As revenue growth failed to meet expectations, SAP revealed a strategic shift in 4Q06 by introducing a new midmarket line of business that will operate in parallel to the traditional large enterprise business. The shift is significant for several reasons: 1) SAP has never put the midmarket under a P&L before; 2) the offering should directly address adoption hesitancy with a SaaS version; and 3) the midmarket plan smoothes the pathway of software consumption from SaaS to hosted to on-premise ownership. TBR believes the lessons SAP learns with the new midmarket business will prove invaluable as the company seeks to reignite growth among the large enterprise segment.

SAP views itself as a source of innovation, and clearly the company is attempting to address a changing market landscape for software consumption. However, midmarket competitors Microsoft, Lawson, Infor, Glovia, Sage and Intuit have traditionally been closer to the midmarket and already claim significant market share. In addition, upstarts such as salesforce.com and Netsuite have a head start in SaaS and offer innovations in software consumption that SAP is currently addressing. Finally, Oracle has many of the cards required to play a winning hand: it controls a complete software stack from OS to application, owns its own datacenters, offers a range of software consumption models from on-premise through SaaS, and has the cash to spend on development and acquisitions. As everyone heads down into the midmarket for revenue growth, the marketplace will become more competitive. TBR believes SAP is well-positioned to drive adoption of SAP applications in the midmarket. However, it must not only address the unique needs and requirements of that segment better than its competitors, but do so sooner rather than later. The deepened executive focus within SAP on the midmarket has happened just in time, and TBR anticipates a long period of investment before a midmarket winner emerges.