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How Not To Build Software For SMBs: SAP’s 3 Billion Euro Story

Tucked away in the story about SAP closing down its SMB suite is one significant detail: It cost the company about 3 billion euros to develop.

SAP, one of the world’s biggest makers of business management software, originally projected that Business by Design – which was launched in 2010 – would reach 10,000 customers and generate $1 billion of revenue.

The magazine reported, however, that the product, which cost roughly 3 billion euros to develop, currently has only 785 customers and is expected to generate no more than 23 million euros in sales this year.

By comparison, in the second quarter, SAP’s software and software-related service revenue stood at 3.35 billion euros.

I am astonished by how on earth can you spend 3 billion to develop almost any software, leave alone one that is aimed at small and medium-sized businesses. The ERP/CRM/PLM landscape these days is an ocean of riches for companies looking for an implementation; be it customization of a generic or product or niche, extremely vertical ones. When anything costs as much as that to develop, it is hamstrung from the word go. I am just surprised that they have managed o keep it going for ten-years. For some perspective, three billion is still considerably north of what most successful software companies are valued at with revenue in the hundreds of millions.

Looking at the pricing for the product (link) it makes no sense at all. If you have to price a product/service like that and yet spend even a billion euros on developing it is nothing short of suicidal. They were hopeful of doing a billion dollars in revenue (annual, I assume); which is astounding considering that their main offerings brought in under 4 billion euros in the second quarter. Normal SAP implementations are long-winded expensive affairs, which plays a key factor in how the company makes most of its money. When big companies lose their way, they tend to do it a spectacular manner like this.

The SMB marketplace is extremely price sensitive and resistance to any change is fairly common place. The newer crop of companies who provide similar services also operate on lower pricing, have no contracts and don’t have many other nice bits companies like SAP are used to. Not surprisingly, the revenue is not expected to top 23 million euros this year, which puts in only in the league of a successful newer SaaS companies.

The upside to all of this is that it makes acquisitions a better option companies like SAP. Three billion euros could easily have been spent on 300 million every year on acquisitions and it would not be a stupid bet to assume that they could have had at least a couple of winners or more in that pick. That said, the conflicts in the business models of the newer crop of software companies and the older mammoth-sized companies is far from a resolution. Companies that are acquired this way have to often force fit themselves into the larger picture, which can be a huge drag. But, that’s a different story altogether, for some other time.


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