Standard & Poor's tips its hat to SAP SME approach

One of the world's leading providers of credit ratings, Standard & Poor's (S&P), has given a buy rating to SAP AG's shares based on the company's successful approach to the small and midsize enterprise (SME) market.

Its sales in the sector contributed to a 17% licence-revenue growth in the first half of 2005 - far exceeding S&P's projected average growth rate of 4% to 6% for software companies.

In analysing SAP's results, S&P points out that medium growth prospects for the software market are forcing more and more vendors whose traditional customers have been large corporates to develop products and services for the largely untapped SME sector as means of either maintaining or increasing licence revenues.

Competition in the SME market is therefore fierce, making SAP's achievements in it all the more remarkable.

S&P states: "SAP has made its name selling back-office accounting and budgeting software called enterprise resource planning (ERP) software, supply-chain automation, and customer relationship management software to the biggest companies. It also has a sizable market capitalisation of more than $50 billion. SAP is still commonly associated with behemoth software deals that were much more common in the late 1990s than now.

"When placed in that context, SAP's evolution and resulting success in selling to SME is particularly impressive, in our opinion, because selling into this segment is different from selling directly into an enterprise or other large account.

"For one thing, many more SME customers exist than the largest companies. And while the traditional direct sales force can be highly effective at selling into a large enterprise, the cost of selling in that manner to millions of potential SME customers could be prohibitive. To leverage its sales resources efficiently within the SME segment, a company needs to sell indirectly by developing and relying on strong partners.

"We believe SAP has successfully developed a network of partners, evidenced by the 300 new ones it added in the first half of 2005, bringing it to 1 600 partners. Over this same period, the volume of deals grew 23%, with overall growth from indirect sales (sales coming from partners, which we are using as a proxy for SME sales) outpacing direct licence-sales growth. In addition, SAP added 2 400 SME customers during the first half of 2005, to make a total of 13 700 SME customers as of 30 June.

"Aside from SAP's success with SME and its ability to lower its reliance on megadeals, SAP also stands out from the pack, in our opinion, because its above-average licence growth has been primarily organic, versus acquired. We don't frown on acquisitions, especially if the price paid is reasonable and the strategic rationale has merit. However, we have a favourable view of SAP's strong in-house engineering talent."

S&P adds that it believes its buy recommendation is "warranted by our view of the company's superior organic growth, solid execution and growing market share".

SAP Africa's SME director, Brett Parker, says SAP is also successful in the SME market because its solutions address the sector's most pressing need - for business expertise.

"Our customers are not just buying software. They're actually making an investment in a combination of technology and business expertise - and therefore in their own growth as business people. "We provide our customers with a deep understanding of industry-related issues. We handpick our implementation partners to ensure industry expertise exists within the partner base. And we've made a substantial investment of our own - in developing a business strategy methodology and framework for SMEs to help them make key business decisions regarding necessary investments, effective resourcing, cost cutting opportunities and critical success criteria to fuel future growth aspirations."