Business software giant SAP is slowing down the rollout of its new hosted applications, as it struggles to reign-in the operating costs of the service.

The German software maker revealed the problems it was having with its Business ByDesign offering at the same time that it released disappointing first-quarter financial results.

Chief executive Henning Kagermann said on a press call that the company was struggling to make the on-demand enterprise resource planning service profitable. "We've had good feedback on the product, but we have to improve how we run it in a hosted environment. At the moment, we have too many manual processes," he said.

SAP had claimed when launching the service that it would attract 1,000 customers in the first year. Kagermann today admitted it would miss that target.

Kagermann also acknowledged that it would take SAP 12 to 18 months longer than expected to hit revenues of $1 bn for Business ByDesign. Orginally, SAP had expected to hit that figure by 2010.

SAP will restrict Business ByDesign availability to just six countries for the rest of 2008. It is also cutting investment in the product by €100m.

SAP posted a 22 per cent drop in profits for its quarter ending 31 March 2008. It made revenues of €622m for the quarter, with net income at €222m. At the same point last year, quarterly net income was €310m. SAP blamed acquisition charges related to its purchase of Business Objects and the strong Euro for its drop in profitability.

The admission that SAP is having difficulties with its multi-tenancy model for Business ByDesign will come as a huge embarrassment.

Earlier this year, Patrick Walravens of financial analyst group JMP Securities had highlighted "fundamental architectural challenges" with Business ByDesign. He suggested that the software may not have been built using a single data model, and that SAP would need to provide a "major update" to rectify that.

Yet when questioned about those assertions on 18 April 2008, SAP's vice president of marketing David Keene had insisted there were no flaws in the product design. "It was designed to always change and grow, without requiring a revolution (like a major update)".