SAP Thinks Small

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Sudden success can be more challenging than failure. In 2000, for example, the German soft pretzelmaker Brezelbäckerei Ditsch GmbH found itself growing faster than it had planned. The Mainz-based company's hottest product — a line of frozen oven-ready soft pretzels — fueled a growth spurt and Ditsch's managers knew they needed to overhaul their computers and software in order to cope with expansion. Ditsch's sales of baked goods to more than 160 bakeries across Germany grew from €40 million in 2000 to about €70 million in 2003. A committee was appointed to explore new software, and Michael Roche, a Briton who had only recently joined the company's three-member executive board, lobbed a simple question at the team. "Has anyone considered SAP?" he asked, referring to Germany's largest software firm. There was a long silence. Then someone replied: "Why? They just make software for big companies like Daimler."

Once upon a time, that was true. SAP, with a market capitalization of about €40 billion, became Europe's biggest software company by selling "enterprise software" — which automates internal processes like supply-chain management and financial reporting — to corporate mammoths such as U.S. aerospace-systems supplier Raytheon and European aerospace group Airbus. These days, however, it's not just pretzel companies that need SAP; SAP needs the pretzel companies. Having sold its wares to most of the world's largest businesses, SAP now believes it has to tap into the small- and midsized-business market to keep growing.

The small-business software market is estimated to be worth $10 billion a year worldwide, but SAP won't corner it without a fight from more consumer-oriented rivals like Microsoft and IBM. As if that competition weren't fierce enough, upstart companies like Salesforce.com, Sage Group plc and UpShot (acquired last year by SAP rival Siebel Systems) are grabbing a piece of the small-business market with products they hope will squeeze SAP out.

SAP has other ideas. "Sooner or later the entire midsized company segment will be as important to our business as the Fortune 500," says Leo Apotheker, the SAP board member in charge of global operations.

This is not the first time that SAP has had to reinvent itself. SAP was founded in 1972 by five IBM software developers, who offered their new program to the company. When Big Blue rejected them, they launched their own business based on the software program, which helps companies automate financial reporting and inventory management. Eventually, SAP perfected its signature product, with the distinctly unsexy name R/3. It was a huge hit in the '90s. The R/3 software racked up more than €10 billion in license sales in some 10 years, and turned SAP into the world's third-largest software company by 1998. Last year, SAP generated €7 billion in revenues and €1 billion in net income. Twelve million people use its software at some 70,000 installations across the planet.