SAP Farms More Business Out Amid Its Staff Reductions

SAP Farms More Business Out Amid Its Staff Reductions
P.J. Jakovljevic - December 18, 2001

Event Summary

On November 26, SAP (NYSE: SAP), the leading provider of business software solutions that has nonetheless long been regarded too unwieldy and costly for small or midsize enterprises, announced plans to deepen its commitment to small and medium businesses (SMBs) by expanding its channel partner sales program to cover businesses with up to $500 million (U.S.) in annual revenue.

The expansion of its indirect sales channel is intended to augment the company's direct sales efforts and give it more complete sales coverage of the entire U.S. market, ranging from businesses with less than $200 million in revenue to the largest global corporations. On December 7, however, SAP undercut the power of its November 26 announcement by deciding to axe approximately 7% staff from its over 4,500-strong U.S. workforce as a part of an overall restructuring program requiring all divisions to curb fourth quarter costs. The cuts are part of SAP's restructuring program in the US to transform its 21 industry groups into 12 vertical industry "clusters" that will focus on the three core e-business software areas -- SCM, CRM and ERP.

Under the SMB program, SAP will certify new and existing channel sales partners to offer its e-business solutions to companies with up to $500 million in annual revenue in specific vertical industries and geographic areas across the United States. The expanded program will build on the success of SAP's current Certified Business Solutions (CBS) program, which was established in 1997 to simplify the process of evaluating and purchasing software, equipment and implementation services for businesses with annual revenues of less than $200 million. Through its current network of seven CBS providers, SAP delivers prepackaged solutions incorporating industry-specific functionality and best practices for faster and more cost-effective deployments.

Businesses with less than $500 million in annual revenue reportedly constitute 58% of SAP's worldwide customer installations and represent an area of increasing focus for solution development and sales efforts, as well as a key market opportunity for SAP. In addition to the enhanced sales and delivery efforts to midsize companies, SAP plans to further expand the depth of its solution offerings for small and medium businesses by partnering with industry-experienced third parties that will bring a series of prepackaged solutions for specific vertical industries to market.

Market Impact

This channel announcement should be regarded as a prudent and positive move for SAP, although much belated. Nonetheless, the move should confirm the company's commitment to SMB customers. Given that now almost two-thirds of all SAP customers would fall within this category (less than $500 million in revenues), the market perception of SAP being overkill for smaller enterprises might change too.

It is interesting to note that SAP has been plagued by this myth particularly in the US. The fact is that a high percentage of SAP's customers elsewhere in the world are mid-market companies. One can wonder why that is still not much of the case in the US. Smaller enterprises, employing an unbiased software selection facilitator, still regard as frivolous the suggestion to include SAP in the bidding process. One reason is very likely that SAP's US-based competitors have done a masterful job of instilling FUD (fear, uncertainty, and doubt) mainly by exploiting some well-publicized SAP implementations' flops in the US; this must have most likely not been that effective in Europe, where SAP is considered a poster child of a successful company and the pride of European corporate world. For example, to not invite SAP to participate in a selection for a German mid-market enterprise, would be equal to blasphemy.

Another major reason is still nascent indirect channel - only seven certified partners for the entire US market sounds rather pathetic compared to thousands that, e.g., Microsoft Great Plains cite. While SAP has increasingly been bidding in smaller deals, it has also been doing mainly through its direct sales force. So far this approach has often proven inappropriate for the market segment. Although its swanky-dressed and haughty mannered pre-sales consultants impress with their knowledge and the professional posture, they repeat the 'spiel' they would play before the users of some corporate giants. As a result, the SMB prospects often get overawed and bamboozled by the perceived complexity of the software and impeding implementation effort.

It is a completely different case when SAP is presented by a local partner, well versed with the issues and fears of the customer (and who can even strike a cultural rapport with them, being a native of the region), particularly if the partner specializes in the customer's industry. Therefore, increasing indirect channels bundled with vertical industry and geographic coverage specialization is a necessary step for positioning SAP as a relevant provider of solutions to this increasingly important market segment. By seemingly giving more away now, SAP might benefit more in the long run. Also, the reliance on partners in the US should give SAP a breathing space in light of its recent internal job cuts that came as no surprise given SAP's protracted dismal performance in the US (see Soft Economy Dents SAP's Armored Shield As Well).

The move might boost the depth of solutions and the level of support for SMB customers, bundled with the program of strengthening SAP's partners network. Although the program had started some time ago and had resulted with some success (see SAP Claims Big Gains In The Low-End Battleground), it had not taken off the big time, partly owing to some dot-com partners going out of business in the meantime, and owing to SAP's painstaking approach of certifying industry solutions that has so far produced only a handful of CBSs. Nevertheless, SAP has been engaged in its channel partners' activities to ensure that they understand the needs of the SMBs. SAP has been providing the help in co-developing Certified Business Solutions (CBS) software add-ons that are vertical specific, down to the SIC-code, a concept believed to have an appeal to SMBs. While, the partnership has implemented its first several U.S.-based, mid-market deals, which can now represent compelling references, much more is needed in order for SAP to become a full-fledged mid-market contender in the US.

The battle for the lower-end of the market, while it had started a few years ago, has begun in earnest during the last 12 months with a number of vendors displaying their arsenals. In its quest to sustain growth despite global blue chips' constipation with business applications, almost the entire ERP industry opted to pursue both lateral expansion into adjacent functional areas, which has led to the current convergence of ERP with SCM, CRM, PLM, trade exchanges, and portals, as well as to move down market.

To that end, fast path/track implementation methods, fixed cost implementations, remote/virtual consulting, web-based and/or computer-based training (CBT), vertical industry templates, are some from the bag of tricks many vendors announced with great fanfare and designed, at least in part, to make a large enterprise application more bite-size and palatable to the mid-market. To that end, Oracle and PeopleSoft have unequivocally shown their interest in smaller customers (see And The 20-Day Implementation,Oracle Claims The Worst Is Over And Turns To KISS For A Boost, PeopleSoft Supply Chain Is Music To Mid Market Ears and PeopleSoft Joins The Hunt For SMEs, with PeopleSoft citing more than 1,000 mid-market customers as one of the reasons for its unimpeded success (see PeopleSoft Remains Rock-Hard And Economy Proof ).

Baan and J.D. Edwards, on the other hand, have more or less vocally relegated themselves to the lower-end of the market, while the $500 million game has long been the sweet spot of QAD, Frontstep, interBiz, Epicor, SCT, Lawson, IFS, SSA, or Intentia. Given that the likes of MAPICS, Navision, Ross Systems and Microsoft Great Plains, to name but a few, have improved their product scalability lately to go up market, the inevitable mid-market carnage might not be for the faint-hearted.

User Recommendations

Interested US companies with less than $500 million in revenue and in particular industries of SAP's focus should certainly consider SAP's SMB offering and carefully determine their needs and implementation time framework, bearing in mind problems typical with new product releases and new partnerships' arrangements. Organizations seeking a Web-based solution and out-of-box functionality with little or no customization may benefit from evaluating the relevant ASP offering.

We strongly recommend identifying your clear e-business strategy and conducting thorough comparison-shopping, at least for the sake of information leverage. Consider all options. Most importantly identify what needs are "must have" requirements and a timeline for additional components. Once identified, comparison-shop and use the related information to negotiate the best price for the solution. Most vendors offer their own version of SMB solutions with programs for rapid, lower-cost implementations. While vendors' endeavors in that regard are highly commendable, the "caveat emptor" approach is still applicable. Although some smaller companies would be well off with scaled-down versions of rapidly implemented, Tier 1 software applications, for many companies this may not necessarily be the best solution (see Fast-path Implementations - Are They Good or Bad?).

For mid-market companies today's dynamic business environment means the survival of the most agile and flexible. When evaluating a software application, companies often fall for a snazzy user interface or raw number-crunching power. However, a flexible system should also offer features like tools and templates, cross-reference checks, and many other parameterization utilities that provide significant system changes without changing source code. Make sure that what you select now will keep abreast of the technology changes in the future. In any case, give SAP a chance to prove that its partners may represent it as nimble and local enough while the company remains huge and global. Still, the nature of the partnership in case (commitment, vertical specialization, client references) should be thoroughly investigated.

More comprehensive recommendations for both current and potential SAP users can be found in SAP - A Humble Giant From The Reality Land? Part 5: Challenges and User Recommendations and in 'Collaborative Commerce': ERP, CRM, e-Proc, and SCM Unite! A Series Study: SAP AG.

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