SAP's New Business Model - Designed for an On-Demand world
The announcement last week by SAP of their new Business ByDesign solution is very significant and I thought I'd spend some time explaining why this will be important. But as a reference point before I begin, let me explain a couple of things about SAP for those of you have may only know the name but don't know much else about them (and apologies to those of you who do).
SAP is the largest supplier of ERP software in the market and one of the largest software companies in the world. ERP stands for Enterprise Resource Planning and covers every aspect of a company's operations from sales order processing through to warehousing and accounting. Indeed the core of SAP was always the accounting functionality. But they have been providing solutions in every operational area for some time.
It is fair to say that almost every large corporation on earth is running an instance of SAP somewhere within their empire and many of the largest run their entire business on SAP. The cost of these installations is typically hundreds of millions each (At least 1 multi nation has spent over $1 billion on SAP). This is why SAP is so large, rich and influential.
However SAP has always exhibited one weakness, it's inflexibility. The huge cost of an SAP installation revolves around the cost of the consultants needed to map and implement SAP against existing business processes. Or more usually, you have to change your business to fit SAP's process maps. This often takes years. The reason companies persist in this endeavour is that once complete, the management can see everything that is happening in the company in real-time and also have total control of the financial operations. If you are running a 150 Billion Euro company, the 500 Million euro cost of an SAP installation is irrelevant if you can control things so tightly.
The problem with this nice picture is that over the past 10 years or so, companies have began to shrink in size and outsource much of their operations. This presents a problem for SAP as the enterprise versions are unable to cope in such a diverse world. The power of SAP is it's ability to ensure all of the processes are adhered to exactly. This is a little tricky if most of the process in question is owned and controlled by someone else.
This problem is also compounded by the growth of internet use and the increase in On-Demand solutions that have totally changed the cost structure of the industry. Most companies complain about the cost and rigidity of SAP along with the time it takes to implement any changes. Any On-Demand solutions that can match SAP's functionality and beat it's implementation timeframes at lower cost, is obviously not good news for them. And this is what has started to happen.
Now why is this such a big deal?
After years of ignoring the rise of internet based solutions and dismissing the notion that anything could challenge the enterprise model, SAP have finally acknowledged this trend and launched their own On-Demand solution.
If you have watched the <SAP product webcast, you will have seen that it is pretty much a fully functional SAP product suite. What is more interesting is that they have embraced collaboration and mash-ups, at last publicly accepting that SAP has to work with other systems.
They mention all of the key benefits of on-demand solutions including; speed of implementation, no limitations on growth, as SAP will always ensure there is enough computing and communications capacity available for customers - so no need to hire an IT staff to manage these functions and finally, from day 1 it is a global solution capable of supporting multiple languages and business practices.
The initial focus is on small and medium sized companies, with a minimum licence population of 25 users - so maybe not that small a company… The solution is available now and they already have 40 companies using it, with 20 of those who have been working with it for some time. Apparently, they have had over 1 million enquiries from potential customers.
A big problem for them is what this may do to their existing customers. It was only briefly mentioned during the Q & A and SAP directors were keen to make the point that this solution is only for smaller companies, not the enterprise. Indeed, they admit they are trying to develop this as another business model that is separate from their main business and one that doesn't require their costly sales force in so far as the solution will sell itself via on-line demos and resale partners who will provide local support - if needed. Hence the low costs. But even so, I think that many large businesses needing to update or increase their SAP installations will look at this first and see how it can do the job at much lower cost.
This point is echoed in an article in The Wall Street Journal
Here's another sign that SAP is only partially on the software as a service bandwagon: SAP says that Business ByDesign is cheaper, faster to implement, and easier to use than SAP's traditional software, but it's positioning it as a product for small and mid-size companies who can't afford to run their own software. But if it's as compelling as SAP claims, why wouldn't large companies want to use it too?
That's what online-software companies are realizing - small companies may sign up first, but large companies can benefit just as much. If larger companies do start asking about it, SAP will have to decide whether it wants to cannibalize its current business or turn those customers down - potentially sending them to the online competitors that Business ByDesign is meant to stave off in the first place.
I think this is the Trojan Horse SAP is banking on. They know they have a product suite that is a gold mine in terms of revenues generated, but that mine is running out. So how can they migrate to a more modern solution without alienating existing customers who have invested a fortune. If they can start a revolution within their customer base so that more and more departments of existing clients start using this instead of waiting for enhancements to the primary SAP solution, after a while most customers are using this platform. I suspect that it won't be quite as smooth as this, but given the other options available to them it's probably worth a try.
So why is all this relevant to BitLogistics?
It's relevant because ultimately they may provide the key 'nodes' in many supply chain networks. We hope to build strong communities of shippers, suppliers and carriers and we will have to collaborate, or at least co-exist, with the ecosystems they establish around their customers.
In time, their announcement may prove to be as noteworthy as that when IBM finally introduced a PC and made it OK for large corporations to buy them. Salesforce.com and a handful of other successful companies have helped bring the On-Demand model to the attention of large customers, but SAP is validating this. The business model they have adopted will help us as it creates a model for the market, i.e. 2-3 year contracts, per user per month pricing at low levels, on-line support, delivered only from SAP computers hosted at their SAP centres and a management and security model built around roles and permissions.
As we develop BitLogistics, any potential investor will want to know a couple of things: 'Is this a good idea and are there any big players making the same bets? What are my exit options?' That is, 'when and how can I get my money out?'
SAP's announcement just answered those questions.