SAP Tries Another, Bifurcated Tack At A Small Guy

Event Summary

On March 21, SAP AG (NYSE: SAP), the leading provider of enterprise applications, reported business success at CeBIT conference, including new partnerships and first wins for a new product offering that comprises one part of SAP's recently espoused bifurcated program to more successfully vie for small-to-medium enterprises. SAP, although the market leader, has nonetheless long been regarded too unwieldy and costly for this target market.

Still, not wanting to be left out of the gold rush for the lower-end of the market, SAP has again revised its plans to deepen its commitment to the segment by further expanding its channel partner sales program and by diversifying its offering to cover differing needs of enterprises belonging to opposite ends of the market segment (business with up to $500 million in annual revenue). To that end, at a press conference at CeBIT on March 13, SAP announced its new Smart Business Solutions program for the small and medium business (SMB) market. The program was devised to address distinct segments of this market based on the degree of IT sophistication customers require with regard to industry- and customer-specific application functionality. Somewhat resembling Starbucks' addressing needs of coffee drinkers with 'tall', 'grande' and 'venti' cup sizes, SAP plans to segment the SMB market into "sophisticated" companies, which require industry-specific support and customization, and "advanced" SMB companies, which do not require much of these.

For "sophisticated" SMBs with a high need for individualization and industry-specific functionality, SAP is globally expanding its existing strategy of offering industry-specific SMB solutions. These are based on flagship product and are tailored, configured and complemented by SAP channel partners (see SAP Claims Big Gains In The Low-End Battleground). To complement the existing above offering, for "advanced" SMBs, which require less sophisticated individualization and industry-specific functionality from their IT solutions, SAP is introducing a new application that it will indirectly market to this segment. In charge of the development and support of these SMB solutions will be a newly formed Business Unit (BU SMB) at SAP. SAP will support its channel partners by providing training and by facilitating the transfer of relevant customization and development knowledge, aiming to create synergies and efficiencies worldwide. In addition, the existing SAP indirect sales organization will also strengthen its support to channel partners with their international marketing and lead-generation activities in this market segment.

The new product for 'advanced' SMBs provides small and medium businesses with an integrated family of enterprise applications tailored to the specific needs of sales-driven companies. It addresses the core operational needs of SMBs, such as accounting and banking, financials and customer relationship management (CRM), purchasing and selling, logistics and product trees, as well as reporting and analysis. It also provides analytical tools to gain insight into an organization's operations, online alerts for collaborative event tracking and problem solving, and customizable reports that give companies the information they need in a format that allows them to brand their business. The solution will be based on TopManage, a product currently developed and marketed by Israeli software company TopManage Financial Solutions LTD. SAP has acquired the assets of TopManage and will integrate them into the newly formed Business Unit for the SMB market (BU SMB) which will support the further development of Smart Business Solutions from SAP and its partners and assist SAP partners in delivering customized, industry-specific solutions.

The touted easy-to-use TopManage solution provides an intuitive interface with Drag&Relate capabilities and strong integration with desktop applications. Drag&Relate capabilities allow users to drag information between different data sources and link them on the desktop. The solution supports the Microsoft SQL Server database and the Microsoft Windows operating system. Its open architecture will reportedly integrate with the e-business platform giving companies the adaptability to scale their applications with the growth of their business.

The new SAP product will be available mainly via multiple indirect channels, as SAP's Smart Business Solutions initiative will supposedly bring together the national SAP SMB partner programs into a global partner program that supports partners in developing solutions with a high level of quality, consistency, and scope. In addition, small and medium companies who have used local SAP solutions in the past will now be able to rapidly expand their systems internationally. SAP will also expand its channel partner community worldwide, recruiting partners with industry-specific experience and a 100% focus on the SMB market. As part of the program, SAP will form partnerships with Independent Software Vendors (ISVs) that already provide multi-lingual software solutions for specific markets, but want to optimize development and maintenance by incorporating SAP's core ERP functions.

Market Impact

A patient man may win the day, and SAP will likely get it eventually right through its perseverance and repeated modifications of its strategy to win less chartered lower-end of the market. This latest tack should be regarded as a prudent move for SAP, although indisputably belated. Nonetheless, the move should confirm the company's commitment to SMB customers through the renewed focus and better-attuned offering. Given that almost two-third of all SAP customers are enterprises with less than $500 million in revenues, the move should slowly alleviate the market perception of SAP being overkill for smaller enterprises.

The fact is that a high percentage of SAP's customers outside the US are mid-market companies. One can wonder why that is still not the case in the US. In addition of SAP's US-based competitors' good propaganda job mainly by exploiting some well-publicized SAP implementations' flops in the US, a major reason is still the nascent indirect channel. Having only a handful of certified partners for the entire US market sound rather dismal compared to the thousands that Microsoft Great Plains cite, or he several hundreds touted by Lilly Software, Made2Manage or Navision.

So far the direct sales approach has often proven inappropriate for the market segment. It is much a different case when 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) represents SAP, particularly if the partner specializes in the customer's industry. The fact that SAP has had a strong channel-driven SMB business in the rest of the world may prove the point. Therefore, increasing indirect channels bundled with vertical industry and geographic coverage specialization remains a necessary step for positioning SAP as a relevant provider of solutions to this increasingly important market segment.

To that end, channel partners will continue to offer to the larger more sophisticated companies and the newly acquired product to the less-sophisticated enterprises. SAP has tried to assault the U.S. market several times before, with only a limited success notwithstanding. The earlier attempts with lighter versions have not been as successful as anticipated, mainly because they would still require more implementation resources and effort than most SMBs could afford. Alternatively, if the pitched solution was a significantly scaled-down and pre-configured version of, without vertical functionality and customization facility, one would have been hard pressed to justify going for it rather than for e.g., Scala, Best Software, QAD, Made2Manage, Syspro, SCT, Baan, IFS, Intentia, MAPICS, Navision, Ross Systems, Microsoft Great Plains, to name only some of well-known mid-market incumbent products. The latest upbeat results and future outlook from many of these may speak in regard of SAP's limited success in their space.

Small enterprises, like their bigger brethren, need some differentiation means in the market, and that will not be achieved by implementing a cut-and-dried business solution in a 'cookie cutter', 'me too' deployment approach. The part of the SAP SMB initiative's tardiness can also be written off to SAP's painstaking approach of certifying industry solutions that has so far produced only a handful of certified business solutions (CBSs). Nevertheless, SAP has been earnestly engaged in its channel partners' activities to ensure that they understand the needs of the SMBs. Also borrowing the page from some its more successful smaller competitors' book, 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 the target customers.

The TopManage Acquisition

While having resorted to an acquisition, which has not been a common SAP's practice in the past, may mean the admission of failure to successfully capture the global SMB market so far, SAP might have killed two birds with one shot. First, an acquisition typically shortens the time-to-market, and second, the company will finally tackle the small business market with a product designed specifically for that market, instead of repeating its previous attempts of fitting a square peg into a round hole, with functionally-depleted versions of (formerly R/3) or its pre-configured templates. At least, SAP may be in an advantageous position over Oracle and PeopleSoft, whose mid-market strategies still revolve around trimmed down versions of their flagship product suites.

Furthermore, TopManage provides a simple product that can be more easily sold and supported by SAP's channel partners. These channel partners will also benefit from touting SAP's leadership position, brand recognition, and viability. TopManage software reportedly integrates quickly with the SAP Enterprise Portal Drag&Relate capabilities obtained in its acquisition of TopTier in 2001, which was another vendor with Israeli roots. TopManage has nearly 800 customers in Europe, and it offers financials, distribution, and Customer Relationship Management (CRM) functionality and supports English, Spanish, and Hebrew versions. This might lead to a stronger channel that eventually may result in more software component sales outside its core ERP. The acquisition also provides SAP with a product to sell to divisions of large global companies with software used at the corporate level, by reducing the potential of eroding divisional account control to another more nimble and/or more vertically focused ERP vendor's offering.

Still, the ride to SAP's SMB success will not go that smoothly, given that managing two different products may go outside of SAP's stronghold so far. The challenge of recruiting new partners and of getting them up to speed with a new, relatively unknown product is imminent. Also, a likely market confusion (not to mention channel confusion and/or conflict due to emotional ties to a certain product line) may aggravate already existing confusion about the huge product portfolio, bundled with recent restructuring within SAP's organization (i.e., merging of its formerly autonomous SAP Portals and SAP Markets divisions).

In addition to the expenses of educating the market and its channel, one should expect higher R&D expenses and possible product delivery delays due to added new product and integration issues. This is particularly true given SAP's Java-camp allegiance. TopManage has been based more on Microsoft technologies. Although SAP will support .NET framework, one should only expect a .NET connector some time in 2002, while a .NET-based portal development kit for SAP's Enterprise Portal is slated for 2003. Also, the fact that the TopManage product is not strong in manufacturing functionality means it won't help much in preempting the intrusion of some competitors that specialize in plant-level manufacturing systems (e.g., QAD, SCT, etc.).

User Recommendations

Enterprises with less than $500 million in revenue and that are looking for a functional depth in particular industries of SAP's focus should certainly consider SAP's 'sophisticated' SMB offering and carefully determine their needs and implementation time framework, bearing in mind problems typical with new product releases and new partnerships' arrangements. Smaller organizations with less than 300 employees or divisions of corporations using SAP on a corporate level, which are seeking core back-office functionality without strong manufacturing features may benefit from evaluating the 'advanced' SMB 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, particularly vigorously weighing the offerings' current and intended functionality and integration. 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.

For mid-market companies today's dynamic business environment means the survival of the most agile and flexible. 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 partnerships in every particular case (commitment, vertical specialization, client references) should be thoroughly investigated.

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