SAP to Chase the SMB Market--Again

Published: February 1, 2007

by Timothy Prickett Morgan

While German ERP software giant SAP is pretty much synonymous with enterprise applications, it is debatable whether or not the company has been able to penetrate into the midrange market very far, and small businesses do not even come close to having budget for the company's software and the hardware it requires. But SAP wants to change that, and it is willing to incur the wrath of investors and brokers to do a better job pursuing the SMB application software market.

Last week, when SAP was announcing it preliminary financial results for the fourth quarter ended December 31, Henning Kagermann, SAP's chief executive officer, said that in the next two years the company would spend between 300 million and 400 million euros (roughly between $390 million and $519 million at current euro-dollar exchange rates) to market an SOA-enabled, easy to use set of application software that would be more economically and technically appealing to SMB customers. This marketing budget is going to hit SAP's profits, but it has run out of room in the enterprise space to grow easily, particularly with the Oracle Collective coming on strong at the high-end and the Infor Collective having control over the vast midrange ERP market.

For the fourth quarter, SAP was projecting that it would have sales of 2.95 billion euros, up 7 percent, with software revenues up 7 percent to 1.26 billion euros, maintenance revenues up 9 percent to 934 million euros, and services sales up 5 percent to 738 million euros. Operating incomes for the final quarter of 2006 are expected to come in at a little under 1.1 billion euros, with net income just under 800 million euros (up 29 percent). For the year, SAP expects sales of around 9.4 billion euros, up 10 percent, and net earnings of just under 1.9 billion euros, up 25 percent.

While SAP announced its intention to support the OS/400 platform back in the late 1990s--as the Y2K and ERP booms were roaring--the company has only been able to garner a few thousand footprints so far. The vast majority of SAP's sites run on Windows, with high-end customers choosing Unix. Sometimes, customers use a hybrid mix of Windows to support mySAP application servers and clustered Unix servers to support databases. The mySAP suite is a bit overkill for actual midrange customers, which is one of the reasons why SAP has created other applications--namely, the BusinessOne and All-In-One suites. Which, ironically, are not supported on the System i5.

The fact that SAP is taking a third stab at the midrange market (which it defines as companies with fewer than 2,500 employees and less than 500 million euros in annual revenues) with a new application suite called A1S is probably going to make a lot of AS/400, iSeries, and System i5 shops laugh at the name. The A1S suite is also known as "Project Vienna," and it is a set of preconfigured mySAP software that can also be deployed as a service over the Internet to give customers the option of buying it or renting it. The A1S suite will be important, according to SAP, in that a fleet of consultants will not be necessary to install the software--or that is the theory, anyway. A1S will initially be offered as a service this year, and then as a licensed product in 2008 for internal servers.

"We have an exciting new opportunity to invest in a new market for us--into an untapped market for us, the midmarket--and we need come investment for this because SAP is an innovator--we don't acquire companies," explained Kagermann in an interview with CNBC. He said that the company is already ramping up subscription-style software pricing, and the A1S roll out is an extension of this approach to software pricing. He said further that it would take two years of marketing investment in the A1S product, but that the four-year span of the product would see returns beginning in the third year and that by the end of the fourth year the company would be able to get margins out of A1S that are larger than it currently has with the current mySAP and Business One products.

SAP currently has 38,000 customers and has a goal of reaching 100,000 customers by the end of 2010. The A1S product is the lynchpin of that strategy. If IBM doesn't have the A1S product in development on the System i5 platform--well, I don't know what I will do. But I know what Big Blue will do: miss out on a huge opportunity.

Not everyone is welcoming SAP to a renewed effort in the midrange. "One has to wonder if SAP truly understands the mid-market or whether this strategy is solely an effort to detract attention from the slowing growth of their Fortune 500 base," said Jim Schaper, chief executive officer at Infor. "Medium-sized customers do not want all-in-one products that need massive customization efforts to address their line of business. That approach is a relic of the past, when ERP implementations were akin to corporate open heart surgery. Infor has built a strong growing company on delivering solutions with industry experience already built in. The bottom line is that customers want more functionality, less complexity, and the lowest total cost of ownership. That is not the plan we see from SAP."

Infor, which is a privately held company that includes the former MAPICS, SSA, Baan, Geac, and myriad other software firms, has over 70,000 customers and $2.1 billion in sales. Infor is the largest application software company in the IBM midrange, ahead of Oracle's JD Edwards unit.

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