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Is SAP any clearer on its SME strategy?

Derek du Preez Profile picture for user ddpreez November 20, 2014
SAP held its annual SME Summit in New York this week and attempted to clear up its strategy on how it is going to get a hold of the SME market.

Clear blue sky
SAP's strategy on selling applications to the SME market has been vague and confused in recent years. Whilst SAP Business One has had some moderate success with mid-market companies, SAP has faced an uphill struggle pitching Business ByDesign – largely due to internal debates at SAP about where exactly it should be positioned, leaving it in a mess.

And although SAP now claims that 80% of its customers sit in the SME space, thanks in part to Business One and the Concur/SuccessFactors acquisitions, it is still very much perceived as a leader in selling big, heavy enterprise apps. Add this to the confusion around how SAP's SME strategy fits with HANA as a platform, combined with NetSuite's dominance in the SME cloud market, SAP has some work to do on how its go to market strategy for SME apps is in fact 'simple'.

Dennis has written a couple of excellent, detailed pieces on SAP's mid-market strategy in recent months, which are definitely worth a read for some more background. Most notably, Dennis revealed that Business ByDesign, which many of us had written off, is in fact still alive and kicking. Who would have thought?

With all of this in mind, SAP held its annual SME Summit in New York this week and took the opportunity to clear up how it is positioning its products for the mid-market and how it is using partners to extend their reach.

The show kicked off with SAP's President of Global Partner Operations, Rodolpho Cardenuto, taking the stage to present a diagram that sums up SAP's current approach in this space. Forgive the shoddy photo, but SAP's SME strategy can now be defined as follows:

SAP's SME Strategy

As you can see, all of the SAP SME apps are now built on HANA, with built in analytics and are designed with mobile in mind. They are split between on-premise and in the cloud and are positioned/segmented based on the size of the organisation. So for the smallest SMEs, Business One on-premise and in the cloud is the focus, whilst those on the next level up (primarily the mid-to-upper market SMEs) are being sold the more mature Business All-in-One for on-premise implementations and Business ByDesign for those with a preference for cloud.

All of these applications are now discrete businesses within SAP and are headed up by different executives, with the idea being that they should utilise more 'traditional' partners to sell in the on-premise roll-outs and look to next-generation cloud partners for the ByDesign and Business One Cloud implementations.

I got a chance to sit down with Cardenuto to discuss this further (albeit very briefly) and he described the SME set-up as SAP's way of segmenting the market. He basically said that SAP now recognises that the SME market is quite fragmented and that no one product will fit all, hence the need for the divisions. He said:

What we are doing is segmenting – segmenting by market - but this is secondary. The primary is to have product segmentation, we develop products for those markets. For example, you have a luxury car for one segment of the market, but you can't sell a $100,000 car to the blue collars. We looked at the market and asked, what do they need? They need simplification, they need it to be easy to use, easy to buy, easy to consume, easy to configure.

We understand the needs from the market and we have developed the portfolios for that.

SAP highlighted during a number of sessions at the event that it is only going to have success in the mid-market through the use of its partners, as opposed to via direct selling. Michael Schmitt, SAP's SVP of Business ByDesign, said that this is the approach that has worked for SAP's other mid-market solutions and partners now need to be utilised heavily going forward.

Keep calm SAP
However, SAP faces a challenge in convincing some of its partners to adopt the cloud model, which is going to be a strong focus for its mid-market applications. Whilst on-premise apps remain to be offered, the majority of the event was spent talking about cloud and getting cloud apps into these smaller companies – largely because this is where the demand is (you only have to look at NetSuite's success to understand that). But, just as SAP is struggling with the transition to cloud subscription revenues vs up-front billing, its partners are going to have to go through the same transition.

At the summit there seemed to be two groups of thinking behind this. One being that SAP will work with partners to help them understand the benefits of shifting to operating within cloud-based economics. The other being that SAP is likely to heavily utilise next-generation partners that are born in the cloud. For example, Kevin Gilroy, SAP's SVP and General Manager of Global Channels, said:

If you think back, the channel over the past 30 years has always been about margin – what's our margin? What's our margin? What's our OpEx cost? That's not the conversation now with our partners, it's really about balance sheet management.

Cash flow in the cloud changes our partners' model. Once they get it and understand the balance sheet impact in the cloud, they get over the chasm of recurring revenues and get to a tipping point where the valuation of their company goes through the roof.”

They're understanding that they can't blend in their on-premise traditional service business with their cloud models, that's a dangerous thing to do because you don't really know where you're making money and where you're not.

However, when I put the question of how partners are dealing with the challenge to Cardenuto, he seemed less concerned:

Some of the partners are born in the cloud. We have a good set of partners that only offer cloud. Last quarter we signed more implementation contracts in the cloud than on-premise. In one single quarter, we had more net new contracts from the partner ecosystem in the cloud than on-premise.

The difference (for partners) is that the cloud is less customised, it's more of a template – our experience is that it is one third less of an effort to implement in the cloud than on-premise. So from a partner perspective is how to live with more volume and less [revenue from lengthy implementations].

Business ByDesign

I was also keen to get Cardenuto's thoughts on Business ByDesign and ask him how he is going to get partners to push this product, given that they are probably already selling in Business One and Business All-in-One. The response I got was both convincing and confusing. Bear with me. Initially Cardenuto spent his time admitting the faults that SAP has made with ByDesign, but assured me that SAP has internally settled on where it fits into the SME portfolio. He said:

You are absolutely right, I think over the past two years we have swung too much with the product. I think it was less of a product issue and more of a strategy and vision issue. It was first a direct sales, large enterprise product, then we swung to indirect SME product, then we swung back to subsidiaries of our large enterprises – no product can survive these things. And look what happened inside the company, only after the second swing everybody gave up.

If you look at ByDesign it is the best product in the market. We commissioned one of the best analysts in the market and asked for them to give us an independent view of the market. ByDesign came back as the best product. It's the most stable, has the most functional reach, it is the easiest to use and is the most attractive from a user perspective. Of course it's not a perfect product, some features are in the green, some are in the red, but it's the best product in the market.

I think we still have a branding issue and maybe we are going to do something about that. The perception is, is it still alive? Which is unfortunate. But ByDesign is the best product in the market.

So we have gone from ByDesign falling by the wayside to now being the “best product in the market”, which should give you an indication of SAP's

SAP's Rodolpho Cardenuto

renewed commitment. However, where Cardenuto stumbled, and I think may have been unintentional, was when I asked him how he was going to differentiate ByDesign between the more mature All-in-One Business products for partners. Why push ByDesign over All-in-One? He said:

Business All-in-One is the most complete suite, it is a full blown business suite. It's like using the business suite that the largest enterprises in the world are using, but with that comes complexity. With that comes cost and time. Business ByDesign was designed with an SME focus, it's much easier to use and much easier to implement and it's more cost effective.

And it was designed with a cloud mentality. All-in-One is an on-premise product. ByDesign is a cloud native product. All-in-One is more for higher up, or upper end of the SME market. ByDesign is for the SME market.

Cardenuto's comments were quickly followed up by his two aides saying that the difference is simply an on-premise versus cloud choice for customers (which fits with the diagram presented earlier on in the day) – but I'll leave you to decide whether there is perhaps a bit more to it than that, given what he said.

Other competitive advantages

Kevin Gilroy made a couple of other comments during his presentation that I thought were worth highlighting, with regard to how SAP sees it has a competitive advantage in this market when compared to others that are making headway. Gilroy recognised that SAP needs to amplify the 'SME' message to the market and it needs to get the industry to understand that SAP doesn't just deal with large companies and complex implementations. He said:

We have the 25th strongest brand in the world, but our brand is still too much associated with Fortune 500 to Fortune 1000. Big, expensive complicated – we have to do that myth busting because it's really an old story. We have been in SME for a long time, our products are now eloquent, easy to deploy, in fact they're delightful to deploy. They take hours, days, in some cases a couple of weeks, but no more than that. We have to bust that myth every day.

It's a marketing led segment. We need to understand that it's not a sales led function, we need to get awareness out. SME is not a homogenous group of customers, it's quite fragmented, we need to understand the industry expertise and we need to continue to refine our channel to understand specific industries.

Interestingly, however, one of the main points that Gilroy made about why SMEs should pick SAP, is because it is a company that isn't going anywhere. He said that this can't be said for all other SME-focused companies out there at the moment.

If you think about the hundreds of cloud companies, I don't know how many are going to be left in 5 years, or who is going to bought, sold or combined. SMEs need to understand that risk when picking suppliers. Who's going to be left standing in 5 to 10 years? SAP.

He also believes that SAP offers an integrated suite, which he argues is a great advantage for SMEs. He said:

The other thing SMEs tell us is that they know they can't get to a one vendor solution, but they can't deal with a 50 vendor solution. If they can integrate mobility, with ERP, with HR into one aggregated cloud system, with one bill, one neck to choke, one back to pat. That's an advantage.

My take

This was a very interesting summit and it is clear that SAP has a renewed commitment to the SME market. In fact, the SAP leadership team confirmed at the event that it has just decided to take the SME summit on the road to a number of cities worldwide that represent an opportunity to the company in the mid-market.

New SAP logo
The SME diagram is also useful to help us understand how SAP is positioning itself. In particular it's good to hear that ByDesign has a place and it is now understood where it should be pushed.

That being said, SAP talks a big game, but still has a lot of work to do. There were discussions today about cracking North America and taking on the other companies that have managed to create a lot of 'hype' in this area, particularly those born in the cloud. If NetSuite CEO Zach Nelson's comments earlier this month were anything to go by, he doesn't seem too worried just yet.

It's also good that SAP recognises the importance of partners, and whilst there is work to do in terms of communicating the messaging to them, there were a number of partners at the event that seemed enthused about the latest strategy.

The next 12 months will be very telling and any future success will likely be gauged from highlighting customer successes – in particular it needs some good wins for ByDesign, otherwise the renewed optimism will once again face a hell of a lot of criticism.

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