FSN: SAP bets up to €400m on hosted ‘on demand’ business software for rental in the mid market

SAP bets up to €400m on hosted ‘on demand' business software for rental in the mid market

1st October 2007
In one of the most audacious moves in its history SAP the global ERP giant has bet the future direction of the mid-market on the success of rented business software made available over the Internet. Low prices and the ability to keep in-house IT resources to a minimum are just two of the attractions of the software “on-demand” model. But is SAP out on a limb? No other vendor has made a major success of accounting/ERP software packaged this way and SAP is gambling that its target market, businesses with 100 to 500 employees, will trust it with all of its information assets. The big question is will SAP make the market or will this be an expensive flop? Gary Simon , FSN's managing editor explores the issues.

In a blaze of publicity, SAP last week unveiled SAP Business ByDesign which it claims is “the most complete on-demand business software solution specifically addressing a new market of prospective, fast-growing midsize customers.” Talking to FSN in London , Hans-Peter Klaey, SAP's president of SME markets, was keen to push home the economies associated with an on-demand model.

With competitive pricing starting at $149 per month per user, the software does appear compelling. “No one else makes such a complete solution so affordable,” enthuses Klaey. “Then there is no need to have lots of in-house IT support or worry about upgrades and systems availability,” he adds.

Indeed Henning Kagermann, CEO, SAP says “SAP Business ByDesign is designed to dramatically simplify IT for midsize companies by substantially reducing the cost of ownership and combining efficiency with business flexibility. The model allows customers to exploit the full potential of new business trends without becoming IT experts.”

The product offering is the culmination of a development completely from scratch started around four years ago. SAP's market investment could reach the €400m mark by next year. However the business case appears confusing and apart from the fact that it is a hosted solution it is not immediately clear how the solution differs enough from other mid-market products.

SAP appears keen to distance itself from the ERP label, for example its launch fact sheet refers to the completeness of the solution but never mentions ERP. Yet the solution includes, compliance management, customer relationship management, executive management support, financials, human capital management, project management, supplier relationship management and supply chain management.

Klaey told FSN “It's not an ERP solution – we're talking about collaboration with suppliers and customers as well,” he insisted. But will the end user see the distinction? Although SAP Business ByDesign, as the solution is called, is indisputably very complete, its breadth is not unique.

Klaey argues that many businesses acquire this functionality as a hotch potch of different best of breed solutions from a variety of software vendors - which is of course often true. Others never reach this state, relying instead on a mix of primitive solutions, spreadsheets and manual processes. So SAP gets a big tick in the box for supplying an apparently affordable and comprehensive solution. But they are not the only ones.

Other global vendors, such as Microsoft, with Dynamics Nav or Ax also provide an extensive range of applications. The big choice that customers have to make is do they want this functionality hosted on a rental basis over the web or do they want it on a server in-house – the so called on-premises solution?

SAP is doing its best to persuade customers that the on-demand solution is often a better option. In this context it is important to remember that SAP Business ByDesign is not replacing it low end SAP Business One offering or its upper mid-market offering SAP Business All in One. SAP genuinely believes that there are more than 60,000 companies in Germany and the United States alone with 100 to 500 employees that typically have not invested in integrated business solutions and sees a worldwide market potential of more than $15 billion.

However dissecting the market is a problem. SAP says that SAP Business One is designed for the small business segment, while SAP Business All-in-One is built specifically for midsize companies that need deep industry-specific functionality and extensibility to meet their precise requirements. But other market commentators are already saying that SAP Business ByDesign could eat into both of these markets. Ovum the analyst commented last week that that Business ByDesign could “cannibalize SAP's traditional offerings.”

So why would a hosted solution be alluring in SAP's intended market. The lower cost of ownership is an obvious plus, particularly when taking into account e-learning, services and support without the need for extensive IT infrastructure and resources.

At this early stage with a limited number of customers the product's ease of configuration is unproven, but SAP makes much of the “try before you buy” capability. Essentially, the software provides an on-line configurator rather like the way people specify a new motor car on line and the car manufacturer builds and displays the product of you dreams on its web site. In this case, SAP (and its partners) provide set piece configurations based on vertical markets with ready to go functionality that potential customers can try and browse on-line before making a purchasing decision. This could be attractive to many customers who wish to de-risk the purchasing decision and be a competitive advantage compared to those vendors that cannot provide a similar proof of concept.

In fact the SAP approach is more than a proof of concept in the sense that once configured and trialled the exact same system can be taken into production. Many customers could be hooked by this approach – but much depends on the widespread availability of pre-prepared configurations, the amount of time customers are willing to invest in trying the software and the granularity of detail that can be configured. The launch demo appeared to be too high level to be worthwhile and many traditional software vendors can attest to the times they have given away trial software only to find that nobody in the target company has bothered to use it.

Whether “try before you buy” is really persuasive will be a severe test for the product's ease of use. If it really can be configured ‘on the fly' by customers without training (like the motor car) then this is brilliant news. On the other hand if it requires hours of dealer support then it could fall flat on its face.

As for the user interface (UI), this has followed the industry trend for roles-based configuration and looks promising, allowing different interfaces to be modelled to specific requirements. Where SAP may have a problem is that the interface is not fashioned around the popular Microsoft Outlook UI which is getting quite a following in the accounting and ERP mid-market.

Defending this position Klaey told FSN, “All the indications are that early customers find the interface extremely easy to use. It's a matter of hours to learn your way around the system.”

So if SAP Business ByDesign is affordable, easy to configure and use then SAP may be onto a winner. But there are some significant hurdles. Firstly, SAP has to convince the market that it is a ‘safe pair of hands' for a hosted model with up to 10,000 customers (its target). The SAP brand is of course very strong and sensibly SAP has taken ownership and responsibility for hosting. But SAP is asking quite substantial businesses (100 to 500 employees) to outsource all of their information assets. It's a “big ask” and in a world of huge corporate turmoil and acquisition activity – some customers will shun the option for this reason alone.

Secondly, will dealers make enough money to give the solution their whole hearted support? Klaey claims they will, but there remains a question mark over whether everyone can be winners? The customer wins because of low prices, SAP wins because of earnings and the dealers win as well – sounds too good to be true, but SAP says it has done the maths.

It is easy to be critical in the face of radical change. SAP has clearly invested enormous resources in this venture and deserves to be successful. The hosted model brings much needed relief and productivity to mid-sized businesses. It makes a lot of sense and the barriers are more psychological than technical or economic. Making a new market is a huge challenge but SAP has the commitment and resources to see it through. Is the move as game-changing as SAP declares? It probably is but it will be interesting to see what other vendors will choose to play.

SAP is currently engaging with pilot customers in the United States and Germany ; is validating the solution with customers in the United Kingdom , France and China ; and says it will continue to build upon a strong demand in these markets throughout the balance of this year. During 2008, the product is planned for expansion to additional markets such as Australia and India in Asia-Pacific; Italy , the Netherlands , the Nordic region, South Africa and Spain in EMEA; and Canada and Mexico in the Americas . SAP says it aims to further extend the country road map in 2009.

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