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SAP's McDermott addresses ESA, midmarket challenges

In part two of a two-part interview, SAP America CEO Bill McDermott addresses meeting Microsoft in the midmarket and how SAP's enterprise services architecture plan will unfold.

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NEWTOWN SQUARE, Pa. -- While SAP looks to penetrate the midmarket, it is meeting stiff competition from Microsoft, Oracle and some best-of-breed vendors.

In part two of an interview with, SAP America CEO Bill McDermott, said the company is strengthening its network of midmarket channel partners and working to improve revenue generated from license sales to small and midsized businesses.

SAP is also working in the upper-midmarket, trying to penetrate Oracle's newly acquired J.D. Edwards customer base, McDermott said. SAP's Safe Passage program, which offers license credits to JDE customers, is beginning to gain momentum, he said.

"There are certain verticals where JDE is strong, but we're softening up those verticals every day," he said.

The message from SAP seems to be that the customer base will migrate to mySAP ERP on its own time frame and that SAP is quite content with that. Yet you've got a program that offers decreasing credit to existing customers: 60% the first year, 40% the second year and 20% in the third year. Aren't you alienating the user base with forced migration with that program?

We're focusing on [the midmarket] with a level of intensity that equals, if not surpasses, what we're doing in the enterprise with the biggest customers.
Bill McDermott,
CEOSAP America Inc.

Bill McDermott: Not really, because customers that have mission-critical business processes or a need for a more modern platform, and the functionality that goes along with it are much more inclined to want to change earlier anyway. It's those customers that perhaps don't have those mission-critical needs or applications. They do the analysis and make a determination that staying on SAP's maintenance a little bit longer is more attractive within the context of their operating model and financial scenario.

The companies that want to change and want to innovate -- they're actually coming to us and we're working quite aggressively with them. The ones that wish to pull back a little bit or take a little bit longer are appreciative that we are maintaining the value of their systems.

You highlighted your enterprise services architecture partners at Sapphire earlier this year. When are we going to start seeing ESA-enabled products?

McDermott: I'm sure we can get you a list of ISVs [independent software vendors] right now that are co-innovating with SAP. Brands like Cisco, EMC, Intel, Microsoft, Adobe, Symantec and many others are co-innovating joint solutions with SAP right now.

One of the products we've already previewed is Mendocino. The interoperability with Microsoft Office and SAP applications really began on the ESA strategy and having co-innovation between SAP and Microsoft. Another one is our co-innovation with Adobe. We've taken Adobe interactive forms and embedded them into the workflow and the business process protocols of SAP to eliminate the paper trail from the knowledge worker who is always searching for documents and filling out and faxing documents, and now they're doing it all online with instant access to the information they need most.

All-in-One and Business One products are still a relatively small percentage of your overall sales. Can you tell us if we'll see any changes to try and penetrate the small and midsized business (SMB) market with more strength?

McDermott: It's important to point out that we're focusing with great intensity on the small and midsized business market. I can tell you that we're making enormous progress in the midmarket and with small companies. There are many new customers with new names that are entering into the SAP portfolio, and over the last several quarters, our mix of install base versus new customers are trending tremendously in favor toward new customers. We're focusing on this with a level of intensity that equals, if not surpasses, what we're doing in the enterprise with the biggest customers. We will stay with this. This company doesn't dabble, we are going to stay incredibly focused on this segment.

Is Microsoft's strong channel network causing the biggest problems?

McDermott: No. In fact I want to make this really clear. Microsoft is a terrific partner. I think very highly of Microsoft. I am personally involved with many of their executives and I think that they are doing a very good job of helping customers be successful in combination with SAP; certainly on the database side and certainly with regards to Mendocino. Their .NET strategy and our NetWeaver strategy are very harmonious and they work well for clients. So the rapport on Microsoft and SAP is thumbs up on this terrific partnership.

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It is true that the low end of the market, mostly establishments with less than $200 million in size, Microsoft has an applications business. It is also true that we sell down there. The reality is that there is plenty of elbowroom and what goes on between Microsoft and SAP is not going to hurt the partnership. We realize that if it wasn't Microsoft down there, it would be somebody else. We realize that we overlap in certain business models and that is something we have to live with.

Some analysts believe that through Oracle's newly acquired JDE products that the company has a lock on the upper profitable end of the midmarket. Can you comment on that?

McDermott: The many JDE professionals that were worth taking, we've taken into SAP, and we realized quickly that they have an aged install base. If you look at the JDE install base, it's an AS400, older platform, JDE install base that is quite vulnerable, because these customers are looking for the next innovation. Oracle's stated strategy is to milk their maintenance base for as long as they can until they have a new viable product.

There is no point to having all these point solutions when you can wipe them out with one stroke of the pen, standardize on a platform, dramatically lower your TCO [total cost of ownership] and dramatically improve your ROI [return on investment] so you're much more relevant in the corner office with the CEO and their plans to grow. There are certain verticals where JDE is strong, but we're softening up those verticals every day.

Site Editor Matt Danielsson and Assistant Editor Lauren Hoyt contributed to this report.

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