SAP reveals it has designs on the mid market
Analysis: The enterprise software giant puts $400m bet on mid-sized firms but will it pay out for either SAP or its customers?
This week's launch of Business By Design, SAP's mid-market, on demand software system [see News] throws down a challenge to software as a services companies such as NetSuite and RightNow, as well as conventional software firms such as Microsoft and Oracle.
But the greater challenge could be for mid-sized company IT directors and chief information officers - who must now choose between the conventional, on-premise Business All In one, the new Business ByDesign software, and possibly the smaller and simpler Business One suite. And SAP itself, as well as its network of partners and resellers, still need to find the right market for each product.
SAP clearly believes Business ByDesign is about attracting new customers to SAP, rather than offering a simpler and cheaper back-office system for existing customers. SAP executives say the software is aimed at "non buyers" and especially, companies that thought of SAP as too complex and too expensive for their needs.
The market opportunity is certainly there. SAP values the potential market at $15 billion (7.5 billion), or about 1.2 million companies worldwide. Forrester Research calculates that the level of adoption of software as a service (SaaS) is currently at about 10 per cent among midsize businesses, mostly for point solutions such as human resources and customer relationship management.
A further six to eight per cent of companies have plans to deploy SaaS, so there is certainly plenty of potential for Business ByDesign. The potential could well be greater than SAP's existing offerings in the space: in an interview at the New York launch, SAP's deputy chief executive Lo Apotheker told IT PRO that SAP currently has 29,000 customers in the mid-market space.
SAP, though, is placing a very large bet on its ability to persuade "non buyers" to sign up for Business ByDesign. The software, which uses model-based development, a services-oriented architecture (SOA) and runs on the NetWeaver platform, has taken four years to develop and cost SAP between $300 million (150 million) and $400 million (200 million) in development costs.
None the less, SAP is taking an initially cautious approach, with just 20 launch customers (in the US and Germany) and some 300 prospects. UK companies can register to try the service this week, but SAP does not expect Business ByDesign to reach its full operating capacity until 2010.
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Ramping up the service will inevitably mean bringing additional data centres on line, as all instances of Business ByDesign are currently hosted at SAP's Waldorf HQ, in Germany. SAP will also have to work out how to divide the attention of its channel between Business ByDesign and Business All in One, and how to provide integration services for customers who want - or need - integration between Business ByDesign and other applications.
"There's no question the mid market needs customisation as much as large enterprises," says Zach Nelson, chief executive of SaaS provider NetSuite. "The decision by Asahi Kasei Spandex America, a division of the $10 billion (5 billion) Asahi Kasei Group, based in Tokyo to switch from SAP R/3 to NetSuite is a case in point. We needed to build a fairly complex SuiteFlex "suitelet" to meet their business process requirements."
It may well be that SAP, or most likely its partners, will provide a degree of customisation beyond the simple, reference profiles a customer can select within Business ByDesign. But this could put SAP in direct competition with some of its most valuable resellers, who often carry out complex customisation for specific industry verticals using existing SAP software - and might even host the resulting code for clients.
"There is some overlap in target customers between Business ByDesign and Business One and Business ByDesign versus All in One," says Paul Hammerman, vice president for business process and applications at Forrester Research.
"The main risk here is channel 'contention' where partners will be competing against one another with different SAP solutions. We see this to some extent in Microsoft's indirect channels with the Dynamics solutions. SAP needs to have clearly defined rules of engagement to minimise this overlap."
SAP, however, maintains that Business ByDesign offers a great deal - possibly all - mid-sized companies need to run their businesses. For industries that deep vertical specialisation, there is Business All in One; but according to Apotheker, there are plenty of companies that simply do not need that specialisation. What they do need is software that allows all the disparate parts of a business to talk to one another.
"Business ByDesign is a complete solution. You don't need to add anything more and you can run a business on it," he says. "Owners of businesses do not care about acronyms. They want to run the business, not a CRM system. They want customer intimacy and want to know their profits when they do a deal."
This simplicity is bound to appeal to many company directors and owner-managers, especially in fields such as professional services, where companies prefer to keep overheads light and where SAP appears to be keen to sell Business ByDesign.
"It will appeal to professional services firms in particular because these firms are already offering outsourced or shared services to their clients; they are the customers that are ripe for this," says Simon Jacobson, a senior analyst at Boston-based AMR Research.
But even though launch customers for Business ByDesign include manufacturers, SAP's Apotheker concedes that there are other customers who will instinctively prefer an in-house system, even if it costs more, because of the greater control it brings.
"There will always be people who want to touch and feel the system, which is why we offer a trial environment, so the accountant or the production guy can test it out. They can touch and kick it," he says.
And analysts believe that SAP will have momentum behind it, when it comes to companies that see IT as a supporting service rather than a core business function.
"A broad ERP offering has considerable appeal to companies that are currently running a variety of point solutions," says Forrester's Hammerman. "On the other hand, SAP must recognise that most businesses need a variety of software solutions, so the notion of a one-stop shop is not valid. Integration options must be provided."
How well SAP manages this, and how well its partners and resellers adapt to the challenge of selling both on-demand and on-premise software will determine whether Business ByDesign is the building block for the future of SAP or an expensive and potentially distracting side show.