Tuesday, April 3rd 2007 | Ismael Ghalimi
The market for enterprise applications is not growing much anymore. Faced with this challenge, large enterprise software vendors have only two options: grow through acquisitions, or go after the SMB market, which has been traditionally underserved. This transition is particularly obvious for a couple of vendors — Oracle and SAP. On the M&A front, nobody could execute better than Larry Ellison and his team today, therefore I contend that SAP’s future lies in the SMB market. But SMBs do not like to buy software, mainly because they do not have access to the IT resources that are necessary to deploy and maintain it. Instead, they would rather buy it as a service, as Salesforce.com’s demonstrated so well. This is why SAP should really get serious about the Software as a Service model.
So far, SAP’s foray into the SaaS market has been unimpressive at best. Over the past couple of years, SAP focused mainly on the NetWeaver middleware and the A1S platform. The later is available as a hosted solution, but is targetted at the mid-market. SAP calls it game-changing, but I do not believe that it has anywhere near the disruptive power of Salesforce.com and the AppExchange, for a couple of reasons: first, it’s out of reach for the smaller SMBs that represent the bulk of the potential market opportunity; second, it lacks a strong ecosystem of partner solutions. I believe that SAP needs a new solution, directly targeted at the SMB market, and only available as a service, for this is the only way to make it work.
As of today, SAP is maintaining three separate product lines: Business One, A1S, and mySAP. What I am advocating is the development of a fourth one, for the following reason: while Business One might be appropriate from a functionality standpoint — even though this is highly debatable — it does not have the right architecture. As our friend Marc Benioff so eloquently taught us, SaaS only works if you have multi-tenancy, and multi-tenancy is not something that you can fake. Also, to support the variety of needs found in smaller organization, the application needs both objects and processes to be configured or customized in a model-driven way. Business One is capable of doing this only for objects, and the way it does it is nowhere near as easy-to-use for non-technical people as Salesforce.com is. Like it or not, a new platform needs to be developed, most likely from scratch.
If it decides to do so, SAP should focus on three functional areas: Finance, CRM, and HCM (Human Capital Management). CRM is a no-brainer, and is what most SMBs need from the start. HCM, and especially an easy-to-use employee self-service portal, is where I would expect most CRM players to go next, mainly because it’s easier to implement than a financial package, and because it gives you the ability to sell many seats — theoretically one seat per employee. Finally, Finance is where SAP could truly leverage its global expertise, and leapfrog its most established SaaS competitors, Salesforce.com being first among them.
As of today, SMBs looking for a financial package have only a handful of options, and few of them are available online. Intuit’s QuickBooks is very strong in the U.S., but not much of a player elsewhere, and it only works with Internet Explorer — what a shame! Microsoft Dynamics is a good on-premise solution, but the on-demand version is at the stage of demoware right now. NetSuite and Salesboom both have decent financial offerings, but they are not fully localized yet, and are supported by limited marketing resources. Workday is an interesting player, but with only 10 customers as of today, it still has a long way to go.
If SAP were to release an on-demand solution including FI, CRM, and HCM sometime in the first half of 2008, it would most likely be one of the very first players to do so. And if it were to release it with something equivalent to Salesforce.com’s AppExchange from the get go, it would have a very decent shot at building one of the next-generation platforms that will be used to build the composite applications that will support most business activities in the future. If it were to inject a healthy dose of Office 2.0 magic as well, it might even have the most attractive platforms of all.
Granted, what I am proposing is no simple feat. For starters, SAP would have to adopt a brand new business model — renewable subscriptions as opposed to perpetual licenses — and get rid of its not-invented-here syndroma. For example, if it were to enforce the use of its own middleware to build such a thing, it would most likely fail. Instead, it should learn from the successful experiences of other players in the field — especially Google and Salesforce.com — and make extensive use of open-source technologies, for the database, the application server, and the web services stack. Also, it should rely on a network of third-party vendors for providing a rich set of Office 2.0 user interfaces that will drive end user adoption.
Such a program is virtually impossible to run internally, for it would face too much opposition, from too many stakeholders. Instead, it should be developed through a semi-independent entity. Of course, similar initiatives have been met with mixed results in the past, but it should not prevent SAP from giving it another shot. Quite frankly, there is not much to loose, and a lot to gain here. I write semi-independent, because one critical success factor would be to get access to functional IP, especially with respect to financial applications. Through the development of Business One, A1S, and mySAP, SAP AG has accumulated a unique expertise that would give an SAP-funded spin-off a truly unfair advantage on the market.
At the time of writing, SAP is going through a major transition, prompted by a series of unrelated events that have created both formidable challenges and fantastic opportunities. There is no way to tell which direction the company will go, but one thing is clear to me: the company has extraordinary assets that could be leveraged for developing a truly game-changing platform, and I find such a prospect quite exciting.