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SAP Business ByDesign and the midmarket: Five questions answered

SAP's midmarket strategy, and its three products aimed at the space, has generated plenty of questions. At its Influencer Summit, SAP provided some answers.

BOSTON -- The buzz from last year's SAP Analyst Summit centered on the company's announcement that it was developing an on-demand product for the midmarket. At this week's event, SAP updated the progress of what is now known as SAP Business ByDesign.

The product was codenamed A1S before its launch in New York on September 19. It joins Business One and Business All-in-One in SAP's midmarket portfolio, a portfolio the company will count on heavily if it is to reach its goal of 100,000 customers by 2010.

Business ByDesign drew much of the attention at this week's SAP Influencer Summit. attended the event, and we answer five important questions about Business ByDesign and SAP's midmarket strategy.

Table of Contents

SAP Business ByDesign and the midmarket: Five questions answered
1. What is "mega-tenancy"?
2. How does Business ByDesign stack up to the competition?
3. Will Business ByDesign compete with All-in-One and Business One?
4. Where is Business ByDesign in the ramp-up process?
5. How is SAP doing in the midmarket?


SAP Business ByDesign and the midmarket: Five questions answered

1. What is "mega-tenancy"?

There had been speculation as to whether SAP would use a multi-tenancy or isolated-tenancy delivery model for Business ByDesign.

Multi-tenant Software as a Service (SaaS) uses one operating environment for multiple customers and is the most cost-effective way for vendors to deliver SaaS, offering the lowest price. Isolated-tenancy, on the other hand, has one customer per application per server. While this method allows some additional flexibility for customers, it is the least efficient model for vendors.

SAP said Business ByDesign will be based on a "mega-tenancy" delivery model. Mega-tenancy, according to Hans-Peter Klaey, SAP's SMB (small and medium-sized business) president, is a sort of combination of the two.

"Our mega-tenancy model takes advantage of all the scalability and TCO [of multi-tenancy], of course, for us, but having separate data instances [for each] customer makes a lot of sense," Klaey said. "So we believe the technology terms are not important. What is important is: Do you fulfill the needs of the customers?"

2. How does Business ByDesign stack up to the competition?

There is no shortage of business application vendors in the midmarket, including NetSuite, and Intuit, all of which have SaaS products.


"Nobody has a comprehensive solution like we have," Klaey said. "I think if you just take CRM -- a little sliver of functionality -- it doesn't give the full competitive advantage to a customer. He will need different solutions, and we have a platform approach."

Klaey added that customers indicated other products would need significant add-ons in order to offer even a fraction of Business ByDesign's functionality.

"Midmarket customers want to avoid investing in IT personnel for integration, etc.," he said. "They want somebody with a comprehensive offering."

Some early customers agreed.

"We wanted an integrated solution," said Harry Hirsch, SAP practice director for Judge Consulting Group of West Conshohocken, Pa. "From a pricing perspective … if we [were to] piece together a solution, it would cost us a lot more than $149 [per-user monthly subscription fee of Business ByDesign]."

Many analysts felt, however, that although Business ByDesign is a significant improvement on existing SAP products, its usability was not on par with offerings from vendors such as Netsuite, Workday and, which built their products as SaaS from the get-go.

"It's above the existing on-premise vendor competition," said Ray Wang, a principal analyst for Forrester, when Business ByDesign was released. "But compared to other competitors that started from scratch -- some of the pure SaaS competitors -- SAP might have that level of functionality, but not the usability."

3. Will Business ByDesign compete with All-in-One and Business One?

One of the other main questions swirling around Business ByDesign is whether it will compete with SAP's other, established offerings. SAP has staunchly maintained it will not.

SAP continued to position All-in-One as an upper-midmarket offering, aimed at companies with fewer than 2,500 employees. Business One focuses on the lower portion of the market, generally companies with fewer than 100 employees. That leaves Business ByDesign focused on companies with 100 to 500 employees, according to Klaey.

Both Klaey and CEO Henning Kagermann made the point that companies looking for a more customizable product should turn to All-in-One, while Business ByDesign is suitable for those more interested in out-of-box functionality.

"We [see] different buying preferences, different deployment preferences, different needs, and different, in general, size of the company [interested in each offering]," Klaey said.

Kagermann said the company has not seen any cannibalization of All-in-One sales by Business ByDesign.

However, some early customers seemed to indicate otherwise.

San Francisco's Pooch Inc. is a happy SAP Business One customer, but Marjorie Scholtz, founder and CEO, was curious to know whether companies might migrate out of existing SAP SMB products onto Business ByDesign after the release date.

"If there was a hosted, Web-based system, we would absolutely use that," Scholtz said.

Also, in an interview with at Business ByDesign's launch, Judge Consulting Group's Hirsch, one of the first Business ByDesign customers, indicated that Judge chose Business ByDesign over All-in-One.

4. Where is Business ByDesign in the ramp-up process?

At the Business ByDesign event in September, SAP announced 40 pilot and 20 live customers. When asked almost three months later how many Business ByDesign customers SAP had now, Klaey replied, "There are more."

This may not seem like a lot of customer momentum, but SAP says it is "on the road to volume," which includes three separate factors, according to Klaey: The new business ByDesign product, the new on-demand deployment model, and a different go-to-market strategy.

"So [SAP wants] to be sure that we understand all three areas and optimize the model before we start to ramp up [with more customers]," Klaey said.

Where SAP has made progress is on the partner front, according to Klaey. SAP now has 22 Business ByDesign partners, and its Business ByDesign partner portal has received 15,000 unique visits since the product's launch.

"We have just started to build the partner channel for Business ByDesign," Kagermann said. "We are more focus[ed] on reselling partners, because it is a different model."

By the time the program is mature, Klaey hopes to have 1,000 Business ByDesign partners.

5. How is SAP doing in the midmarket?

Although the customer momentum for Business ByDesign has yet to come, SAP reported solid gains in other areas of the midmarket.

"The best-kept secret of SAP is that we're already No. 1 in the SMB space," Klaey said.

SAP counts 31,000 SMB customers, about 70% of its customer base. Broken out by product, SAP reports more than 16,000 customers on Business One and more than 10,500 for All-in-One. According to Klaey, SAP's software sales to SMBs account for more than 1 billion euros of revenue per year, and the company added 4,800 SMB customers in the first nine months of 2007.

"We have stated our goal of 100,000 customers by 2010. Business One is a big factor in that," Klaey said.

According to his presentation, if SAP does reach that goal, 50,000 of those customers will be running Business One.

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