SAP Goes to the Mat With On-Demand

Not only does SAP (NYSE: SAP  ) have to fend off fierce rivals like Microsoft (Nasdaq: MSFT  ) and Oracle (Nasdaq: ORCL  ) , it also has to contend with Web-based providers, such as Salesforce.com (NYSE: CRM  ) and NetSuite. But SAP is fighting back. Yesterday, the company announced a major product initiative, Business ByDesign, which is Web-based, uses a subscription model, and is focused on the mid-market. 

This is certainly a huge shift for SAP. The company's software, which helps companies manage core operations like payroll, HR, orders, and so on, has been mostly for large companies that can afford multimillion-dollar license fees and maintenance charges. Because of the complexity of the solutions, customers typically need to hire high-paid consultants to customize things.

But to reach the mid-market, SAP realizes it needs to make some radical changes. So with Business ByDesign, SAP has strived for ease of use, low total cost of ownership, and adaptability. In fact, the company has spent more than $500 million over the past two years on the new offering.

On its face, the strategy makes sense. However, execution won't be easy.

"SAP was built to provide client-server applications, and the company's entire financial model is designed to sell client-server," said Greg Gianforte, the CEO of RightNow (Nasdaq: RNOW  ) , in a Fool interview. "These do not fit with SAP's business model or culture."

Additionally, SAP's brand may also be perceived negatively by smaller companies. "SAP symbolizes everything a mid-sized company fears: complex software, endless implementations, and millions of dollars of cost," said Zach Nelson, the CEO of NetSuite. "When we do focus groups with mid-market customers and mention 'SAP' to them as an option, they run screaming at the thought of it."

Also, SAP might face difficulty in getting acceptance from its salespeople, because it plans to charge $149 per month of use. But what might an SAP salesperson think about that? Why focus on low-priced solutions when you can land much larger licensing deals? For example, an SAP implementation can easily require a $1 million to $2 million up-front fee. But by using a subscription approach, the costs can be a third of this amount or less. Interestingly enough, on the SAP webcast yesterday, there was much talk about the cost savings of the subscription approach. This might cause existing SAP customers to think. It seems they would want a good deal, too, and might well ask for discounts or rebates. To me, it seems this could cannibalize the customer base.

The history of tech is fraught with examples of leading companies trying to make significant changes. I'm not saying that SAP is going to suffer. If anything, its move to a Web-based approach is admirable. But it is not without risks, and it will involve a good amount of trial and error.

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