholders would not be supportive of large amounts of money to fix those problems. At the close of a difficult financial quarter, SAP said it would slash by half what it previously planned to invest in Business ByDesign in 2008 -- down to about 100 million euros -- as it worked to "fine-tune" the service for its first customers. It also tempered its revenue goals for the product, estimating it would take until 2011 or 2012 to hit $1 billion in annual sales for the service, originally a target for 2010.

On Tuesday, 13 months after that estimate was made, Apotheker said in an InformationWeek interview, "We're on track for our plans for Business ByDesign. We want to make sure we can deliver service 24 by 7 by 365, by providing the only holistic suite out there. We are progressing well.

"Hopefully early next year, we will provide the service on a broader basis," Apotheker said, while adding, "but that decision hasn't been made yet."

Some questions remain unanswered about the suite. If parts of it need to be reengineered, then why did SAP reduce its workforce on Business ByDesign to 800 people from 2,600 and provide in a March e-mail its explanation that "as large parts of the software are already developed ... SAP will transfer most of the programmers to its flagship project Business Suite." (Business Suite is SAP's core product: an on-site, licensed suite that includes its ERP applications.)

Apotheker also refused to say whether Business ByDesign is being served to customers in a multitenant architecture or single tenant.

"Who cares?" Apotheker said in Tuesday's interview. "What matters to customers is SAP has solved some very interesting technology challenges with Business ByDesign."

The multitenant question does have relevancy, though. Some SaaS companies, such as Salesforce and Workday, insist that multitenancy (meaning groups of customers "share" an application, yet keep their data separate) is the only way to profitably offer SaaS, since it requires less investment in hardware and storage than a single-tenant approach.

When Business ByDesign was introduced, it was single tenant. Platter indicated Tuesday that the Business ByDesign development team may be working to move the suite to a multitenant infrastructure, but it's unclear how much, if any, of that work has been done.

Twenty months later, the high-profile launch of Business ByDesign, and its subsequent delay, will be remembered more for its poor execution than how it marked SAP's willingness to try something different.

Still, the delay may not have lasting damage on SAP's SaaS efforts. Perhaps its typical customer base still isn't convinced a SaaS ERP suite is the right way to go. Several CIOs interviewed at Sapphire, from companies big and small, said they still have concerns about the perceived lack of security and control they would have with SaaS, but that it might work with some applications.

Indeed, SAP already offers several on-demand applications in such areas as CRM and procurement. It's also working on a software-plus-services strategy, in which it'll offer hosted software modules that plug into customer's on-site ERP systems. More information will come out on that in coming months, Apotheker said.

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