SAP's slow hand A1S play

Late yesterday, Henning Kagermann, CEO of SAP hosted Zoli Erdos, James Governor, Prashanth Rai, Charlie Wood, Jason Wood and myself for a pre-launch discussion about A1S. During the meeting, Kagermann emphasized the company's cautious approach to the SaaS market. On the one hand, SAP is readying itself for a volume play, looking to ramp up to 'thousands of customers.' On on the other hand, he is not promising investors Web 2.0 style viral sales miracles.

Viewed from an investment analyst position, nothing could be worse. Wall Street will hate the company for taking a less than all out aggressive approach. In contrast to the usual fanfare and razzamatazz accompanying software launches, Kagermann takes a measured and thoughtful stance. He knows that much of SAP's future rides on A1S. Yet with just 20 customers actively working with A1S, a total of some 45 customers in test mode and several hundred in the pipeline, A1S is a step into the unknown.

Industry pundits are looking at A1S to bring significant TCO gains. As Vinnie Mirchanani has said:

Clearly, I am interested in how this will change SAP TCO at its customers. As I have written before SaaS economics are almost 1/10th of on premise TCO. Can SAP come close?

"Volume readiness is one thing - you can be ready for the market. But business volume readiness is another thing. If we are only getting 3x TCO reduction then we have a problem with the market,"says Kagermann as he targets Vinnie's 10x reduction as part of SAP's long term strategy. Commenting on early customer experience, he adds: "TCO is significantly lower but it is not where I want it to be - yet."

SAP is hoping to quickly ramp up to tens of thousands of customers but Kagermann realises that it is not a done deal. The key comes in the way SAP partners in its go to market strategy. My sense is that SAP has yet to establish a firm base of business partners that understands the company's logic. Talking about the existing community of consulting partners, he says: "They need to understand that the consulting opportunities are very different. It won't be a case of surviving on four or five big customers a year but a much higher volume," says Kagermann. Consultants will in part be drawn from the existing BusinessOne group. I feel SAP will have to rapidly identify partners who are more used to selling than providing custom services.

Embedded services like inbuilt training, e-learning and automated diagnostic data collection during usage will chop out cost bringing the ongoing SAP consulting gravy train to a grinding halt. While Kagermann appears confident that he can bring consulting friends on board, I'm not convinced the company has yet fully identified the kinds of partner it needs. Coming from an SMB background, I don't think it is that hard but during the conversation I felt Kagermann was making it intellectually harder than necessary.

One of the ways SAP plans to address complexity is by getting as close to 100% process completeness as possible. On a narrow set of (as yet not fully described) verticals, Kagermann seems determined the company will not be dragged down the bespoke road which has been the starting point for much past criticism. There are many ways it can do this over time. Kagermann said the company will mine the existing 800,000 SDN developer network and 120,000 business process experts as sources of expertise from which it can flesh out A1S vertical market solutions. This is entirely sensible.

Earlier in the year, Hasso Plattner, one of the company's founders said the company made an early mistake by allowing customers access to the code. This lead to code proliferation and the creation of one off processes over which the company had little control but which it has had to support ever since. Expressions like 'never again' and 'over my dead body' are the ways in which SAP executives have described their forward looking approach to customization. Instead, Kagermann adds: "We'll provide rich configurations and extensions as and when customers are ready. But not customizations."

Another way SAP will reduce cost is through use of low cost components. Here the database is a key target and Kagermann made plain it won't be Oracle to whom SAP forks over in excess of $1 billion a year. Similarly, in its so-called mega-tenant (as opposed to multi-tenant') architecture, SAP will have to drive down hardware cost. In the post meeting discussion, James Governor suggested that:

For SAP to scale up the way it says, it might want to take a leaf out of Google' s playbook. Who knows, it might end up as a major server manufacturer in its own right?

A tantalizing, if speculative prospect given SAP's existing partnerships with players like Sun and HP.

The biggest hurdle SAP faces is in managing a changing culture. Kagermann is clear for example that the German worker's council is four square behind the new business model. "There is no question they understand what needs to be done and are fully supportive of what we're saying." I hope he's right. In the past, the council has hindered progress like the adoption of Harmony, SAP's internal social networking style collaboration tool.

When asked about the potential for SAP to partner up with Web 2.0 wunderkinds like Google, Kagermann says: "Too many people think everyone will be bottom up Web 2.0 but we still need order from the top. No-one has really addressed service integration. We have to. Transformation is something we'll all have to deal with but we will need to prove that we're capable of elevating what that means in software to a higher level."

Regardless of SAP's past image, today's launch is an important day in understanding the company's future. Does that make SAP a safe bet? Zoli says:

My bet is on SAP: they may stumble a number of times, which will effect their quarterly numbers - but in the end, I believe they will succeed. They will become the dominant SaaS player in the mid-market, forcing smaller players like NetSuite down-market. In the next 2-3 years while SAP flexes their On-demand muscles, we’ll see just how pervasive SaaS proves in the large corporate market, and that will determine whether A1S remains a midmarket solution or becomes the foundation of SAP’s forey into that market - their natural home base.

Kagermann's measured approach is exactly the right position to take and one that investors will appreciate further down the road. Who knows, in time we may look back and say that in making the slow hand play, Kagermann parallels Eric Clapton's maturing musical path? As a progressive rock fan, I suspect this comparison will bring a wry smile to Kagermann's face.

More to follow as we meet with other SAPpers and early customers later in the day.

Update: Photo added, courtesy of Prashanth Rai. The Irregulars with Henning Kagermann.