FSN: Is SAP a mid-market ‘gorilla’ in waiting?

Is SAP a mid-market ‘gorilla' in waiting?

6th March 2006
SAP's entry to the mid-market presents fascinating opportunities and challenges. Its proven credentials in large scale enterprises gives SAP an extraordinary depth and breadth of knowledge in business processes and industry best practice, yet presenting this in a way that is sympathetic to the needs of the mid-market represents a formidable challenge. Indeed, 70 percent of SAP's turnover is derived from multinational corporations with turnover greater than $1bn per annum, so smaller businesses may be justified in questioning the sincerity of its overtures to the mid-market.

Eric Duffaut, SAP EMEA

The truth is that the global ERP market is rapidly approaching maturity and with SAP's dominance already firmly established, there is limited headroom for growth. This is one of the reasons that this behemoth of the software industry, is seeking more fertile territory in the small and medium sized market space.

SAP has been here before but failed to make a favourable impression on SMEs (small and medium sized enterprises). In the past, the perceived complexity of its product offerings, its consultant-bound route to market, culture and emphasis on global enterprises did not sit comfortably with the mid-market. So what is different this time around?

What is clearly different now is that SAP has learnt from its earlier forays into this space and knows that you cannot simply ‘re-tread' enterprise salesman as mid-market specialists. Owner managed businesses have different business and service delivery needs combined with a very distinct culture and outlook. Eric Duffaut, responsible for SMEs in the EMEA region of SAP told FSN, “We recognise that mid-sized companies are every bit as complicated as larger businesses”. He also knows that persuading managers in a multinational corporation to part with their budget is a very different proposition from persuading a small businessman to part with his hard earned cash. Duffaut acknowledges that the culture in SAP will have to change and knows he needs to leverage the mid-market expertise of his dealers if he is to succeed.

So this time around, SAP has assembled a more compelling product portfolio, a more inclusive partnering model with its resellers, reshaped its organisation and is better prepared to build on its success in the large enterprise market. Above all, there is significant and very public backing for this initiative from the top management of the organisation which has specifically drafted in new talent with skills and experience gained in serving the SME sector and its channel. So, any lingering doubts the marketplace may have harboured concerning SAP's commitment to the mid-market or understanding of the issues it faces appear to be misplaced.

Significant transformation is underway, underlined by its publicly declared objective of changing the ratio of its sales mix from 70:30 large enterprise to SME in 2005, to 55:45 large enterprise to SME by 2010. However, few realise, that SAP has a substantial ‘footprint' in the mid-market already. More than half, (57.3%) of SAP installations world-wide are in companies with less than $500m in revenue.

SAP says that this gives them the greatest share of the mid-market, something which by their own admission they have been slow to publicise. Of course statistics like this depend on how the mid-market is defined and over what period you do the comparison. Nevertheless, SAP's critical mass in the mid-market is strategically very significant. It illustrates the extent of its customer reach right now and provides a notable springboard for growth. It also demonstrates the potency of its solution, namely; its ability to win market share by not only serving the needs of large enterprises through regional data centres and the like, but also its ability to meet the needs of their divisional and operating trading units. Few, if any other ERP software houses appear to be so evenly deployed across the entire market spectrum. It is also noteworthy that SAP has managed this feat without large scale acquisitions, so it doesn't suffer the ‘indigestion' problems of some of its close competitors who have yet to absorb fully the acquisitions they have made.

The ability to meet the end to end needs of large corporations is a compelling proposition to multinationals that might otherwise seek out alternative supplier solutions for their smaller business entities. SAP's overarching solution is comprised of mySAP Business Suite and ERP at the top end, mySAP All-In-One, (pre-configured by dealers with industry functionality) for midsize enterprises and SAP Business One for smaller subsidiaries. The mySAP and ERP products share the same programme code and therefore provide an obvious upgrade path for mid-sized organisations. SAP Business One has a different pedigree and is intended primarily as product suitable for SMEs regardless of whether they are a part of a larger group or not. Simon Harrison, CTO for SAP in the UK and Ireland says that it is scalable to around 100 concurrent users.

Innovation in the SAP product portfolio is likely to come in three areas. Firstly, SAP's implementation of a Services Oriented Architecture (SOA) aimed at building adaptable processes into the applications, tighter links to Microsoft technology (the Mendocino project) and specific mid-market developments.

A major plank of SAP's strategy this time around is to open up its organisation to a far greater extent to partners and other resellers, with a view to making them an extension of the SAP family. Building this so called “ecosystem” is fundamental to leveraging SAP's resources and delivering the right skills and experience to where it is required. SAP has learnt that mid-market businesses value local delivery of services working with local partners. It is also the only way that SAP can make the arithmetic of its strategy work. If it is to increase its customer base to around 150,000 customers by the end of the decade from its 2005 base of around 30,000 then it needs to substantially increase its daily run rate of new customer wins. The extended ecosystem of SAP resellers is intended to do this and to provide vertical market expertise and solutions. Not that SAP is appointing dealers willy nilly. “We are looking for quality not volume. Dealers who can enrich the vertical market solutions,” Duffaut told FSN.

Getting the consultancies on board could be a considerable advantage in securing the mid-market component of SAP's large scale enterprise customers. Duffaut is encouraged by the willingness of the large integrators and consultancies to buy into SAP's mid-market vision. “They also want to grow their business and see advantages in being able to offer mid-market solutions which leverage their skills in larger enterprises,” says Duffaut.

Industry expertise is one of the most important ingredients that SAP brings to the mid-market mix and is one of the areas where SAP's business model is different. Whereas many competitors rely exclusively on the dealer network for in-depth vertical market expertise, SAP has lived and breathed it for many years. If this capability can be blended with the vertical market knowledge brought to the party by the resellers they recruit then SAP will indeed enjoy a significant competitive advantage. Capitalising on this combined intellectual property is an important strand of the strategy and SAP plans to make this body of expertise and experience available through ‘centres of excellence' that will dispense best practice advice and processes through the SAP/reseller ecosystem.

Time is not on SAP's side. Competition for both resellers and customers in the mid-market is intense. The strategy is sound but as Duffaut concedes, “execution is everything.” With entry systems of around £10,000 SAP is looking keenly priced but far removed from the multi-million pound comfort zone of its historic market place. The strategy is technically, economically and operationally challenging, but if SAP succeeds in pulling it off, it will indeed be a remarkable achievement.

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