SAP's challenge to NetSuite, Workday and salesforce.com
This week SAP finally introduced its on demand Business ByDesign suite, aimed at the mid-market (companies with 100 to 500 employees) and starting at $149 per per month per user but with a $54 a month option for a set of five users with limited usage of the software.It appears to be the initial step in a decade-long transformation of SAP's ERP offerings across all market segments and verticals.
This week SAP finally introduced its on demand Business ByDesign suite, aimed at the mid-market (companies with 100 to 500 employees) and starting at $149 per per month per user but with a $54 a month option for a set of five users with limited usage of the software.
It appears to be the initial step in a decade-long transformation of SAP's ERP offerings across all market segments and verticals. [Check out coverage and analysis from Dennis Howlett, Michael Krigsman, Larry Dignan and Josh Greenbaum on the launch of Business ByDesign.]
SAP CEO Henning Kagermann said Business ByDesign was "most important announcement I’ve made in my career." Given he has been at SAP since 1982 and joined the company's Executive Board in 1991, that statement puts a lot of weight on the shoulders of the fledgling Business ByDesign (an odd name--how about SAP Business Suite, Mid-market Edition).
If SAP is successful with Business ByDesign, which isn't a certainty, customers will be asking for the same kind of user experience and cost efficiencies in the rest of the product line, across all verticals and industries.
SAP will need to worry less about cannibalization of its other product lines by Business ByDesign, and more about customers defecting to alternative solutions that do a better job at delivering on demand ERP. Thus, you can expect SAP to give All-In-One and Business Suite, which are aimed at larger companies and have deep verticalization, the Business ByDesign makeover in the next several years.
When asked about what customers do when they outgrow Business ByDesign in an interview with InformationWeek, SAP Deputy CEO and sales chief Leo Apotheker said, "I think it will scale and we’ll continue to develop. It’s not the final version. Partners will add to it. It’s just the beginning and not the end."
My reading of this is that the slow hand introduction of Business ByDesign is less of an Eric Clapton-style riff and more like the kind of delicate handling that bomb disposal experts apply to live munitions of unidentified origins. SAP knows that in Business ByDesign it has something powerfully explosive on its hands and the last thing it wants it to have it blow up its face. It would rather risk burning the fuse so slow that it might even blow out altogether — that’s why the company has now decided to backpedal on its earlier ambitious forecast of reaching the 100,000 customer mark by 2010. But at the same time SAP’s leadership recognizes that the company’s future depends on whether it can engineer Business ByDesign in such a way that it ignites a controlled explosion to rip through and replace much of its current catalog — before competitors get there first.
In other words, the mid-market is a segment of convenience.
Kagermann summed up his introduction of Business ByDesign in saying, “I believe what you see today is something no one else can offer.”
That last statement is worth investigating. What is SAP doing that uniquely differentiates it from NetSuite, Workday, Salesforce.com and others who have been pioneering the space.
Architecturally all the companies are basing their offerings on modern software technology--SOA and Web services with master data management, workflow and process management, customization capabilities and an host of built-in functions, such as business intelligence and mobile support.
Business ByDesign is powered by SAP's Netweaver platform (application server, business intelligence, master data management, portal, mobile, identity management, auto-ID infrastructure, development tools, etc.) and an enterprise SOA repository of services that encapsulate business processes.
Without doubt, the currently vaporous Business ByDesign, which is being piloted by a handful of customers, has the most industrial strength feature set among the on demand players. What will actually be delivered in version 1.0, and when, is unclear. Business ByDesign won't be generally available until sometime next year, and SAP is late to the on demand dance.
NetSuite CEO Zach Nelson contends that SAP has a lot to learn about delivering an on- demand ERP suite. "If it follows history, [Business ByDesign] will be a version 1.0," Nelson said. "There's no way it can be as deep as they say when it is released to run generically a 100 to 500 person company. It's a 'functionality' sell, not a brand sell like CRM. If you don't have demand-based inventory replenishment, for example, they don't buy your software. Depth only comes from years of development--and there isn't much that accelerates a new code base built all from scratch."
He also cited the lack of extensive customization, verticalization, an untested delivery approach, and a questionable channel strategy as issues for SAP. NetSuite offers four vertical editions and is adding two more this year, and has extensive customization capabilities used by its more than 5,300 customers.
Nelson pointed to Asahi Kasei Spandex America, a $100 million division of the $10 billion Japanese conglomerate, as a customer that recently chose NetSuite (see diagram at left) over an SAP on-premises solution.
Nelson also doesn't believe that Business ByDesign will be an easy sell. "You can try it for free but it's not proof that it will run your business. We've been doing this for ten years and trial by Web isn't the way. Selling into this market is the same as SAP in the enterprise, it's just missing a few zeros in the purchase order," Nelson said.
As NetSuite has proven, selling a full ERP suite is much tougher than getting in via SFA and CRM as salesforce.com, which has 900,000 subscribers across more than 35,000 customers, has done. SAP hopes to add 10,000 Business ByDesign customers a year by 2010, and has signed up channel partners to sell the suite.
Of course, NetSuite is a blip on SAP's screen. NetSuite, which has filed for an IPO, had 72 percent revenue growth in Q107 compared with Q106 ($23.2MM vs $13.5MM) and has about 500 employees. On the other hand, salesforce.com is closing in on a billion dollars in revenue for its next fiscal year. SAP reported $1.92 billion in revenue for the quarter ended Sept. 30.
SAP said that it has spent $500 million over four years with 1000 developers hammering away at the new suite. "We'll have to see what they come out with, but the best software comes from small groups, not thousands of developers," Nelson stated.
He may be underestimating SAP's development prowess, given Business ByDesign is built on the company's well established core SOA engine, and it has a deep well of ERP process knowledge. Business ByDesign is supposed to make SAP software usable by mere mortals who lack billions to spend on ERP deployments (which should be appealing to every user segment).
SAP is a large company trying to protect different revenue streams," Nelson said. "It will cause enormous confusion in sales channels. From a NetSuite perspective, this announcement is a watershed moment for us. All of SAP's noise about 'on-demand suites' gives more credibility to our marketing message, and will pull us up market and into deals we otherwise would not have found. Larry [Ellison] always said the best thing that ever happened to Oracle was IBM's announcement of a relational database. It pulled Oracle into all IBM’s major accounts, and when you looked at the two products side-by-side, the more mature Oracle product beat the 'new' IBM product hands down. This is our 'IBM' moment."
Workday also provides on demand ERP software, currently with HR and financials only. According to CTO Stan Swete Workday won't compete directly with Business ByDesign. "The market SAP identified isn't our target market," Swete said. "We look at the upper mid-market--1,000 to 10,000 employees--and we expect to be taken further up market. It seems to me that a more direct comparison is with salesforce.com, NetSuite and Microsoft." Swete also said it wasn't clear from what SAP showed just how deep the various module of Business ByDesign were at this point, or if SAP's database isolation for individual customers within a shared infrastructure could offer the same cost savings as a multi-tenant approach.
"All the way through the presentation, SAP's messaging and value proposition was right on--driving down TCO, driving up agility, increasing usability--that's what we and others say," Swete told me. "But does confining it to the mid-market mean that larger companies don't need those things? These are issues of importance up and down all segments. The real reason they need to have an initial focus on such a narrow and down-market segment is that they don't want to cannibalize where they have product, and they are not ready to address higher-end segments with the on demand solutions."
That said, the two-year-old Workday will end up competing with SAP as customers determine that SAP's notion of market segmentation doesn't apply to them. In reality, Workday could be playing catch up with SAP as it tries to add new and deeper modules, such as supply chain management to its ERP suite, in the coming months. "It's a question how fast can we get wide," Swete said.
I asked Salesforce.com CEO Marc Benioff for his impressions of Business ByDesign. In an email he wrote:
"SAP is suffering from the innovator's dilemma. They are trying to limit the on demand opportunity by customer size, and by making their systems single tenant, hoping they can sell them back to the customer over time. The right strategy is to embrace the full technology and business model of on demand, not just the parts SAP likes. Their current strategy is doomed to fail--the only hope they have is to change it."
In an interview with eWeek, SAP's Apotheker countered, "It is comparing a little hors d'oeuvre, an appetizer, and a complete three-star meal. Salesforce has a CRM application. It happens to be that the vast majority of businesses on this planet do a little more than just CRM. Our attempt is to get rid of all these acronyms. Businesses don't really buy acronyms, they buy a processes flow, a business model. We provide a complete solution and we provide a complete suite, lock stock and barrel, which is Business [ByDesign]. You don't need CRM from Salesforce any more. It's superfluous. No wonder [Salesforce.com CEO] Marc [Benioff] is worried. It is disconcerting. He has every right to be concerned."
Benioff is right that SAP is taking a tentative approach to on demand, but as Phil Wainewright said, it's a risk that SAP cannot avoid given its history and current business dynamics. Whereas SAP is taking more of a top down approach to reducing cost and complexity of ERP functionality, salesforce is taking the bottom up approach, opening up its platform in hopes that scores of developers will fill in the gaps of its incomplete set of applications with a broad variety of ERP and other business software that address every business market segment through the programmable Force.com platform and its AppExchange.
Both companies are trying to attract developers to expand the reach and capabilities of their offerings. It's too early to pick any winners. In baseball terms, we are in the second inning, but there will be multiple winners, and room for both approaches, as the shift to on demand and utility computing gets into full gear. Who knows. Maybe salesforce.com and Workday will join forces to blunt SAP's foray into on demand. And Oracle and Microsoft don't plan to sit on the sideline. For customers healthy competition can only mean more choice and better deals.