SAP's rocky road

Posted by: Steve Hamm on January 25, 2007

SAP’s stock got hammered after it announced fourth quarter earnings yesterday—even though it had warned earlier that its software license revenue growth would come in well under analysts’ forecasts. The reason? The company said it plans on spending 400 million euros or so over the next two years building up the piece of its business that targets smaller companies. Most of the news commentaries I read erroneously reported that the target is medium-sized businesses, but Bill McDermott, who runs SAP’s Americas subsidiary, dropped by the office yesterday after the earning announcement to explain just what is being done. This is a new organization being built to go after a new segment, companies with 100 to 500 employees (I call that small), with an all-new product—code named “A 1 S.” McDermott points out that SAP believes there’s potentially a $19 billion addressable worldwide market in that segment.

I applaud the strategy, and SAP’s willingness to make serious long term bets on new markets. This is what highly-compensated executives get paid to do. But I think this is a market that will be very difficult for SAP top succeed in. The company already has two products targeting smaller companies: Business One for companies with fewer than 100 employees, and All-In-One for mid-sized companies. All-In-One has sold well, but Business One hasn’t gained a lot of traction. The smaller a company is, the less likely it is to be attracted to SAP, which is known for making huge complex programs that run giant corporations. Also, the new product is going to be delivered first as an on-demand service. This is smart—based on the success being reaped by on-demand software specialists such as Salesforce.com, NetSuite, and RightNow. But SAP’s first foray into software-as-a-service, SAP CRM, has been slow to get off the launch pad.

I expect SAP to continue to do well in its competition with Oracle in the enterprise applications business, but the company needs to succeed in the vast small-business market if it is to goose revenues. Yet this is going to be one of the most challenging projects the company has ever taken on.

Reader Comments

Mark Crofton

January 26, 2007 3:26 PM

"but Business One hasn’t gained a lot of traction"

there are over 10,000 Business One customers. Doesn't this qualify as traction?

Ken Rudin

January 26, 2007 6:21 PM

Hi Steve -- Great post! As a founder of a new on-demand software company called LucidEra focusing on the BI space, and as the prior head of the CRM OnDemand division in Siebel, I think SAP has a huge challenge ahead of them with A1S. Even if they break their old habits and come up with the right product for small companies, the more difficult challenge is that the on-demand business model is in conflict with the traditional on-premise perpetual license business model, and that will create a civil war inside SAP. I saw this first hand at Siebel. Even though we targeted our on-demand solution at the midmarket, we found that lots of larger companies (or divisions of larger companies) wanted to take a look at it.

Jim Nofalt

January 28, 2007 8:35 PM

I am a Business One Partner and I doubled sales this year... I just attended SAP Cahnnel update and heard SAP got to the 13K customer mark with Business One- almost 50% growth...

steve hamm

January 29, 2007 10:04 AM

It was McDermott who told me Business One has done okay but not great.

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Bloomberg Businessweek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, and Douglas MacMillan, dig behind the headlines to analyze what’s really happening throughout the world of technology. Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

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