SAP executives were in what can only be described as a giddy mood during the companys July 19 conference call with press and analysts to discuss SAPs earnings report for the second quarter of 2007.
They also provided a fuller picture (sans any actual technical details) of the companys long-anticipated midmarket suite.
Code-named A1S, the suite has been in the works at SAP since the beginning of the 2007, when SAP CEO Henning Kagermann outlined the companys plans to invest between $414 million and $552 million (300 to 400 million euros) over eight quarters to build up a new midmarket business; nearly $70 million (50 million euros) of that war chest has already been spent in the first two quarters of 2007.
Kagermann confirmed during the July 19 call that A1S will be available both as an on-demand and on-premises application, as reported by eWEEK in January.
“[A1S] is planned first to be hosted exclusively. Then once it works, to offer it as an appliance on-site—it gives customers more security as they feel that its not only their data that is separated, but also the drive,” Kagermann said. If customers chose, “They could cut the line [to hosted services] and run,” he said.
Kagermann said SAP, based in Walldorf, Germany, plans to first host A1S in its own data centers in order to keep close tabs on the product and operations; over time the company will extend hosting opportunities to partners.
Like many SAP rollouts, A1S will be phased into existence. SAP is working now with a group of customers who are testing the product; it will not officially launch until September, and even then, only on a limited basis. “I think we will combine the launch of the new brand [and] new name, with presenting live customers so that you are feeling this is reality, this is true and not just a nice demo,” Kagermann said. “Anyone can present a nice demo.”
After the September launch, SAP will enter the “operation set-up phase,” which Kagermann referred to as the “Is this working?” phase, which will last to the end of 2007. At the beginning of 2008, SAP will see how fast it can ramp up production.
“We should have in mind that we have never done a launch like this in our history,” Kagermann said. “Its not a product launch—it should not be compared to CRM [customer relationship management] or a new GRC [governance risk and compliance] product. Its a new business, with an entirely new product, on entirely new technology, addressing an entirely new model with entirely new customers and demands.”
Broader Partner Implications
Kagermann said A1S will affect the entire company, from internal processes—the price list has to be small and simple, and contracts have to be simple and easy to read—to marketing and sales, which will be conducted much more over the phone and Internet than is currently the case at SAP.
SAP will also have to partly rethink its ecosystem strategy in order to find partners willing sell, configure, integrate and host A1S under the new model. Not that SAP has to reinvent partnering, Kagermann said, but rather it has to present a different proposition to partners regarding how they will make money. “We need a certain criteria from partners,” Kagermann said.
SAP is not the only company in the midst of a partner revolution when it comes to selling on-demand software. Microsoft, and even established SAAS (software-as-a-service) poster child Salesforce.com, are undergoing partner transformations. Microsoft, with the upcoming release of its CRM Live service, is working to give partners incentives to sell its on-demand software even though it will take them several years to break even. Salesforce.com, which will release its Apex on-demand programming language to customers and partners with the August upgrade of its software, is also working on pounding out a model that will work for partners.
Kagermann also said implementing A1S might take a fifth of the time required by a traditional SAP implementation. The length of time involved has been a source of criticism from competitors and some customers; SAPs on-premises software can take months and months to implement. “We have embedded services so we will have service factories [that] can be located in areas where we find the right talent at a reasonable price that can be available 24 hours, etc.,” Kagermann said. “What you dont see in the future is traditional upgrades. You will see more continuous cycles of innovation.”
SAP has already gone partway down the road of what it deems continuous innovation. At its TechEd event in September 2006, it announced that it would keep the core of MySAP 2005, its next-generation services-based suite, stable until 2010. Upgrades would come in the form of enhancement packages that customers could implement if they wished. At the end of about five years, SAP said it would likely roll the enhancement packages up into the next major upgrade.
The idea is to save customers the pain of implementing a major upgrade every couple of years in an effort to stay current. Its an idea that seems to be resonating well with customers.
Kagermann said during the July 19 conference call that there are currently 2,800 customers live on MySAP 2005, with many looking to upgrade in the coming year.
At the same time Kagermann pointed to a 50 percent gross increase in revenue from NetWeaver, SAPs services-based integration and development platform, with 18,000 NetWeaver systems in production and roughly 9,000 customers.
Leo Apotheker, deputy CEO of SAP, added that the new suite is not immediately intended for larger enterprise customers, but that some cross-pollination could occur further down the road. “A1S is designed to go after an untapped market for us, the midmarket, with a quick-adoption, ready-for-quick consumption model where people are looking to get a suite of enterprise capabilities that they can get very fast … It is designed broadly but not as deeply as our enterprise suite.”
Apotheker said SAPs large customers—some of the worlds biggest companies—arent interested in doing something that is “taboo” in a large company: implementing a new system “without even questioning for 1 second the performance and integrity of the core business they run.” Rather, he said, SAP is providing an evolution of SOA (service-oriented architecture) development.
“Once A1S is out, there will be interconnections,” Apotheker said. “There will B2B [business to business] traffic and there will be some innovation that will go both ways, and you cannot exclude that once we are in the next phase of evolution, some differences will happen. But for the foreseeable future, the next two or three years, our enterprise customers want to see an evolutionary approach minimizing downside risk.”
Some analysts have predicted that A1S will be the future replacement suite for SAPs older R/3 suite, which has some 30,000 customers—despite the massive investment in MySAP ERP 2006.
Bernstein Research analyst Charles Di Bona said in a July 19 research note that his company continues to view SAP as a fundamentally sound company.
“[We] expect SAP to continue to gain share in its core business against its applications competitors, most notably Oracle, even as it extends its reach into new product areas and deeper into the infrastructure stack underlying service-oriented architectures,” wrote Di Bona. “Meanwhile, it is apparent now that the company is looking to expand its reach and extend its growth horizon through investments in alternative delivery models such as the appliance, which will have at least near-term negative impacts on margins … nonetheless we believe its new investments appear strategically sound and may indeed improve its long-term growth potential.”
On the other hand, Michael Nemeroff, an analyst with Wedbush Morgan, said in his July 19 research note that while SAP posted a solid second quarter, his company remains on the sidelines due to long-term execution risk surrounding A1S, and the long-term transition in revenue mix from licenses to subscriptions.
“We believe that the company could have to reset investor expectations surrounding the on-demand A1S service aimed at the SMB [small and midsize business] market,” Nemeroff wrote. “In our opinion, the company could fall short of its target of $1 billion in revenue from that service by 2010.”