SAP's New Model: Think Smaller
On Simpler, Cheaper Business Software
German technology giant SAP AG became a leading software player by selling the programming equivalent of a Mercedes-Benz -- large, expensive and engineering-heavy applications that help the world's biggest businesses manage everything from payroll to manufacturing and billing.
Now SAP is introducing simplified and cheaper business software aimed at small and midsize companies -- think Mini Cooper. The move represents a cultural shift and a considerable challenge for the company.
The product, known internally as A1S but whose brand name will be unveiled today in New York, is delivered and used over the Internet. It helps companies manage back-office work and important tasks such as running a sales force or filling orders. Instead of shelling out large licensing fees up front, customers pay a monthly subscription per employee using the system, putting it within reach of companies that don't have millions to spend on information technology.
SAP's move into Web-based, or on-demand, software is a product of necessity. In the past decade, many large companies have bought software from SAP and rival Oracle Corp., and are reluctant to spend more. That has sent both companies, as well as others such as Microsoft Corp., looking to smaller companies to fuel growth.
At the same time, nimbler competitors have emerged, selling Internet-based software on a subscription basis, epitomized by San Francisco start-up Salesforce.com Inc. Another rival in on-demand software is NetSuite Inc., which is backed by Oracle founder Larry Ellison and is preparing an initial public offering in the U.S.
A1S is SAP's attempt to reach this market and face off against these new competitors. "We're not just launching a new product," Chief Executive Henning Kagermann said in an interview. "We're creating a new business model and a new market."
To pull that off, SAP itself is going to have to learn a new bag of tricks. The company can no longer build the software and collect its fees all at once. It must now help firms set up and use the software on a continuing basis, something that is usually done at big companies by fleets of consultants. And its sales force, used to courting big, tech-savvy customers, now must sell in large volumes at lower prices to more inexperienced customers.
In another departure, SAP will begin offering services to clients who use its Web-based software. It is starting what it calls the "service factory," in which it will offer cheap and quick services for A1S clients, such as data migration or analytical reports based on sales or inventory data. "This is new for us; today this work is done by consultants," Mr. Kagermann said, adding the work would be done by SAP staff in low-cost countries such as India or China. "But in the future there will be nobody in between us and our clients."
The risks are considerable, but so are the potential rewards. James Clark, an analyst at Credit Suisse, says he thinks A1S could reach €471 million ($653.2 million) in revenue by 2010, and €2.13 billion by 2015. SAP's revenue was €9.4 billion last year, with net income of €1.96 billion, and is forecast by analysts to rise at 8% to 10% a year over the next decade.
"It would [be] a setback to their reputation if they got A1S wrong," Mr. Clark said. "If they get it right, the service will be a material driver of profitability and revenue stability for the business."
One of the biggest challenges for SAP is figuring out how to make a profit off on-demand software. For example, it hopes to keep sales and marketing costs down by allowing prospective customers to do free trials for days or even weeks online. The companies would be able to enter their own data and run parts of their business on A1S to see whether they liked it. Mr. Kagermann said such "self-service selling" was the best approach for SAP to win over clients at a reasonable cost.
Zach Nelson, chief executive of NetSuite in San Mateo, Calif., said SAP may be "underestimating the complexity of the sales cycle." He said NetSuite, which also offers free trials, takes, on average, 60 days to close a deal and might run three to five demonstrations of the program before customers are convinced. "It isn't easy to figure out how to acquire customers and keep them happy, all at a low enough cost that you still earn healthy margins," he said.
Mr. Kagermann said SAP would refine the business model to ensure it was profitable as it expanded to thousands of clients. "We know how we want to do it. We have certain business assumptions, and we now have to verify them," he said.
SAP has been testing A1S with 43 small and midsize companies since March. Today, it will release pricing information, and over the next six months roll the product out to hundreds of customers, initially in the U.S., the United Kingdom, France, Germany and China. It will be available to the mass market by the end of the 2008 first quarter.
Peter Zencke, who led the development of A1S, said the product has been designed to make it easy for small companies. Before Mr. Zencke allowed the techies to start coding A1S, he ran focus groups to show mockups of the design to potential users. Then he devised what he called a stylebook on everything from tabs to fonts. "People expect business software to have the same simplicity as the Internet," he said.
One of the companies that tested A1S was Compass Pharma Services LLC, a pharmaceutical packaging company with about 200 employees in Clifton, N.J. In the past, the company had no central software program -- when an order came in, workers from the various departments either emailed or walked over to each others' desks to check up on it.
Kevin Flanagan, Compass Pharma's chief executive, expected to revamp its software by buying a bunch of programs for manufacturing and order management. Instead the company became an early guinea pig for A1S. Five months later, Compass is running its entire business on A1S. Mr. Flanagan said the new system has helped cut the time the firm takes to process an order from about a week to two days, which is a "light-years change for us."
He also says he is spending substantially less than had he tried to cobble together his own software system. He estimates that the A1S software "is costing us a quarter of what it would have otherwise." He is using the money he saved to hire two more sales people.