SAP's New Target: Small Biz

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AMR pegs applications sales growth at 14% in Asia and 15% in Latin America—twice as fast as in the U.S. and Europe.

Trouble is, SAP's sales machine has been tuned to serve large accounts, and it lacks the network of dealers that specialty software makers use to reach smaller clients. Making matters trickier, SAP's twin goals of reaching down to smaller customers and updating its traditional customers are somewhat at odds. "The midmarket is the last mining opportunity for enterprise software companies," says Kuper. "The problem is once you go downstream, it can lead to pricing pressure at the top end," as large companies demand discounts to close the gap between what they and smaller users pay.

To help ease the tension, SAP plans to offer A1S in two flavors: as a software package midsize companies can install on their servers and customize to their needs, and as an online software suite that SAP will run on its own computers and deliver over the Internet for small companies with fewer options. The online software could cost half as much as the packaged version of A1S, says Kagermann. "That's the only way to lower the cost of ownership by factors," he says.

Challenges Ahead

SAP will have to build new data centers to host the software, and that won't be cheap. The investment will shave its expected 2007 operating margin by 1% to 2%, to around 27% of sales. That's slightly lower than in 2006. "You have a lot of costs up front," says Kagermann. "It's a different model." If sales go as forecast, A1S could generate $1.3 billion in revenues by 2010.

At the same time, SAP needs to give established customers new reasons to upgrade. Many of SAP's core manufacturing customers still run 1990s software called R/3, written in an arcane programming language owned by SAP. The company has been working furiously to convert those shops to newer software, called NetWeaver, that's based on Java, an initiative spearheaded by Agassi before he left the company (see BusinessWeek.com, 3/29/07, "Agassi's Departure Realigns SAP"). "That's a huge and expensive switch to make," says Bill McSpadden, CEO of PWR Consulting, which advises manufacturing companies on technology. "They were banking on him."

What's more, many customers are struggling to extract a simple, unified view of their business data from SAP systems, which can run on computers scattered around the world. Rod Masney, president of the Americas' SAP Users' Group and global IT director at packaging maker Owens-Illinois (OI), says he plans to raise the issue in meetings with Kagermann and other SAP executives in Atlanta. Sharing key information with customers "can be differentiating, lock a customer in, and help drive top-line revenue," he says. But "companies with global operations may have different versions of the [information]."

Satifying Customers and Investors

At the conference in Atlanta, SAP plans to unveil new software that may make customers like Masney happy: a single program that can track performance, hedge against risks, and comply with government regulations from within a single application. SAP and Cisco Systems (CSCO) will also deliver a jointly developed server preloaded with software for preventing computer security breaches and privacy violations.

SAP's results may have soothed investor angst—for the moment. Now it will need to prove it can manage two big product transitions without stumbling further. And the company's mum on what comes next, as it tries to keep customers focused on its NetWeaver technology. "There is no next," says Kagermann. "This is an architecture that's here to stay." For SAP to keep meeting expectations, it will need to show that its best customers also are here to stay.

Ricadela is a writer for BusinessWeek in Silicon Valley.