"SAP’s small and midsize enterprise (SME) business continued to perform well in the first quarter of 2008 as the Company added more than 1,570 new SME customers (excluding customers from Business Objects) in the quarter, representing a 28% increase compared to the first quarter of 2007. A principal component of the SME strategy is SAP’s breakthrough innovative new solution, SAP Business ByDesign.
Since last September’s announcement of SAP Business ByDesign, the Company has been working closely with early customers and partners to validate and fine-tune the solution. As a result of this process, SAP has elected to modify the rollout strategy for SAP Business ByDesign to ensure a more focused and controlled ramp-up process. The new rollout strategy includes the following:
For 2008, go-to-market efforts for SAP Business ByDesign will focus on six countries, where all the current productive early customers are based and which represent a large amount of the worldwide volume market opportunity. Additional country rollouts will be executed in 2009.
It is expected to take around 12 months to 18 months longer than the original 2010 target to reach the SAP Business ByDesign $1 billion revenue and 10,000 customer potential.
However, the Company will use SAP Business ByDesign innovations and technologies for the existing solutions and this will contribute significantly to the overall revenues of SAP in 2010.
Also, the Company will engage with significantly less than 1,000 customers in 2008.
In light of the modified rollout strategy, SAP will reduce its accelerated investments around SAP Business ByDesign in 2008 by approximately €100 million, which is expected to result in additional operating margin expansion in 2008 as noted in the “Business Outlook” section of this release. Furthermore, beginning in 2009 there will be no further accelerated investments. The expected expenses related to SAP Business ByDesign will be funded out of SAP’s normal operational business.
SAP maintains its full confidence in the product, the market opportunity and the associated business model of SAP Business ByDesign, as the Company continues to move toward volume readiness in 2008."
Many might think that there is something to this, given that SAP acknowledged as much. In fact, the vendor built a single-tenancy (OK, "mega-tenancy" in SAP's lingo) option to host itself. This is hugely costly, and the numbers just don't add up based on the demand pipeline vs. cost to break-even, let alone be profitable (see NetSuite for how long this takes).
Prior to SAP Business ByDesign, SAP has been offering hosted solutions primarily to large companies because, as a single tenant solution (essentially an on-premise solution that is simply being hosted), the vendor could charge for and add as much processing power as needed on a client by client basis. That's why the solution has to be much more expensive - it is a one-to-one vs. one-to-many (multi-tenant) proposition, and the initially suggested US$149/per user/per month price tag would likely not cover the needed SaaS investment.
Indeed, many might belittle Salesforce.com, Microsoft Dynamics CRM Online, Concur, ADP, Ultimate Software or NetSuite for being too simple, narrow and/or shallow when it comes to functionality, but there is a reason for it. Namely, at least (almost) everything there works and scales now after several years of fixing and ironing things out (and much less publicly).
While many will think that SAP is big enough to not have to worry about that, I have still been intrigued why SAP targets only companies with 100-500 users with the on-demand story; why not offer SAP Business ByDesign to whomever might want it, big or little (e.g., Salesforce.com has customers with nearly 30,000 users, while the newcomer Workday just signed Flextronics for a mind-boggling 200,000 on-demand seats)?
At least, that was the genesis of SAP Business One (formerly TopManage) and SAP MII (Manufacturing Integration & Intelligence, formerly Lighthammer).
SaaS for ERP is bleeding edge and that is something that SAP does not do well at this stage. The vendor wants to work in mature markets where the tried and tested processes will fit. Yet, smaller companies have the same needs as large customers, just with fewer transactions, so a stripped back SaaS solution is often not the solution and an inflexible template method is neither understood nor desirable.
SaaS for customer relationship management (CRM)/sales force automation (SFA) is a much simpler solution understood by all users and really limited to operation within a single department, with only reports being used outside that department. Conversely, SaaS for ERP cuts across all company departments and there the system gets complex. Any one can roll out a solution, but making it work as required is the trick.
Furthermore, it is becoming increasingly clear that SAP’s target customers will require a degree of customization SAP is trying hard to avoid. My belief is that there is no way to avoid the problem, since a "vanilla SaaS" offering might get SAP into the game but will not take it into the playoffs. This dovetails into the company’s questionable SaaS partnering strategy and how to bring partners on board. Without much customization and consulting opportunity, what are the incentives for partners other than being mere low-margin sales ’shops’?
I could have overlooked something (we are all human after all, including SAP folks).