SAP announced its new A1S mid-market product at the beginning of this year on the heels of several All-in-One updates. SAP CEO Henning Kagermann said at a media event in Palo Alto, California last week to inaugurate its new Co-Innovation Lab that the company will be re-branding the product with a more appropriate name later this year.

Even though SAP is now embracing the on-demand model in a big way to extend the reach of its core business applications suite to lower-ends of the market, Kagermann does not believe that the model for delivering software-as-a-service over the Web, will take over the corporate world as others like Salesforce.com envisage.

I don’t believe that SaaS is the ultimate answer. Customer choice is the answer which is why we’re offering a hybrid model that allows companies to decide which applications they want to run as SaaS or not.

With the notion of flexible customer choice in mind, Kagermann said that unlike Saleforce.com’s multi-tenancy model, A1S will also support a single-tenancy model — something he called isolated tenancy — to address concerns of data security and privacy.

Again customers should decide which data is managed as a service and which is not.

Kagermann also dismissed direct comparisons between A1S and Salesforce.com’s hosted CRM platform, which he said is much narrower in scope.

Salesforce is just one part [CRM] of an application suite. A1S is an entire business applications suite that includes ERP, CRM, supplier relationship management and more.

When asked exactly who A1S is being targeted at, Leo Apotheker, deputy-CEO of SAP, pointed to customers of SAP’s two on-premise mid-market offerings: All-In-One, which is a configurable SOA by design system built on NetWeaver that targets the high-end of the mid-market; and Business One, which is a more self-contained product that targets low-end deployments of 50 to 80 users.

Apotheker however does not expect A1S to impact its existing mid-market applications business, which now totals 27,000 customers out of SAP’s total base of 40,000.

Its not had a negative impact. In fact its been positive since it shows how committed we are to the mid-market.

Apotheker said the mid-market remains relatively untapped and thinks it could reach $15bn. We’re seeing strong demand [in the mid-market] and continue to add 6 to 7 thousand new customers each year. It’s now the fastest growing part of our business.

The mid-market now accounts for 30% of SAP’s business.

Apotheker also said that SAP plans to roll-out hundreds of vertically focused versions of All-In-One products which will be sold through direct and indirect channels.

A1S is not a product. But it’s a go-to-market concept that we want to innovate over with a multi-channel and hybrid [on-demand and on-premise] approach, Kagermann added.

Our View

Recognizing the near-saturation level of the enterprise ERP market SAP clearly spots an opportunity in the mid-market to open up a lucrative new revenue stream. Like some other software vendors SAP also believes this market is best served by a hybrid model of on-demand and on-premise software; the key factor being cheap and easy installation.

In reality SAP has two mid-market customers it can target with A1S: the one the company already serves with Business One and the updated All-in-One; the other, made up of companies that are not typically SAP buyers as yet.

However SAP does face some challenges in delivering a compelling offering that matches the unique requirements of mid-market firms. For one the level of functionality has to be not only rich enough, but more importantly easy to use – something that SAP software isn’t renowned for.

There is also a psychological barrier to overcome. Simply put, many mid-market firms continue to hold the view that SAP, which has made a name for itself as an enterprise software player, is simply too big to serve their humbler needs.

But to SAP’s credit A1S’ enterprise SOA by design aspect, which adds new modules and functionality as services, affords mid market customers with more cost-effective application management and upgrade potential.