What SAP Knows but Won't Admit: Scaling Down Harder than Scaling up

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When re-engineering business processes, moving from simple to complex is usually less of a challenge than the other way around.


During my stint as a reporter covering the automated teller machine industry, I interviewed a major player that took a bath on a deal with a partner that was, for lack of a better word, dicey. Why had it ever gotten involved with such a partner, I asked an executive.


Simple, he said. His company couldn't figure out how to cost-effectively modify its manufacturing processes to produce the low-cost machines the other company churned out. Even if it could, it had no idea how to sell to the kinds of customers who bought those machines.


Such discomfort with courting smaller business seems to be plaguing SAP, with its ill-fated Business ByDesign, its first effort at software-as-a-service and the product that was supposed to help it tap into the SMB market.


A Gartner analyst last summer called it "a big bet" for the German software giant, one upon which it was betting its profitability. So far, it's not paying off. SAP announced that it expects to sign fewer than 1,000 Business ByDesign customers this year and is scaling back the rollout of the software. It will also cut back spending on Business ByDesign.


Part of the problem, writes InfoWorld blogger Bill Snyder, is that Business ByDesign is too closely tied to Netweaver 7.1, "SAP's latest iteration of the big honking platform that nobody likes." SaaS is designed to reduce complexity, but SAP spent nearly four years developing Business ByDesign -- and precious little of that time apparently went to coming up with a workable license model. Writes Snyder:

SAP set a price of $149 per user and tried to work backward to a cost structure that allowed for a reasonable profit, but hasn't been able to do it.

An even bigger issue, notes Snyder, is that SAP doesn't seem to understand that SMBs don't necessarily want an entire software stack from the same vendor. He writes:

The wave of consolidation that has swept the enterprise software world since Oracle bought PeopleSoft has been accompanied by a drive on the part of the largest survivors to build and sell complete software stacks. Although there are reasons that the stack strategy offers benefits to the enterprise customer, it clearly doesn't serve the interests of the little guy.

If SAP really wants to win SMB business, Snyder suggests it should consider buying Salesforce.com, which has legions of SMB fans. He doesn't think that will happen, though, since it would be a tacit admission that SAP doesn't know how to develop and sell software to SMBs. This isn't something that SAP -- or large competitors like Microsoft and Oracle -- appear ready to acknowledge.


Unfortunately for SAP, the much-delayed Business ByDesign launch roughly coincided with the tanking economy. SAP's financials took a hit in Q1, according to IT Jungle. In addition to ramp-up costs for the new software, the company is faced with an unfavorable euro-U.S. dollar exchange rate and acquisition costs related to its purchase of Business Objects. On the latter front, SAP is looking to eliminate software with similar functionality as it combines its products with Business Objects. Further slowing the ramp-up for Business ByDesign is "as much about cutting costs as anything else," notes IT Jungle.