SAP to cut spending but spare product development, help with SMB financing

An abrupt halt in SMB spending has SAP cutting millions in expenses, but it won't come at the expense of development, officials say. SAP will also help customers with financing.

The abrupt halt in ERP software spending by small and medium-sized businesses (SMBs) has SAP cutting millions of

dollars in spending across the organization, but those cuts won't come from skimping on new SAP product development, SAP's Bill McDermott pledged yesterday.

"The fact of the matter is, what our customers can expect is SAP to continue to bring the most innovative solutions in the world to help them better run their businesses," said McDermott, who -- as president and CEO of global field operations and an executive board member -- oversees operations worldwide.

"We will not cut back on our product development and the expertise we bring to customers," he said. "This is a time to invest in the things that bring customers value."

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The root of SAP's lower-than-expected third quarter earnings is the current economic crisis. SMBs couldn't get access to capital to finance planned purchases in the last two weeks of September, when most customers sign agreements, McDermott said. Because of that, in order to meet its operating margin goals, SAP needs to find savings of 200 million euros (about $250 million U.S.) in its budget and continue to grow software and software services-related revenue in the 20% to 22% range.

Because it is still too difficult to predict when and whether those SMB customers in the pipeline will sign deals this year, if at all, the vendor decided not to offer forecasts for the remainder of the year.

"I never witnessed such a sharp decline in customer spending in such a short period of time," SAP CEO Henning Kagermann said on a conference call with financial analysts, following the release of SAP's third quarter earnings.

SAP is taking steps to shore up the business of these SMB customers by trying to make it easier for them to get financing, the vendor said. SAP is partnering with Siemens AG to help ensure that customers get financing and will continue to seek help from its partners.

To find savings, SAP is cutting spending internally – taking measures the vendor says will stay in place through 2009.

SAP is going to run a more virtualized IT environment and cut back on non-customer-related activities and travel, McDermott said. A hiring freeze is also in place, and SAP will reduce third-party expenses related to development and professional services, Kagermann and SAP CEO Leo Apotheker said during a conference call.

Despite earnings that were lower than anticipated, many, if not most, enterprise-size customers decided to go forward with their purchases, McDermott said, and SAP grew its market share six and a half points.

"I would have to say those are strong numbers in the face of adversity," he said.

While business suffered in the United Kingdom, Russia, France and the United States – though SAP did win some new, enterprise-size customers here— business remains strong in Germany, the Nordic region, China, India, Brazil and Canada, Apotheker said.

Sectors that performed well for SAP included life sciences, banking, the public sector and consumer products. Apotheker said that SAP signed a Global Enterprise Agreement for software with Procter and Gamble in the third quarter.

Kagermann and Apotheker also made clear that SAP will continue its rollout of Enterprise Support, the new support structure that will increase SAP support fees from 17% of net licensing fees to 22% over the next four years. Apotheker said they have been in talks with user groups worldwide, and they have been able to adjust the Enterprise Support portfolio slightly, though he didn't specify how.

"We are about to put it behind us," he said.

McDermott shared some advice for staying afloat in this economy, shedding light on SAP's strategy. Businesses have to manage their cash, run lean operations and drive compliance activities. They must get closer to the best customers, retain and nurture top talent, and protect brands – by not cutting marketing budgets.

And he offered his email contact for more questions –– bill.mcdermott@sap.com.

"We're going to find out who the real leaders are," McDermott said. "Tough times don't last. Great companies do."

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