The battle between software giants SAP and Microsoft to capture the software as a service (Saas) mid-market took a dramatic turn last week as SAP announced its ByDemand package for small and medium-sized enterprises (SMEs) will be delayed by 12 to 18 months.

SAP was set to be the first major vendor to move into the market, occupied by smaller specialists such as Salesforce.com and Netsuite.

“We can afford to do this since we’re targeting an untapped market,” said SAP’s chief executive Henning Kagermann.

But Microsoft is developing a suite of products targeting exactly the same market.
The Software Plus Services strategy will see the vendor offering web-hosted and traditional software packages to businesses looking to ease themselves into the market.

Earlier this year, Microsoft chief executive Steve Ballmer said the company would start to phase in hosted services slowly over the next two years.

But Microsoft is now likely to accelerate this process, according to Gartner research director Tim Payne.

“Microsoft will definitely see this as an opportunity to get into this market quickly,” he said.

The reasons for the delays in SAP’s offerings are unclear, though early indicators suggest that SAP underestimated the robustness of the infrastructure required to operate the service.

“There is no real consensus on how to deliver by-demand software, and it’s trickier than SAP thought,” said Datamonitor senior analyst Vuk Trifkovic.

“Microsoft has taken its time until now ­ it will be interesting to see how aggressively it goes after this new opportunity.”

Big vendors have been somewhat hesitant in this area because of a desire to maintain focus on their traditional licensing business, according to Woodson Martin, vice president of strategy at Salesforce.com.

“We’ve seen a history of large vendors approaching this area with half steps ­ it’s very difficult to keep both models working at once,” he said.

SMEs hesitating over whether Saas is the right model for them will be convinced only when the big players start to offer products in that sector, according to IDC analyst David Bradshaw.

“By entering the market they will lend credibility to it,” he said.

Peter Scargill, IT chairman of the Federation of Small Businesses, said the lower mid-market is simply waiting for the right product.

“Broadband has taken off and people are less choosy about keeping hold of their systems. If the right package comes along, the climate is right for it,” he said.