SoftBrands to Institute Fourth Shift for SAP Business One Manufacturing Work-Plan Part Three: Market Impact

Market Impact

At the National Manufacturing Week (NMW) event, held February 23-26, 2004 in Chicago, Illinois (US), SAP AG (NYSE: SAP), the leading provider of enterprise applications, announced the availability of new industry-specific solutions for small and midsize manufacturing companies, with the aim of extending its leadership as a provider of solutions for an even broader range of companies from small enterprises via the mid-market to the world's industry leaders.

Part One and Part Two of this note details the announcements.

The fact that the lower-end of the enterprise applications market is the next frontier and a promised land for all small, medium, and large enterprise vendors alike, has long not been news. During economic slowdowns, the larger corporations will likely curb their IT spending to a degree, whereas their smaller counterparts will all but completely recoil from any spending. However, with a recovery in the offing, one should expect a built-up need for enterprise systems from these companies that will have weathered the storm and that now need to bolster their competitiveness and agility in the market. Still, the willingness of smaller enterprises, which as a rule lag behind their larger brethren in technology innovation, to go for more sophisticated technology that is beyond the rapidly outmoded two-tier client/server architectures in the best case scenario, or, in the worse case scenario, beyond the all-too-common dispersed islands of information on Microsoft Excel or other spreadsheets, Access-based reports and queries, or managers' notepads and "post-it" notes, does not guarantee any vendor an easy ride. For a detailed discussion see Cookie-Cutter Solutions Won't Cut It with the Mid-Market.

This is Part Three of a five-part note.

Parts One and Two presented the event summary.

Part Four will continue to discuss the market impact.

Part Five will cover challenges and make user recommendations.

SAP's Answer for SMBs

For that reason, SAP has responded by acquiring a more suitable, genuine product for the segment, while it is not unlikely to see the other ERP giants follow suit in the future. This latest SAP announcements should be regarded as sensible moves, although somewhat belated. Nonetheless, these moves should confirm SAP's commitment to smaller customers through the unrelenting focus and repeated attempts of delivering better-attuned offerings. A less known fact might be that almost two-third of all SAP's installations are enterprises with less than $500 million (USD) in revenues. Given SAP's predictions of a healthy revenue streams from all the sectors including SAP's sweet spot of large corporations, we tend to believe that SAP SMB drive is a well thought-out, proactive drive into a new market rather than a knee-jerk reaction to a slumping stronghold market. Over last year or so, SAP has not only formed a division dedicated to SMB, but has also created the analyst relationship and public relations team that focuses only on informing the industry influencers about SAP's relevant initiatives in the segment. During the same time period, the marketing budget for the segment has increased tremendously, which also vouches for a long-term endeavor.

Also, having resorted to an acquisition, which has not been a common SAP practice in the past, may mean the admission of failing to first successfully capture the global SMB market , SAP will have "killed two birds with one stone" with SAP Business One. First, an acquisition typically shortens the time-to-market, as proven by a number of functional scope enhancements in a short time frame, and second, SAP will have tackled 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 mySAP Business Suite or by even using the older R/3 suite or their pre-configured templates.

Furthermore, SAP Business One provides a simple product that can be more easily sold and supported by SAP's channel partners, particularly by being technologically advanced from the ground up and unburdened by the need for migration paths from its former incarnations. Before SAP Business One, there had hardly been a differentiating product among the likes of Microsoft Business Solutions (MBS) Great Plains, MBS Navision, Best Software's MAS 200 or Exact Macola, to name a few. While the advantage of these products is their longevity in the market and large install bases, the liability are their numerous little idiosyncrasies, which make it more difficult to bring the technology forward for these vendors, users and resellers alike. Further, SAP channel partners will also benefit from touting SAP's leadership position, brand recognition, and viability, albeit this will become more handy when competing with other mid-market incumbents other than MBS and Sage/Best, whose viability and recognition remain spotless.

However, where SAP will challenge or at least make things more interesting for these SMB juggernauts is their vulnerability in terms of integrating disparate product lines (i.e., general ledgers) on disparate technologies. Neither of these solutions is functionally complete enough at this stage, and the customized code for extension is often not owned by the vendor but rather by the partner, which SAP tends to avoid with the more complete, from the ground up designed SAP Business One solution. Microsoft will additionally have to deal with users' wariness of the technology lock-up bundled with ongoing security issues and unresolved licensing and upgrades issues, which may eventually decide to diversify their product portfolios.

Further, as a new paradigm shift, SAP Business One software features natively the SAP Enterprise Portal's drag and relate capabilities obtained in its acquisition of TopTier in 2001 (see SAP Acquires TopTier To Further Broaden Its Horizons). A user is, for example, able to add a data field to an invoice, and then drag and drop the newly created data field into another part of the system, which should be able to produce new reports based on the data field. Another example would be selecting an available item from the inventory list, and then dragging and dropping, for example, its description field to the "Accounts Payable Invoices" function within the "Purchase" module. The resulting new pop-up window will list every invoice from every supplier of the item so far. These examples of instant analysis and reporting, easy access to real time business data and proactive business management are a quantum leap compared to the above traditional accounting solutions that have been written for accountants by accountants, and where other "non-bean-counting" staff members have a hard time discerning useful information without a serious training and familiarity with pesky reporting facilities, or, worse, needing to export inordinate amounts of data to Excel, and trying to make sense out of tweaking it.

The product also features embedded business process management or improvement (BPM/BPI) integration to mySAP Business Suite products (e.g. BI, Portals, Exchange Integration), and an SDK facilitating integration of third party software and services with SAP Business One, since it utilizes SAP Business One business logic and has the ability to read and write to and from each object in the system, and a simpler development and maintenance of integrated processes. It also provides analytical tools to gain insight into an organization's operations, online alerts for collaborative event tracking and problem solving (via a "management by exception" approach that relies on predefined business rules, and which monitors data for certain conditions, such as, a minimal allowed profit margin for a sales quote), and customizable reports that give companies the information they need in a format that allows them to brand their business. These reports solve the drag and relate queries' shortcomings of not being able to be saved and reused later, instead serving as a good starting point for more detailed reports.

Therefore, the solution is not a reconfigured or "watered-down" version of its larger sibling mySAP Business Suite, but rather it is based on TopManage, a product developed and marketed by the former Israeli software company TopManage Financial Solutions LTD, which SAP acquired in March 2002 and integrated into its business unit for the SMB market. At the time of its acquisition in 2002, TopManage had nearly 800 customers in Europe, and it offered financials, distribution, and CRM functionality and supported English, Spanish, and Hebrew versions, along with the updated pertinent figures for the SAP Business One successor that were mentioned earlier. The still newcomer product in the US has for some time been successfully sold in the lower-end of the European market, since it provides small and medium businesses with an integrated family of enterprise applications tailored to the specific needs of sales-driven companies, while the manufacturing prospects will be addressed through the SoftBrands' alliance. For details on this alliance, see Part One of this note.

Focus on US Market

All the above facts might lead to an enthusiastic and stronger channel that eventually will provide SAP with a product to sell to divisions of large global companies with mySAP Business Suite used at the corporate level, by reducing the potential of eroding divisional account control to another more nimble, more vertical or plant-level focused ERP vendor's offering. The fact is that a high percentage of SAP's customers outside the US are small and mid-market companies. One can wonder why that is still not the case in the US. In addition to SAP's US-based competitors' good job with propaganda (mainly by exploiting some well-publicized SAP implementations' flops in the US), a major reason is still the nascent indirect channel. Having currently only about 100 certified partners for the entire US market sounds rather nascent compared to the several thousands that Microsoft or Best Software cite, or several hundreds touted by Lilly Software, SYSPRO, or Intuitive Manufacturing Systems.

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, given its better success therein. Therefore, increasing indirect channels bundled with vertical industry and geographic coverage specialization, either in original or a "private label" form, remains a necessary step for positioning SAP as a relevant provider of solutions to this increasingly important market segment.

SAP seems to have grasped that the key to success in the SMB market is brand awareness, since SMBs are looking for support from incumbent vendors with intimate knowledge of their vertical and business processes; ample local resources; and the commitment to support them both off and on site to achieve value over a long-term relationship. SAP realizes it will likely never match the channel size of established players such as MBS and Sage/Best Software that already have large channels (over 6,000 and 20,000 respectively) starting with CPAs and independent resellers and independent software vendors (ISVs). Thus, SAP does not seem inclined to recruit en masse the formalized small local resellers and value-added resellers (VARs) that have so far dominated the low-end application market.

Therefore, we expect that SAP will make other channel deals in the future either with other very large companies like American Express, IBM, and HP that are already serving small businesses and are looking for additional products and services to sell, or by cherry-picking certain group of disgruntled, neglected or simply disconcerted resellers of MBS, Best or Epicor, particularly after recent Microsoft's restructuring of its global partner channel, which still leaves many answers in the air. In turn, this smaller but high-quality, high-touch SAP reseller channel will be developed by SAP global development support, product training and marketing and sales support, including pre-sales support and lead generation, whereby SAP will provide:

1) qualification guidelines, including partner sales capability and industry knowledge assessment,

2) an SMB partner portal to provide a single point of access to information, and

3) an investment in partners and customers to ensure a highly valuable partnership and best-of-class solutions for their businesses, such as SDK, training, and various levels of marketing and "other" support subject to the partner's size and degree of involvement in the program. To enroll, resellers have to invest a $10,000 (USD) fee and submit customer preferences, along with a credible marketing and business plan. They must also have sales representatives that have to pass a certification test after a week or so of training.

Some of the nearly one hundred partners trained in selling SAP Business One (while SAP expects that number to exceed 200 by the end of 2005) covering all of the metropolitan areas in the US, which we have had a chance to talk to, have only praises about their treatment and commitment by SAP so far. The theme that SAP has not been insisting on the number of software boxes they can move, but is genuinely interested in having successful partners and delighted customers, seems to be recurring. Although the lower number of partners means "fewer feet on the street" compared to MBS and Best, it at least provides for more intimate relationship between SAP and a controllable number of partners. Namely, partners' solutions have been leveraged and managed through SAP Global Solutions Network, so that partners do not have to reinvent the wheel, and even unnecessarily compete in same industries. Not to mention the ability to manage the code centrally, instead of current anarchy of solutions, customizations and extensions amongst thousands of MBS' partners.

Moreover, SAP's global presence and technical capabilities indicate that the company can adapt its product to meet the local requirements of many countries. As the enterprise applications market leader, SAP also has strong credibility. To be fair, SAP Business One is not a cheap product based on the recommended price list of $3,750 (USD) license fee per user for a minimum three users and 17 percent for annual service and maintenance. Thus, one cannot accuse SAP for giving the software away just to enter the fray. However, SAP does not charge a per-module license fee. In addition, given that sales to additional users has a sliding scale of discounts and that the product has built-in CRM and analytic capabilities, bundled with short implementation times and adequately low costs (which may still sound strange when someone thinks of SAP), the total price becomes quite competitive when compared to buying a concoction of separately priced modules from the other SMB vendors.

This concludes Part Three of a five-part note.

Parts One and Two presented the event summary.

Part Four will continue to discuss the market impact.

Part Five will cover challenges and make user recommendations.

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