Shape of SAPs Midmarket Suite Raises Questions

News Analysis: The company's "A1S" suite could involve on-demand services, appliance-based ERP and an indirect channel, analysts say.

By this point its no secret that SAP is investing heavily in the midmarket. The company is planning to spend between $370 million and $493 million (from 300 million euros to 400 million euros) over the next eight quarters in building out a new suite of enterprise application software that is both agile and appealing to IT-starved midmarket companies.

While SAP has said it will unveil the new suite in March, there are still a lot of questions left unanswered. Mainly, what will the suite consist of? What will it look like?

During his presentation to investors as part of SAPs Jan. 24 earnings call, SAP CEO Henning Kagermann danced around the details of the new suite, code-named A1S.

"We are combining the power of the new platform that SAP has developed over the last three years [NetWeaver] with a new approach in the way software is delivered and consumed, to reach a broad segment of midsized companies with requirements not addressed by either traditional or on-demand solutions available today," Kagermann said.

The A1S suite will coexist with SAPs Business One suite, geared toward the lower end of the midmarket, and SAP All-in-One, a suite based MySAP ERP (SAPs latest enterprise resource planning suite, based on service-oriented architecture) geared toward the mid- and upper midmarkets. Kagermann said he expects AS1 will open new markets for the company, generating about $1 billion in business for SAP by 2010.

What does SAP plan to offer thats so different from whats already on the market from competitors and NetSuite—not to mention Microsoft, which is developing its own suite of applications that will leverage an SOA and services-based model?

Clearly theres going to be an on-demand component to A1S. SAP announced during its earnings call, which covered its fourth quarter and full-year 2006, that for that period and in the future it would replace the product revenue line item with something called "software and software-related service revenues." At the same time, the company added a new line item: "Subscription and other software-related services revenues."

But, according to Joshua Greenbaum, principal of Enterprise Applications Consulting, A1S could also involve appliance-based ERP.

"This is an old model for the midmarket that goes back to System 36; turnkey systems that turn on and start working with very little database administration [needed] to start working," Greenbaum said. "Its business in a box. Giving businesses pre-configured [applications] that you turn on and run could be very powerful for them."

SAP has been dabbling quite a bit with the appliance concept. In 2006 it introduced its Business Intelligence Accelerator, an analytic engine for NetWeaver (SAPs integration platform) that utilizes in-memory technology to enable very fast query processing—and has no requirements for an underlying database. Essentially an appliance, the BI Accelerator bundles hardware and software in a single package.

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To create the BI Accelerator, SAP has partnered with Intel, which provides the processors, and HP and IBM, which provide their respective server and storage technologies. Its not inconceivable that SAP could partner with the same companies to put business applications in a box for the midmarket. Taking the speculation further, its not hard to imagine that SAP would look to verticalize an ERP-based appliance by building, with partners, industry-specific processes rather than pre-installed, pre-configured application suites.

Judith Hurwitz, president and CEO of IT research firm Hurwitz & Associates, said she believes SAP has a good start in building the necessary components for an on-demand suite—modularized products, streamlined code, a Web 2.0 browser interface and reliable support.

"They are making progress. Has SAP figured it out? Probably not," Hurwitz said. "If you look at, a lot of their wins have been in the midmarket, [companies] that say, I want to do sales force automation but I dont want a system administrator, I dont want to buy hardware, so theyre very happy to do software as a service. But to take something much bigger and complex like ERP and apply the same philosophy [is challenging because] there are a lot more moving parts that are a lot more complex."

Hurwitz pointed to another complex issue for SAP: figuring out how much to invest in the on-demand business model. Getting money once a month under the subscription model instead of getting it upfront through the traditional perpetual license structure can affect not only a companys bottom line, but also how investors look at the company. "And once you open the flood gates to that, who is to say that companies that are much larger than midmarket," wont move to the on-demand model, Hurwitz asked. "In the long run, SAP might make more money [with on-demand sales]. In the short run, it can impact the bottom line."

Next Page: Revenue misses mean SAP must prioritize its midmarket push.