SAP announced today that Shai Agassi, president of its product and technology group and architect of SAP’s Netweaver software, is leaving the company to pursue his interests in alternative energy and climate change.

While these are honorable reasons to move on, it is very likely that his departure was also prompted by the overwhelming challenges associated with migrating SAP’s software to an on-demand, Software-as-a-Service (SaaS) model, as well as some executive suite politics.

In addition to his broader responsibilities, Agassi was the chief architect and senior champion for SAP’s on-demand efforts which were launched in February, 2006. He joined the company in 2001, when SAP acquired his company TopTier Software. He was also among several SAP executives considered a potential successor to Chief Executive Henning Kagermann, who recently had his employment contract extended through 2009, creating a bottleneck among his lieutenants, including Agassi.

Agassi’s departure compounds SAP challenges fulfilling its promise of delivering on-demand solutions which keep pace with escalating customer demands. Although the company announced that his position will be filled by a team of people, Agassi had the greatest cache and credibility inside and outside the company to drive SAP’s on-demand efforts.

His departure certainly raises enough concerns about SAP’s on-demand strategies and services to open the door for Salesforce.com and other SaaS vendors to steal away customers seeking on-demand solutions in the areas that SAP has traditionally served.

Although it is not a SaaS vendor, Oracle Corporation will also capitalize on Agassi’s departure and intensify its campaign against SAP which has included its acquisitions of PeopleSoft, Siebel Systems and most recently Hyperion.

Agassi’s departure is also the latest example of executive defections among legacy enterprise application companies seeking to migrate to an on-demand services model. Tim Chou, the former head of Oracle’s hosting business, wrote the book on the challenges facing traditional software companies in the face of the on-demand movement, called “The End of Software.” Ken Rudin, a veteran of Siebel Systems’ on-demand efforts, is now the founder and CEO of LucidERA.

Executive defections from entrenched players to promising start-ups aren’t new. In this latest example it will be interesting to see if Agassi pursues his noble interests in alternative energy and climate change, or leverages his on-demand experience and joins a true SaaS vendor. Or, if SAP uses this as an opportunity to acquire a SaaS vendor to obtain a new leader for its on-demand efforts.