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Shifting Business Models & What It Means For You

Many people think choosing a winning business model means selecting from a list of “proven” or “emerging” models such as “SaaS,” “Open Source,” or “Traditional.” A business model is much more than the way you collect money from customers, it also drives development, marketing, sales, deployment, support, accounting and all the other functions I neglected to list. A winning business model incorporates all parts of a business holistically. Making significant changes in any part of your business should drive an examination of the other areas as well.

Choosing the right business model is a strategic decision, but it is more than that. The business model is fundamentally both strategic and tactical, and allows companies to do entirely new things, not simply charge people a different way.

SAP announcement leads to questions about channels
In what many are calling the most significant announcement since R/3, SAP announced Business ByDesign (BBD), a completely new offering for mid-sized businesses. BBD represents as big a technological leap as the jump from R/2 (mainframe) to R/3 (client-server). On the business model front, it’s probably an even bigger change to SAP’s internal operating structure. The sales force is designed around selling big deals to a (relatively) small number of sophisticated IT buyers who invest heavily in deployment supported by a third-party eco-system. BBD targets smaller deals from customers demanding rapid implementation. SAP currently lacks a volume channel that can sell BBD, and they moved much of the functionality and services away from the R/3 eco-system. BBD requires entirely new sales, implementation and support channels. I say channels because SAP would be foolish–and we will all be waiting a long time–if they try to do it all themselves.

BBD also introduces a new financial model. SAP is used to a big payment up front, followed by annual maintenance payments. Often these payments are guaranteed for 2-3 years. SaaS offerings such as BBD generate much lower monthly payments contracted for on a month-to-month basis. For SAP, this means less cash up front–and probably less customer tolerance for lengthy or painful implementations. For some companies, the new cash flow profile is material and requires investor acquiescence.

Rethinking the operations to match BBD
While SAP’s brand and development resources are enormous assets, SAP’s operations–the very way it does business–must be re-thought for BBD and the changes required for success are fundamental in every sense. SAP needs to re-think its sales, services, integration, support, development and revenue models. The enterprise sales force is too expensive to address mid-sized customers and the R/3 eco-system is ill-suited to address BBD deployment. Even the SaaS revenue stream will require major adjustments.

BBD is a very ambitious play. The big challenges are less about whether SAP can deliver useful solutions, but more about whether they can do so profitably. Time will tell not only how well SAP executes, but also how well they understand the extent to which BBD fundamentally changes SAP’s business model.

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