SAP Claims Big Gains In The Low-End Battleground

Event Summary

Business applications leader, SAP AG (NYSE ADR: SAP), traditionally regarded too unwieldy and costly for small or midsize enterprises, has been touting stellar increases in sales and acceptance of its Internet-based flagship product mySAP.com by smaller companies. On November 15, SAP America, Inc., a subsidiary of SAP, announced during an analyst briefing that sales of mySAP.com solutions to small and medium-sized businesses (mySAP SMB) have doubled in North America this year, reflecting a nearly 40% increase in the SAP SMB customer base year-over-year.

SAP claims that small and medium-sized businesses have been choosing mySAP.com for scalable, rapidly implemented, cost-effective e-business solutions delivered through SAP Certified Business Solutions (CBS) providers, a network of 11 SMB channel partners dedicated to providing SAP solutions across North America. In partnership with its CBS providers, SAP supplies the end-to-end integration, unlimited scalability and most pertinent business processes that small and medium-sized businesses require. The company says that mySAP SMB solutions are supported by market-specific expertise garnered from vertical solutions in more than 20 industries, and from relationships with more than 13,000 SAP customers around the world.

"We first introduced Accelerated Solutions to the SMB marketplace in May of 1997," said Allen Brault, vice president of SMB Solutions for SAP America, Inc. "The continued evolution and experience we have gained over the last two-and-a-half years is illustrated in our SMB successes, which have uniquely positioned SAP to leverage new business models and channels of distribution previously not feasible."

SAP SMB vertical solutions are developed by CBS providers and experienced consulting partners, based on previous successful implementations. SAP also claims that these solutions are now economically priced, low-risk and quickly installed, and that they feature industry-specific functionality and best practices for the SMB marketplace. SMB vertical solutions are also available in a hosted environment. The SMB vertical solutions program was launched at its user conference, SAPPHIRE, in June 2000, with a solution for Internet service providers (ISPs) and application service providers (ASPs) developed by CBS provider Plaut Sigma Solutions and an oil and gas exploration and production solution for the Canadian marketplace developed by FinTech Solutions Ltd. By the end of 2000 the roster of market-ready solutions supporting the expansion of the SMB vertical solutions program will include Automotive, Projects, Biotechnology, Advertising Agencies, Wholesale/Retail, and Consulting, with nearly 20 more in planning and development.

SAP is also expanding the portfolio of SMB channel partners to include ASPs that meet the needs of smaller-sized SMB customers for entry-level yet scalable e-business solutions. As an example, FiNetrics is a SAP ASP partner specifically focusing on the SMB market that provides per-user application rental to small businesses, for which the cost of entry for e-business applications is a simple Web browser. However, as SMB customers' requirements expand with their growing business, the FiNetrics solution scales with them, allowing easy migration to other mySAP.com solutions without costly and time-consuming future migrations.

Market Impact

"Still water runs deep", an old adage says. SAP, while admittedly slow and inflexible in the past, may have also impressed many by its persistence and its ability to learn from its mistakes. It seems to have finally realized that the enterprise applications universe does not necessarily revolve around the 'planet SAP'. Its recent successes are, therefore, mainly attributable to the entire company shifting to a market driven (instead of product driven) culture. The company, which particularly belatedly recognized its US image problem of being a stodgy behemoth, eventually resorted to an internal restructuring and an external image renovation through much more aggressive, US-focused marketing. Consequently, it may appear that its US subsidiary has recently been less rigidly controlled by its German parent. The company also seems to be more focused on partnerships and working with other vendors as well as on nurturing its partners' channel. SAP has also simplified and clarified the pricing scheme and the migration path for its e-business products, which should also play a significant role in customers acceptance of mySAP.com. These moves lead us to believe that mySAP.com will be well accepted among companies of all sizes.

This is by no means SAP's first attempt to penetrate the still untapped lower-end of the market. Neither has SAP been the only Tier 1 vendor that has ever attempted it. Over the last three years the market has seen a plethora of fixed-scope and fixed-price applications, pre-packaged vertical solutions, attractive support programs and hosting services with catchy names (FastForward, Select, Genesis, etc.), all aimed at making it faster, simpler and cheaper for enterprises under $500 million to use them. However, all of these typically also involved some form of trade-off in the name of expediency. The features traded might have been functionality, customizability, platform options, solution scalability or extensibility.

Unfortunately, small and mid-sized enterprises, like their bigger brethren, generally operate in a dynamic, competitive environment and have global, multi-site operations that are either wholly owned or that function in a supply chain relationship. Consequently, all these companies need some level of support for advanced functionality, scalability, supply chain management, customer relationship management, e-commerce, and distributed computing environments. And they have to accomplish these deeds with less (or completely without) IT staff and a much more limited budget compared to their bigger counterparts. For these reasons, the first generation of Tier 1 vendors' offerings for smaller enterprises has had only a limited success.

For example, SAP long ago introduced its AcceleratedSAP program, also referred to as "ASAP," to facilitate mid-market implementations. Reports have confirmed that ASAP enables companies of all sizes to implement SAP R/3 faster and more cost effectively. Case studies have talked about implementation times ranging from 4 to 11 months and projects that stay within schedule and cost objectives. However, these studies often failed to indicate how many modules or even which modules have been implemented in that time frame and for what cost.

Also, SAP has begun development of a series of pre-configured R/3 templates for use within specific industries. By using pre-configured applications known as SAP Accelerated Solutions, SAP has offered small to medium sized organizations inter-enterprise solutions. The first deliverable under this initiative was SAP Accelerated Financials. The Accelerated Solutions also enabled SAP and its channel to offer a fixed price and fixed time implementation program. Again, this has often not necessarily been ERP, but rather a small part of ERP. By the time the customer puts together modules to build a full ERP system for a mid-market company, and then adds up the implementation time and cost, all the touted benefits have been annulled. We do not intend to berate either SAP's or other vendors' notable endeavors at simplification, but only to point out that what had initially seemed like a bargain often may not have been the one in the long run.

SAP's New Market Strategy

SAP seems to have learned a few lessons and have grasped the key factors for greater success in the coveted low-end market segment. While the figures presented at the briefing (39% of SAP customer base worldwide are companies with less than $200 million in revenues, whereas 58.3% are companies with less than $500 million; 125 new North American SMB customers in 2000, etc.) speak in that regard, we are more impressed with SAP's new approach to further penetrate this fertile ground. Its SMB market strategy is based on a methodology that consists of the following three steps:

1. Identify an opportunity and focus on it
   
   
2. Build a solution that best fits that opportunity
   
   
3. Deploy channel strategy

As for the first step, SAP has estimated enormous opportunities in the market segment consisting of companies with less than $500 million in revenues. The company has estimated over seven million companies - potential customers - with less than $50 million in revenue, over 22,000 companies with revenues between $50 and $200 million, and over 4,500 companies with revenues between $200 and $500 million. The opportunities have, therefore, been identified!

In the second step, SAP plans to tackle these sub-segments in a somewhat different manner. While the higher-end of the segment will be served with pre-packaged ('accelerated') vertical solutions that are channel ready and repeatable, but also customizable, the lower-end of the segment will be offered standard 'off-the-shelf' pre-packaged solutions. These are going to be pre-customized and adapted for e-business, and will be sold under the concept 'The right solution, for the right market, and the right price'. While many may see this as another instance of dj vu, the main difference is the sharpness of vertical focus that SAP intends to deliver in these solutions for the smallest customers. Granularity of vertical focus will go down to the level of US-SIC (Statistical Industry Classes) codes within the following Industry Sectors:

• Discrete Manufacturing (7 solutions in qualification stage, 9 solutions in planning stage)
  
  
• Process Manufacturing (5 solutions in qualification stage, 4 solutions in planning stage)
  
  
• Consumer Products (2 solutions in qualification stage, 2 solutions in planning stage)
  
  
• Service (10 solutions in qualification stage, 9 solutions in planning stage)
  
  
• Public Sector (2 solutions in qualification stage, 1 solution in planning stage)
  
  
• Financial Services (1 solution in qualification stage, 1 solution in planning stage)

This level of vertical focus possibly represents a thought leadership that other vendors may find hard to emulate. As an illustration, the service industrial sector will feature vertical solutions for ASPs/ISPs, consulting firms, ad agencies, legal firms, and recruiting agencies, to name but a few. Although SAP plans to deliver over 50 vertical solutions in total, the fact that only two are ready now, with seven more being ready by the end of 2000 and only 18 more throughout 2001, may indicate the meticulous approach of SAP and its partner network in developing these.

This leads us to the third principle of SAP SMB methodology: SAP has also been relying heavily on Certified Business Solution (CBS) partners for successful market penetration. The CBS program is comprised of 11 partners dedicated to developing, selling and supporting SAP products to small and midsize businesses in North America. The word "partnership" does not seem to be used loosely in this case - SAP has been showing a congenial approach and true commitment to the success of its channel. SAP recognizes these partnerships as being essential and is proud to claim that SMB channel revenues grew more than 100% while their customer base grew 74% in 2000 compared to a year ago. CBS's, on their hand, praise SAP for providing them with all necessary development help and 'jump-starts' in the shape of its already developed generic Accelerated Industry Solutions, which SMBs further tailor to the above described finely polished SIC solutions.

Also impressive is the rigorousness of the vertical solutions qualification procedure that SAP has imposed upon its partners; a CBS partner is supposed to provide a sound business plan and marketing strategy, solution packaging strategy, customers willing to be pilot sites, and meet a number of stringent requirements. This level of commitment in developing the indirect channel may have only been achieved in the past by a handful of mid-market vendors, MAPICS and Great Plains being two of the most prominent.

Success Factors and Vulnerabilities

As well known and much publicized, the major factors of success in business applications for the small and mid market segment are price, speed of implementation, vertical focus, product scalability and scope expandability, and a single point of contact. SAP seems to have captured most of them, partly owing to finally breaking its product in more manageable components (which provides for faster phased implementations and system agility) and Internet-enabling it (which provides for easier deployability and user interface intuitiveness). SAP's solutions within ERP, e-procurement, supply chain management (SCM) and digital marketplace functionality provide a wide scope of features. Few, if any, vendors can provide tightly integrated applications of this magnitude under one umbrella. Furthermore, SAP has possibly the strongest product technology in terms of support for almost all industry relevant platforms and/or middleware standards. These facts, bundled with SAP's corporate viability and mind share, have encouraged even some pre-IPO startup companies (both dot-com's and brick-and-mortar's) as well as some existing companies currently using PC-based applications to opt for the SAP offering, which has not been quite conceivable until very recently.

Nevertheless, one should not expect SAP's SMB initiative to go without challenges and competition. Despite its notable effort in developing its pre-configured Accelerated Industry Solutions, SAP has been doggedly trailed by a bad reputation for protracted and costly implementations, as well as for a complex, rigid product that often imposes radical changes on the customer's business practices. This perception of complexity remains ammunition that the smaller vendors will continue to exploit in order to hinder SAP's attempt to penetrate their traditional stronghold.

While SAP has more horizontal functionality than most of its competitors, it is so spread over a range of industries that it is susceptible to focused attacks from more experienced competitors within a certain industry. Further, the incorporation of products from other vendors such as Clarify and Commerce One has added another level of complexity to this mix. One should also expect a possible internal competition within the CBS resellers' channel; despite SAP's genuine interest in ensuring the well being of all members of the channel, there will always be some overlap in both geographic and vertical industry coverage between two or more partners.

SAP should also carefully reevaluate its mySAP.com product migration strategy for current R/3 customers, in order not to alienate and disillusion its loyal customer base and possibly repel potential ones. It should also more clearly articulate product upgrade requirements; With many components to choose from it is sometimes difficult to understand what R/3 versions are required to run the new applications and whether any components are excluded from mySAP.com product upgrade agreements (thereby requiring additional license.) However, the new mySAP.com pricing flexibility, as well as the license fee credit policies may go a long way to easing upgrade concerns.

Nevertheless, SAP seems to have raised the bar in providing solutions for smaller enterprises, and Tier 2 and Tier 3 vendors might be in for a tough battle to defend their turf, especially as they are concurrently trying to expand and modernize their products with ever diminishing resources. SAP has proven itself a tenacious and persistent fighter able to endure the long hauls.

User Recommendations

Interested customers in particular industries 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. Organizations seeking a Web-based solution and out-of-box functionality with little or no customization may benefit from evaluating the ASP offering. Support, connectivity, ease of use, security, acceptance, and scalability are only a few considerations. Current users of its traditional client/server product may benefit from informing themselves of the ramifications of switching to the ASP mode.

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.

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. It may sometimes be more beneficial to implement the right solution slowly than to rush the wrong one into place.

If SAP SMB is the final choice, future clients should consider the following:

• Negotiate the license fee per component if the entire mySAP.com breadth is not needed (after a thorough consideration).
  
  
• Provide for future incorporation of mySAP.com components by bundling them into your contract now at negotiated license fees.
  
  
• Stay away from consulting partners who don't follow SAP's stringent implementation methodology; the best scenario would be to use a partner belonging to SAP's CBS initiative.
  
  
• Conduct preliminary research on the industry expertise and reference accounts of a regional CBS affiliate service partner. Also, familiarize yourselves with the solution's strengths and weaknesses within certain vertical industries.