Two years ago, SAP’s CEO Henning Kagermann told me that he did not foresee any major shift in the company’s large business vs. SMB revenue mix: “We have today a 70%/30% revenue mix. Next year, it might be 68%/32% – that is not a revolution.”

His rationale was that the large enterprise business was such a big focus for SAP – and would continue to account for so much of the business – that any SMB progress would seem marginal, relative to SAP’s overall growth. As it turns out, he was right: in the subsequent two years, the mix didn’t change that much; at this year’s SAPPHIRE, Hans-Peter Klaey, the president of SAP’s new SMB line-of-business, said that today’s SMB share of SAP business is around 30%.

But, as we anticipated last year, things have clearly changed at SAP – in the priority that management is putting on the SMB market, and in terms of what SAP is prepared to do to compete successfully. SAP has a high-priority, well-funded push down into the SMB Long Tail. Based on SAP’s behavior in the past six months – punctuated by last week’s SAPPHIRE customer event – Kagermann and team seem to have a revolution of sorts in mind, revolving around a high-priority, well-funded push down into the SMB Long Tail, defined in part by three key elements:

• New SaaS-optimized SMB Offering: As we predicted six months ago, SAP is developing a brand new application suite for the midmarket, dubbed “A1S” – that will initially be available only as an on-demand (SaaS) offering. Featuring usage-based pricing, and online delivery, this offering should be considerably better positioned for midmarket adoption than SAP’s current A1 (on-premise only) application suite.
• New SMB Go-to-Market approaches: The biggest changes, and challenges, of A1S will be in the go-to-market model. The new offering will require new marketing messages and approaches; new pricing models; the introduction of more high-volume, transactional sales processes; the expansion and education of the SMB channel and partner ecosystem; and a refresh of the rules of engagement between SAP and its channel partners. SAP has earmarked 300-400 million euros of investment around the A1S launch, of which SAP has only spent around 10% or less thus far; my guess is that the go-to-market overhaul will take the lion’s share of this investment and the lion’s share of the launch timeline. The need to develop new go-to-market approaches for the SMB sector was, no doubt, a key factor in SAP’s creation of a new, globally integrated SMB Line-of-Business last November.
• Ambitious SMB Revenue Goals: Betting in large part on the success of the A1S offering – which will be announced in the Fall, but probably not widely available until 2008 – SAP has predicted that software sales to SMBs will jump from less than one billion euros in 2006 to two billion euros in 2010. By my estimate, that means SAP will need to generate about three times the SMB sales for each of the next four years, on average, than they did in the last two years – a pretty tall order.

So why the big change in SAP’s ambitions for the SMB market? I see two overarching reasons:

• To Support Above-Maket Growth: Opening up the under-penetrated SMB market is a critical step for SAP to achieve the above-market growth its shareholders demand. In fact, at SAPPHIRE, Kagermann addressed this issue, when asked about the challenges of a “maturing” software market to SAP’s growth prospects: “We have this program for doubling our addressable market to make clear to our investors that SAP dosen’t depend on the growth rates of the market, that we create our own market, we extend our market. Today we have 25% market share [in our current, narrow market]; we will extend to, by 2010, nearly double [our addressable market]. That will make our share fall to… less than 20%. If we then go for 35% or 40% – which is still low – I think we have, for the next 5-10 years, double-digit growth.” As I wrote in IDC Predictions 2007, the “almost boringly moderate IT market growth [of 6.6%] will drive vendors in a relentless hunt for growth pockets and accelerate their adoption of disruptive business models”. SAP is clearly attempting to follow that recipe.
• To Provide a Test-Bed for the Future: Yes, the development of A1S, and the business models and processes to support it, are directed at opening up SAP’s SMB market share. But – from both business model and product/technology perspectives – there is longer-term impact on SAP’s success in the large enterprise as well. From a business model standpoint, over time a growing portion of large enterprises will certainly want to take advantage of the adoption simplicity, the pricing flexibility and the support cost relief offered by the on-demand model; the SMB market is SAP’s testing ground for the next several years for how to get these models to work for the company and its customers. From a product/technology standpoint, success with A1S in the SMB space is absolutely critical to the future of SAP’s entire product line. At SAPPHIRE, SAP executives all but said that the “SOA by Design” platform underpinning the A1S offering is ultimately going to be the basis for offerings for their entire customer set, including large enterprises. The A1S release to the midmarket is going to be the proving ground for the architecture; if A1S is technically successful, the eventual successor version to mySAP will almost certainly be a variant of the A1S offering, designed for scale, for both on-premise and on-demand deployment. (A1S will not remain an exclusively on-demand offering, but will SAP will likely introduce an on-premise option within 18-24 months of the A1S introduction). As I noted in my IDC Directions 2007 presentation, “Hyperdisruption and the Redefinition of the Enterprise IT Marketplace“, “The SMB market is not just about the SMB market: it is the test-bed for the new offerings and business models that will also rise up into the large enterprise.”

Needless to say, I think Henning would agree that the assessment he gave me in 2005 has become obsolete. Will SAP’s attempt at revolution be revolutionary enough?SAP’s journey down the SMB Long Tail is based – as it must be – on a revolutionary, not an evolutionary, game plan. But given whom SAP is likely to meet on that journey – including not only a goodly number of very cost-conscious, technophobic SMB prospects, but also very disruptive competitors like Google, Yahoo and eBay (never mind the relatively more conventional competitors salesforce.com, SugarCRM, Intuit, and maybe even a radicalized Microsoft, once it decides what to do about SaaS) – it’s going to be interesting to assess whether SAP’s attempt at revolution is revolutionary enough, as it tries to concurrently manage its traditional business, as it must, on an evolutionary path.