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.