SAP is stepping into uncharted waters with the launch of its hosted business applications service, codenamed A1S, on Wednesday. The move will give it a head start over Microsoft and other rivals, but could also mean SAP learns the hard way that offering hosted ERP on a wide scale is difficult to do.

Offering business applications on demand, also called software as a service (SaaS), is not new. But most services, including those from trailblazer Salesforce.com, have focused on customer relationship management or human resources management, only a part of ERP (enterprise resource planning).

Those functions are easier to offer as a hosted service, since managing sales and payroll tends to be fairly standard across industries and countries. ERP as a whole is more complex, involving tasks like supply chain management, procurement and accounting, for which requirements and regulations can vary greatly.

"It's less standard across industries, but even more importantly across geographies. The regulatory differences are profound even between the Netherlands, Belgium, and Luxembourg," said Bo Lykkegaard, a research manager with IDC in Denmark.

Even the existing leader in hosted ERP, NetSuite, has found it difficult to offer the services widely outside the U.S., according to Lykkegaard. "They've been selling mostly CRM internationally, which is easier to localize because it's mostly a question of currency and sales tax."

"Hosted ERP is still nascent, and that's what A1S is largely about. That's what makes the A1S launch today so interesting," he said.

SAP executives are giving the first public demonstration of A1S, aimed at midmarket companies with up to about 2,000 employees, in New York on Wednesday. They are also expected to unveil the name for the service and possibly pricing. The software is being tested by a handful of customers now and is likely to be rolled out gradually next year starting in the U.S. and parts of Europe.

The complexity of hosting ERP software has prevented Microsoft from announcing plans to offer its Dynamics ERP applications as a service, although its hosted Live CRM software is being released this quarter.

"Software as a service makes a lot of sense for CRM, because the offering typically goes in with very little customization -- a sales process is a sales process," Klaus Helge Andersen, corporate vice president for Microsoft Business Solutions, said in a recent interview. "ERP has more deep vertical content, and all the multitenant platforms I know about don't have a customization model that works well for individual customers."

SAP is expected to show in New York Wednesday how it gets around this problem. It has touted the benefits of A1S at some length but hasn't shown publicly yet how it works. It has said it will be quick and easy for businesses to set up, with interfaces tailored for industries and users. And it promises to open a new market for ERP for smaller companies wary of its complexity, much as Salesforce.com opened doors for CRM.

Lykkegaard has seen A1S and said it is built from the ground up as a hosted service, and that SAP has done much to make it easy to use.

Customers can look at the software on the Web and try configuring it before they purchase it, "so what used to be a presales exercise the customer can do for themselves," he said. "Then when you configure a business process it's all model-based, so you choose a business process and the user interface will change correspondingly. It's procedure driven."

"They truth will be in the details, and we'll see that when some of these midsize companies start to work with the software," he said.

Besides NetSuite, SAP will face competition from many small companies offering hosted ERP in local markets. In addition, Deloitte & Touche has been offering hosted ERP using Microsoft's Dynamics software in some European countries, Lykkegaard said, although Deloitte declined a request to discuss it.

The rewards are potentially big. IDC projects revenue from on-demand applications to increase almost 60 percent in 2007, and grow at a compound annual rate of 32 percent over the next five years. In 2006, hosted applications accounted for about 3 percent of all software applications revenue. That will increase to 10 percent by 2011, Lykkegaard said.

"Keep in mind that's revenue from licenses and maintenance, not just new software licenses, so it's a very profound impact," he said.