SAP's Revamped Strategy for Small and Midsize Businesses

Dean Mansfield

SAP announced today the launch of a new division focused solely on sales of its systems to small and midsize businesses. The SMB Solutions Group will be headed up by Dean Mansfield and will focus on companies with up to 500 employees. Moving against the tide, Mansfield comes to SAP from NetSuite, where he headed up global sales and operations.

Product Strategy: Simplified Suite on HANA and Business One

What I find most interesting in the SAP press release is its ambiguity on what products Mansfield will be selling into the SMB market. The first part of the announcement appears to be saying that SAP will target the SMB market with a cloud version of its Business Suite, though it does not say so explicitly: 

Mansfield will execute on a board strategy to redefine the SMB business solutions market by creating the next generation of simplified, integrated business applications powered by SAP HANA®, delivered via the cloud that will solve tomorrow's complex SMB business challenges. 

The announcement then explicitly mentions Business One (a separate system from SAP's Business Suite), which will continue to be sold and supported through partners. It also refers to a push to move those partner offerings to hosting on HANA, as a separate deployment option for SMBs:

In addition, Mansfield will lead the current SAP Business One application portfolio, which will continue to operate through the Global Partner Operations organization, and plans to accelerate the adoption of SAP Business One, version for SAP HANA, as well as the SAP Business One Cloud solution, version for SAP HANA. 

What's missing from the announcement? Any mention of SAP Business ByDesign (ByD).

This lack of clarity about the products that SAP will offer to SMBs was also picked up by one analyst in SAP's quarterly earnings call. Adam Wood from Morgan Stanley, noting that SAP appears to have deemphasized ByDesign, asked SAP CEO Bill McDermott what would be the main product focus in SAP going to market with SMBs.

McDermott responded, in part:

ByDesign is still part of our product portfolio and we now have ByDesign on SAP HANA, which is absolutely a game changer because everything is faster and better on HANA as you know. [Emphasis mine.]

McDermott is a careful speaker, and his use of the word "still" is revealing. He wouldn't dream of saying, "The Business Suite is still part of our product portfolio," or "SAP HANA is still part of our product portfolio." The word "still," therefore, indicates that ByDesign is not part of SAP's core strategy.

McDermott continued:  

We also believe strongly that Business One has been going through an indirect channel now and has proven itself to be a very successful, high growth, double-digit business with good margin. So we will continue that. But we also put B1 up on HANA in the Cloud and we go global and we think that can be a very serious category killer.

Once it get into the market place and people see what it can do on HANA and we will continue innovate in that space now with a defined agenda underneath Dean Mansfield. So it's a combination of things we are going to go after the market with.

So, this confirms the implication in SAP's announcement that, in contrast to Business ByDesign,  Business One is strategic to SAP's SMB strategy.

Without directly using the words "Business Suite," McDermott then implied that the Business Suite itself, running on the HANA Enterprise Cloud, would also be a product offering for SMBs:

Related to the HANA Enterprise Cloud and the multi-tenant debate, the bottom line is the HANA Enterprise Cloud and each customer wants their solutions. They want it beautiful. They want them to work and yes, we can make money on it because HANA is the great simplifier.

When you radically simplify the IT stack--I mean SAP [in context, the SAP Business Suite--ed] used to run on eight terabytes of data. Now it's like closer to 1.5. You dramatically lower your cost of operation and improve the speed of everything in the operation. So it's perfect for "Run Simple." It doesn’t matter whether it's single- or multi-tenant. What matters is the customer gets what they want at the price point in the performance and the user experience they're looking for, and that's precisely what we intend to give them.

Will SAP's SMB Strategy Work? 

I would interpret SAP's strategy as two-fold. For really small businesses, starting at even five or 10 employees, SAP wants to continue its reseller channel strategy with Business One. For small divisions of larger companies, especially those already running its Business Suite globally, SAP will also position Business One, whether on-premises or hosted by partners.

For midsize companies, especially those that are growing and need more comprehensive functionality, SAP wants to position its flagship Business Suite. But this product has not performed well for midsized businesses in the past, even when packaged with preconfigured industry templates as SAP All-in-One, due to its size and complexity. SAP is betting that it will be successful with its "Run Simple" strategy to turn this product into a "Simple Suite." This is what McDermott was talking about when he mentioned going from 8 terabytes to 1.5. And, by running it as a managed service on the HANA Enterprise Cloud, SAP hopes to simplify the implementation and ongoing support experience for SMBs.

In my view, there are two risks in SAP's strategy and they both involve the Business Suite. First, even if "simplified," will midsize businesses find the Suite simple enough? The early signs with SAP's Simple Financials are promising. But is that possible with the rest of the Business Suite? Second, will the experience of the HANA Enterprise Cloud be as friendly as the cloud-only ERP providers, such as NetSuite, Plex, Rootstock, FinancialForce, and others?

In recent years, SAP had a cloud-only solution in Business ByDesign that was more directly comparable to the competition. That's no longer part of the plan. Rather, SAP believes that a combination of Business One and a simplified Business Suite will be a winning strategy. Time will tell.

Update, 5:22 p.m.: Removed references to Business One on Hana Enterprise Cloud (HEC), which does not appear to be part of the solution. Thanks to Dick Hirsch for the clarification.

Update, July 18: Dennis Howlett picks up on my post and provides more analysis, including a history of ByD.

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Plex's Growth Strategy: Glass Half Full

Those interested in cloud ERP know that Plex was the first provider to offer a cloud-only manufacturing system. Yet Plex has had nowhere near the growth of other cloud enterprise system providers, such as NetSuite. SAP receives a lot of criticism for only having sold 1,000 or so customers its Business ByDesign system--but ByD has only been in general distribution for three or four years. Yet Plex, which launched its cloud offering over 10 years ago, has fewer than 500 customers.What's wrong with this picture?

Last year, encouraged by Plex's new private equity owners, CEO Jason Blessing and his management team formulated a growth strategy, which they presented at the Plex user conference. Afterwards, I outlined what I thought Plex needed to do to execute on it.

Following up now half a year later, Jason circled back to give me another briefing, and it was a good opportunity also to see what progress Plex was making. Here is my take: 

1. Management changes are part of the growth plan. Plex this week announced the appointment of Don Clarke as its new CFO. He appears to be a great candidate for the job. He comes most recently from Eloqua, a leading marketing cloud vendor, where he oversaw Eloqua's growth to nearly $100M in annual revenue, its initial public offering, and its eventual sale to Oracle last year, which put Clarke out of a job.
   
   I joked with Jason that Oracle's acquisition strategy has been serving Plex well in terms of recruiting, as several of Plex's top management team have come from companies that Oracle acquired: Heidi Melin, Plex's CMO, also came from Eloqua, Karl Ederle, VP of Product Management spent time at Taleo, which Oracle acquired in April 2012, and Jason himself came from Taleo.
   
   If Plex's growth strategy is successful, there is likely to be an IPO in Plex's future. Clarke's experience in taking Eloqua public will serve Plex well.
    
2. Plex added 59 new customers in 2013, bringing its customer count to "nearly 400." As mentioned earlier, in my view, the total customer count is well below where it should for a decade-old cloud provider. Jason compares it favorably with the 500 or so customer count for Workday, overlooking the fact that Workday launched in late 2006 and that its typical customer is several times larger than Plex's.
   
   Still, Plex's growth in 2013 represents a 15% increase in its customer base and signals that its growth strategy is beginning to take hold.
   
   The new customer count includes some accounts that are larger than Plex has sold to in the past, such as Caterpillar, which is running Plex in a two-tier model for some smaller plants. In my previous post, I outlined some of the functionality improvements that Plex would need to make to better serve these large customers, and there are signs that these enhancements are underway.
    
3. Plex doubled its sales force last year. This, no doubt, is behind the uptick in new customer sales. The new sales headcount is serving primarily to expand the geographic coverage outside of Plex's traditional Great Lakes concentration to the South and also to the West Coast. (As part of the expansion, Plex opened a Southern California sales office, which happens to be a short walk from my office near the John Wayne Airport.) There are also increased sales to organizations outside North America, another hopeful sign.
    
4. Plex's industry focus remains in three industry sectors: motor vehicles, food and beverage, and aerospace and defense. In my view, this is probably the greatest constraint to Plex's growth strategy. Short-term, having more feet on the street and expanding geographically are low-hanging fruit. But at some point, there will be diminishing returns. Manufacturing contains dozens of sub-sectors, many of which are adjacent to Plex's existing markets. It is not a big jump to build out support and sell into these sub-sectors. We discussed a couple of these, and hopefully, Plex's product management team will have the bandwidth to address them.
    
5. Plex's platform remains a weak spot. Most cloud systems today provide a platform for customer enhancements and development of complementary functionality. For example, Salesforce.com offers Salesforce1, a mature platform-as-a-service (PaaS) capability that has spawned an entire ecosystem of partners. NetSuite, likewise, has its SuiteCloud platform.  Although Plex has the beginnings of such a platform, it is still limited to use by Plex's own development team and a few carefully-vetted partners. Jason knows this is a need, and hopefully we will see more progress in this area. 

There is a lot to admire about Plex. Of the few cloud-only ERP providers that are addressing the manufacturing sector, Plex has the most complete footprint of functionality, rivaling mature on-premise manufacturing systems. In addition, customer satisfaction is readily apparent when I speak to installed customers, both new and old. Hopefully, Plex will build on these strengths and see growth accelerate.

There is a Plex 2013 year-end recap available on the Plex website.

Update: And right on cue, Dennis Howlett has done an on-camera interview with Jason Blessing about Plex's 2014 strategy. He also comments on Plex's approach to SaaS pricing. 

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