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SAP Aims To Ride SaaS Wave

Although technology companies like to say they can revolutionize any business, many blue-chip vendors have concentrated on selling only to certain businesses: the biggest ones.

But with overall tech revenue growth less than dazzling, several providers are working harder to lure deals from small and medium-sized businesses, whose tech spending now outpaces that of big organizations.

One major player, German software giant SAP AG, hopes to catch a powerful updraft into smaller-business sales -- the rise of software delivered over the Internet as a service.

After three years of development, SAP on Wednesday introduced Web-hosted business-management software aimed at customers with 100 to 500 employees. These tools, known as "enterprise resource management" software, corral data from multiple parts of a business, such as the human resources and accounting departments and the supply chain.

Such software used to require complicated installations on servers inside a company and cost well into six and seven figures.

The new offering, known as Business By Design, will run on SAP's own servers and be accessible over the Internet for as little as $54 a month.

The Web subscription model -- pioneered by SAP rival Salesforce.com and increasingly pursued by such disparate providers as Google Inc. and IBM Corp. -- allows for less of the customization that mega-corporations require. But its simpler design is meant to accommodate the lesser financial and logistical resources of small and mid-sized companies.

The model can be less risky for customers because it gives them a flexible way to test software before buying. And while smaller customers tend to be less profitable than larger enterprises, SAP CEO Henning Kagermann believes SAP can reverse that dynamic in a few years as the new method benefits from economies of scale that come with wider adoption.

In fact, Kagermann argues that Business By Design will be crucial for his $13 billion company's efforts to expand its customer base from the current 42,000 to 100,000 by 2010.

He also contends that the built-from-scratch elements in the new offering should end up improving the way SAP designs software for its biggest customers. That would be notable because IT innovations generally move in the other direction: Smaller customers get lighter-weight versions (often called "Express" editions) of products that debuted for gold-plated buyers.

"The more different types of customers we support, the better overall solution for every customer," Kagermann said in an interview. "We learn from everything."

SAP will encounter a fair amount of competition: Microsoft Corp. and several smaller vendors offer less-expensive tools that handle aspects of what Business By Design rolls together, and some of it comes over the Web as well. SAP will have to persuade those buyers that its package is truly better and less complex than they might fear.

Andy Miedler, an analyst with Edward Jones & Co., called Business By Design "a first mover" but cautioned that SAP will find that enticing new customers "doesn't come fast and it doesn't come cheap."

Indeed, SAP expects to spend $500 million marketing and ramping up the product through 2008. "We're trying to launch a whole new business model," said Leo Apotheker, SAP's deputy CEO.

SAP also is incurring a new risk: Huge vendors need a vast network of partners and resellers to reach small-business customers. If end users can download and deploy software like Business By Design by themselves, some resellers might hesitate to promote it.

Yet SAP probably has little choice but to get more aggressive here. Big tech vendors like Microsoft, Hewlett-Packard Co. and Dell Inc. have long shown that there is a lot of green in this market, and other tech players are eyeing a bigger share of those dollars too.

IBM, for example, is ramping up pitches to mid-sized businesses for everything from disaster recovery services to e-mail security at $2 per user, per month.

IBM claims the worldwide market for selling technology to such customers is a staggering $487 billion a year and growing at 6.5 percent, faster than the mid-single-digit rates posted overall in the IT industry.

"It's a big market, and because it's a market where technology has been relatively less affordable, there is a lot of untapped opportunity," said Michael Speyer, an analyst with Forrester Research. "The small and medium business market is by nature a very difficult market to reach."

Among the first buyers of SAP's new package is 200-employee Compass Pharma Services LLC of Clifton, N.J., which packages and distributes pharmaceuticals.

CEO Kevin Flanagan said that without an automated way to share information across departments, executives at Compass couldn't peer into the finance system, for example, to check how the business was doing.

"What I'm hoping is that the availability of information will eliminate the constant meetings, the constant downtime, the constant waiting to hear back from people about things," he said. "It's early, but the signs are good."

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