Last week, amongst the financial numbers in SAP’s 2006 preliminary results webcast, Henning Kagerman outlined their new A1S product and the associated strategy to tackle the mid-market. Any of us that are involved in enterprise applications, particularly for the SME/SMB market is going to be watching what the market leader does closely. They’ve talked about tackling the mid market before, but haven’t taken it by storm yet. Will things be different this time?
I was surprised that there hasn’t been more detailed coverage of Kagerman’s explanation - I could only find a couple of articles of any depth, and not much around the blogs. My SAP friends, like Thomas Otter and Mark Crofton, have all seen demos of the new product already, but can’t say anything as they are embargoed under a non-disclosure agreement. When they do make general comments, they are extremely enthusiastic. However, SAP’s own press release on the announcement just confused me. Thomas suggested I go back to the source, so I listened carefully to what Henning Kagerman said (twice!), along with the questions from the audience. You can do the same, but you need to jump in to the screencast about half way through. Here are my notes on what was said, folowed by a few preliminary thoughts:
Kagerman explained to the analysts that SAP’s number 1 priority is to win market share, and move to more predictable, less volatile revenue streams. By 2010 they want to have over 100,000 customers. They believe they could achieve that without the new product, but with the new product and a new approach, they believe they will also be adding 10,000 mid-market customers a year by that time, rather than the 2,000 customers they could achieve by traditional means. Currently they have mySAP ERP 2005 (ERP 2005) aimed at large enterprises, SAP All In One (A1N) for medium sized customers, and Business One (B1) aimed at smaller enterprises.
Henning explained that there will be a new version of the proven A1N product, that will be SOA based, using the ERP business process platform, available for all countries, and all business sectors. They will be able to leverage their existing investments and partner network. It will have more function and a better user experience. They will be selling this and B1 to their established business.
Kagerman categorised, rather arrogantly in my opinion, the mid-market in to two camps - buyers and non-buyers. Buyers are the ones who are comfortable with the established SAP approach of traditional software, consulting, and implementation timescales, and who are prepared to buy A1N and B1. The non-buyers aren’t interested in SAP’s current range - they want a much faster time to value.
He explained that, although SAP might do minor acquisitions, fundamentally they want to grow organically, through innovation, and he believes that they can’t buy the innovation they need elsewhere in the market. They don’t want to wait until some new entrant comes and disrupts them, and so they are accelerating their investment to get quicker time to market. Consequently, they have set up a new division to address the mid-market headed by Hans-Peter Klaey, and they have developed an entirely new product “in the last years“. As well as the spend to date, they plan to invest a further 350-400m euros over 8 quarters, although in later questions he said there was no detailed breakdown of costs or associated headcount available yet. The new product, currently called A1S, will be formally launched in March, and Kagerman said:
“We believe this is a game-changing product… with a lot of breakthrough innovations,”
He said that the new product will have cost of ownership better by a factor of 10. Apparently the product is SOA architecture based, has lots of innovations in it, and is a complete “suite in a box” - not CRM, not ERP, but covering the entire business process of the mid market company. The whole approach will be based on quick value, low cost, low risk, and quick return, which is what these “non-buyers” want. Later in the presentation he explained that the new approach is intended to change the common perception of SAP away from “too difficult and too expensive“.
As well as the new product, Kagerman explained that, if they sold it in the traditional way that they sell their other products, they would not achieve the margins they need to deliver. Consequently the new product will be delivered with an “entirely new business model“. The product will be sold through the Internet and with telesales. Customers will be able to try before they buy. In 2007 the product will only be available on a subscription basis, but by 2008, customers will have the choice to pay by subscription, finance options, or be able to buy it outright and install it on-premise if required. SAP believed that the overall approach, business model and the way the product is delivered is new.
“Nobody else has done it this way“, he said.
Kagerman believes A1S is more flexible than other software, and adapting it for a business is easy. He suggested training of users will be factors cheaper, and that there won’t be the volume of consulting required, like their traditional business. Configuration of the product is said to be simple, driven by straightforward business questions. There are embedded services for easy maintainability. Application management is handled remotely, and so upgrades will be managed for you, however the software is deployed. This brings the overall cost of maintenance down.
Kagerman went on to say that the new business model is all about economies of scale. He explained to the investors that it is a “back end loaded business“, and so the initial risk is with SAP, but it will produce a higher margin business at the end. They believe it will create a more predictable business, one of the things they are trying to achieve across the whole of SAP. He talked about some of the “one time” investments they are making in setting up the infrastructure. He reiterated that this is a very different model compared to their traditional approach, but added this is the first time they have brought an entirely new product to market.
Kagerman explained that they will share details of their investments on the new product separately, along with the return, on a quarterly basis. He said that you cannot expect this new business to have the same margin as the existing business in the second year, it’s an investment. However, after 4 years they expect significant volumes, and margins should be better than SAP’s established business. He believes that 40-45% of their order entry will be coming from the mid-market by 2010.
The first five things that jumped out at me following listening to this were:
- The phrases “on-demand” or “Software as a Service” were never mentioned. Admittedly SAP will be presenting a hybrid model, but the product is going to be available web-deployed on a subscription basis. Are they avoiding those terms because they are inventing another one? Is it down to marketing and they want to avoid comparisons with the likes of NetSuite and Salesforce.com? Do they believe that their approach is something different?
- Wow - taken on face value, if the product is as good, flexible, and cost effective as they say then this really is a significant announcement for the mid-market.
- This will mean that SAP’s mid market approach will involve three products - B1, A1N and A1S. How much overlap and channel conflict will there be?
- If the A1S approach is so good, so flexible, and with cost of ownership better by a factor of 10, what effect will that have on the rest of SAP’s traditional business, including ERP 2005?
- Why haven’t they said more about the underlying architecture of the new product so that the SAP detractors can see that this is a new product rather than an evolution of one of their existing products?
I guess we will have to wait for the full announcement in March. I have to say that this is a much more significant change for SAP than I expected. I suppose it is inevitable that they couldn’t give us the complete story, but a distilled pre-announcement for the analyst and investment community. I can’t wait to find out more, and to see if SAP can pull this off.
Technorati Tags : Enterprise+Irregulars, SAP, A1S, SaaS, on-demand, ERP, CRM, Henning+Kagerman, SME, SMB, mid-market
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