SAP’s New First Step

I am still thinking about SAP’s announcement last week that it would invest in a new business model to bring its new SOA mid-market products to the marketplace. I thought it was a significant enough announcement that I wanted to offer an opinion on it right away, which is why I did a piece last week, and a few days’ perspective have given me additional thoughts.

If you parse the announcement you may conclude that it is significant, but perhaps more because of where SAP is in its own evolution than for what is offered.

According to last week’s press release, “CEO Henning Kagermann outlined plans to introduce a new mid-market solution offering breakthrough innovations in faster, lower-risk implementation, continuous adaptability and easier user adoption.”

Familiar Platform

They are talking about an application set based on a platform that the company has been working on for three years. Later on the release refers to a “largely untapped market” and there we might need some clarification.

First off, the platform and business model sound a lot like what Salesforce.com has been doing with AppExchange, or, on a less grand scale, what NetSuite has been doing with its NetFlex product. Either way, we’re familiar with the broad outlines — on-demand solutions, easy to implement and manage, low total cost of ownership.

How much the additional benefit of financials will be is hard to gauge. Lacking financials has not exactly slowed down Salesforce.com and other vendors like Sage and NetSuite have integrated financials and are doing well, thank you very much.

Many Competitors in ‘Untapped Market’

That brings me to my second point — the “untapped” market. Now, every vendor has a right to make its best case in a press release, as long as there is some truth in it, and I suppose describing the market as “largely” untapped covers things.

Nevertheless, there is no shortage of companies engaged in the mid-market — the aforementioned NetSuite, Sage and Salesforce.com as well as others that would make up a long list that I don’t want to get into here. In fact, the press release claims that SAP’s customer base is 65 percent mid-market companies.

Add to that list the emergence of third party platform providers and the list grows. By third party I mean any vendor with an integration platform, whether it’s Cast Iron Systems, with their application integration appliance, or Above All, which does similar things with software. There are also plenty of more traditional EAI (Enterprise Application Integration) vendors like Tibco to consider too.

Pretty quickly you can see that the number of platform and integration choices available today makes it plausible for even mid-market companies to use a best-of-breed approach. I have spoken with customers who say they have integrated three major on-demand solutions using Cast Iron, and Above All has similar tales to tell. All in all, I think the “largely” modifier was a wise choice.

Necessary Transition

All that said, it is still an important announcement for SAP. As I said at the beginning, the announcement says a lot about where the company is right now.

For starters, I think it’s clear that SAP is one of the top two or three companies with the most to lose by the on-demand tsunami, so it’s good that they’re learning to surf. Spinning up a new business model in a well-defined market is a way for the company to begin a necessary transition to an on-demand approach for all of its customers — or at least as many as want to come along.

The new model in a defined market enables the company to begin positioning shareholders for the time when revenues come from repeat monthly payments rather than large episodic license payments. At some point the new model will have to become the primary model, and I would not be surprised to eventually see the new model begin to creep up market as the company gains experience and proof points.

Right now though, SAP is a late entrant in the on-demand market — there is really no other way to say it. It has a new product in beta and it is apparently indicating that it has found religion on the business model. It also has a tremendous customer base.

It would be a mistake to believe that SAP will be able to convert all of its existing customers to the new on-demand technology when it comes out. Customers have a way of drifting away for all kinds of reasons. This announcement is as much as anything else a nod to the fact that until now, customers wanting a lower-cost on-demand offering had to look elsewhere.

Keeping It Real

With all that said, from a pure business perspective, if I had to be any conventional enterprise software vendor right now, I think I would choose SAP because it has taken the most realistic approach to the situation of any vendor I have seen.

In contrast Microsoft brought out Vista this week — four years late — along with a new Office suite. Microsoft is one example of where I wouldn’t want to be right now. There are many competitors with on-demand office software and plenty of competition at the system level from Linux and Apple’s Macintosh.

Worse, there is plenty of talk about virtualizers that would make operating systems largely unnecessary. The bad news for Microsoft is that even if all of this competition turns out to be rather benign, taken together it represents a lot of pressure on growth.

No sir. If I had my druthers I’d rather be at least embarked on the new direction than trying to preserve the old way of doing things. The ancient Chinese philosopher Lao Tzu is supposed to have said, “A journey of a thousand miles begins with a single step,” and I think you have to applaud SAP for taking its first step.