We look at SAP’s roadmap and ask whether the enterprise software firm can innovate fast enough to keep its heartland of large customers happy and break into newer markets. Janine Milne reports.
Back in the old days, when SAP basically had one product, it was easy to see which direction the company was heading. But as the company has grown – it is now the third largest independent software firm – and diversified its business, it’s harder to keep track of where the applications megavendor is heading. No longer just an ERP player, it has added a host of other three-letter acronyms to its product portfolio: CRM, SCM, SRM and PLM. More recently, it added business intelligence capabilities with the acquisition of Business Objects in 2008.
One early change, soon after its inception in 1972, when it was set up by five former IBMers, was to ditch its name from the non-too-catchy: System Analyse und Programmentwicklung (Systems Applications and Products for Data Processing) to the far more memorable SAP.
Like the other traditional megavendors, SAP’s roadmap is changing because it needs to find different ways of making money. “SAP has changed tremendously over the last five or six years in how it’s made its money,” says Thomas Otter, research director at Gartner Group. “Ten years ago, SAP made most of its money in upfront deals. That model has changed and that change affects relationships with SAP.”
It’s changed because the large deal has become an endangered species, so SAP has to change its hunting ground and look for smaller prey. At the same time, it needs to find different ways of maintaining the cash flow from its existing customer base.
“Firms like SAP and Oracle are under some pressure because the existing customer base is where they make their money Ð they’re not in hunting but in farming mode. So if you thought you’d signed a big cheque to SAP in the 1990s and that was it, well now you’ll see a salesman once a quarter,” believes Otter. “Driving money out of the existing customer base for SAP and Oracle is far more important than acquiring new customers.”
Otter continues: “In the past, SAP was keen to sell you something, then move on to the next customer, but now they realise they need to lower the cost of running your SAP systems then that will free up some budget that you can spend with them.”
Maintenance has become a negotiating lever that didn’t exist before, according to Otter, but maintenance and support has also got SAP into hot water with its customers recently. The problem began in 2008, when SAP announced it was going to hike software prices from 17% to 22% annually. Customers were not happy, to put it mildly. “Through SAP’s rather messy attempt at pushing through a contractual price increase, the company managed to alienate more customers. It was something they are contractually able to do, but there was poor communication and bad timing,” explains Otter.
Bad timing, because a recession was round the corner and because customers had already spent a lot of money and felt SAP’s roadmaps had not been fulfilled.
Tim Noble, SAP UK managing director, concedes that the whole business was not handled well at the time. “The timing couldn’t have been worse, but no one could have predicted the recession at the time. To be fair, SAP has learnt from this. We could have done a better job of communicating why, how and when, instead of announcing maintenance is going from x to y.”
The customer backlash forced the company to postpone its pricing plans and in April 2009 it agreed to a number of key performance indicators (KPIs) set out by SUGEN, the global confederation of SAP user groups. If SAP could prove its value through meeting these KPIs, then the price rises would be agreed over the next four or five years. Although in December, SAP announced that clear value had been shown, full results have been delayed until next year while a task force talks to customers and user groups.
Alan Bowling, chairman, SAP UK and Ireland user group, is pleased with progress so far and that SAP is listening to customers and making improvements. “We welcome this statement from SAP Ð both in recognition of the hard work recognising value that has taken place on the benchmarking exercise, but also the consideration SAP is giving to its customers in these tough economic times.
“We’ve always said the benchmarking programme linking price to value, although ground breaking, was going to be a difficult process, especially in the time frames involved this year. As we stated at our recent conference in the UK & Ireland we are happy to see that SAP is increasing its work with customers and look forward to this developing and continuing, not just around delivering value for all enterprise support customers but across the board,” said Bowling.
Despite the maintenance furore, SAP has long been working towards changing its pricing policy for large customers to give them greater choice. While they can still pay the whole lot upfront, old-style, they can also pay in phased payments or by subscription.
“What SAP did a few years ago was start a strategic engagement with big clients and craft subscription-based pricing. In 2007, it went unnoticed in the market, but we stopped reporting one of our KPIs as software revenues and reported it software-related services. We believed subscriptions would pick up in a big way and we’ve now brought that model to a much broader base and subscriptions are available for small and medium companies,” Jose Duarte, S&P president and CEO EMEA told CBR in November.
One of the reasons for the maintenance price hike, according to Otter, was because SAP was following what Oracle had done. “The reason given was that Oracle was charging 22% so they were catching up with the industry, but the average SAP customer was getting 60% discount and Oracle customers were getting 80%,” says Otter.
SAP’s bete noir is Oracle, though Otter points out that if you go back ten years ago, they actually had a quite a good relationship for 70% of its business, but it has now “deteriorated to the point where they really do dislike each other”.
In fact, SAP has a bad case of Oracle myopia, he believes. This is hardly surprising when you consider that Siebel, Peoplesoft, Hyperion, JDS, Sun, BEA are all under (or in the case of Sun, soon to be under) Oracle’s banner.
Although SAP’s sights are set on Oracle, Altimeter analyst Ray Wang believes that the same cannot be said for Ellison’s mob. “SAP may be focused on Oracle, but Oracle is not focused on SAP. They’re going after IBM. SAP is a sidebar for them,” Wang points out.
Although agreeing that Oracle is their largest competitor, Noble is clear that SAP is not Oracle blinkered. “Oracle is a competitor and a pretty big competitor, but I don’t think there’s an obsession there. There are a lot of different competitors depending on which areas we are working on with a customer,” says Noble.
In contrast to Oracle, SAP’s relationship with IBM has strengthened and it is also getting more cosy with Microsoft. A recent announcement, for example, saw Business Objects and Microsoft working together on Duet enhancements, making SharePoint more important to SAP.
A key question is, where is the innovation coming from? Otter believes that there isn’t really much new functionality happening at the moment from SAP or Oracle for that matter. He suggests customers categorise announcements as either brand new, never been done before, renovated or simply renaming. “When you look at product announcements, dig in and try and understand the percentages of this. There are pros and cons to ‘a’ and ‘b’ and you’re just being taken for a ride with ‘c’.”
Wang believes there is innovation going on at SAP, but just not in the right places. For example, a year and a half ago SAP developers came up with Enterprise Social Networking Experiment (ESME), which was basically a better version of Salesforce.com’s recently launched enterprise Twitter application Chatter. But ESME has not been launched with great fanfare. “This was something that could have been taken to market, but it wasn’t. Customers are asking what are they getting for their maintenance dollar,” says Wang. At the recent UK user conference in November, whether SAP can innovate fast enough was the key concern raised by users, alongside maintenance.
He believes there is a mismatch between where SAP is spending its money and what its customers want and that in particular, SAP tends to listen to big customers and then expect that this will translate to smaller firms. SAP needs to get closer to their customers and listen to what they want Ð something that SAP does appear to be doing, according to Bowling.
“We’ve seen good collaboration with SAP this year, but as always would welcome the opportunity for more. Innovation is an area we’d love to get involved in. As users we could play a big role in helping them decide which innovations come out of the lab and are taken to market. It would be great to get better visibility of what’s going on in the labs and help SAP more with the direction of its R&D efforts,” says Bowling.
Since he took over the helm as UK managing director, Noble says that one of his main jobs has been to get out and talk to customers and find out what they want.
At SAP’s annual Influencer Summit in December, the company laid out its five-year product and technology vision. One of the key innovation areas mentioned was on-demand, cloud-based extensions to its applications. SAP’s major foray into cloud computing with its Business ByDesign mid-range ERP product was not the success it hoped. The problem was that it would have cost them too much to sell. The company has now regrouped and is confident that it will get it right.
“Safe to say it didn’t go according to plan,” says Noble. “SAP’s commitment [to Business ByDesign] is unwavering. However, it is right SAP take more time to develop it and has not released it generally. We’re aiming to generally release it next year outside the initial target countries.”
The UK, alongside, US, France, Germany and China, is one of these target countries, where the product has already been on sale. Noble says there are five or six UIK deployments. Bowling is happy that SAP seems to be on the right track now after its false start.
SAP have admitted they didn’t get it right with the first iteration of Business ByDesign, but what they are doing now is really interesting. The hybrid approach where you can have some of your processes in the cloud and others still within the business is very innovative. For business that don’t want to put their business critical processes in the cloud as they see it as too risky this could really work, as they can keep those in house and put less critical processes in the cloud.”
Business ByDesign is not the company’s only cloud initiative. In autumn 2008, SAP brought across former Oracle applications executive John Wookey to head up SAP’s on-demand business for large customers.
“Business By Design is for small and medium businesses, but we also want to serve a larger audience. Our belief is that large enterprises will not run their mission-critical applications on public clouds. What companies have told us is they’d like to keep a private cloud in-house for mission-critical systems, while deploying a public cloud for the fringes of applications. So SAP is developing and will deliver a set of applications for SaaS on the public cloud for this area. We will see a full suite for small and large enterprises with a host of applications,” according to Duarte.
“I think cloud is an important part of their strategy,” says Wang. “Cloud is going to mean a lot of different things and that’s why it’s confusing for them. What will happen though is cloud won’t replace what’s there, there will be a hybrid approach.”
Another area identified at the Influencer Summit was business intelligence. SAP’s uncharacteristically large acquisition of BI firm Business Objects gave the company an opening into a new customer base and market.
“SAP feels it has done a good job in its operational line of business processes, but realised that alone was not enough, so bought Business Objects to attack managerial layer of the case base. SAP did a relatively poor job before of providing tools that managers could use. Finally, it admitted that and went out and bought Business Objects,” says Otter.
Wang adds that in retrospect, the acquisition has also given SAP the infrastructure improvements to NetWeaver and fills a lot of the gaps where NetWeaver was weak.
Both Wang and Otter believe that business process management could be an area where SAP would next think about extending its reach either through partnerships or acquisition.
“I expect SAP to keep core applications going, delivering innovation through drip feeds, new applications through software-as-a-service and focus on pushing Business Objects into the managerial layer of the customer base,” says Otter.
He also sees Business Suite 7, SAP’s main go-to-market product pulling together CRM, SRM, ERP – all SAP’s siloed products under one umbrella. In a way returning to its message of ten to 15 years ago when integration was the word on every SAP employee. Since then, the silos have developed as the company moved into different areas. “SAP talk about value scenarios. With value scenarios SAP is trying to build processes that span siloed processed and return to a consistent message,” says Otter.
SAP has come a long way since 1972, but the market is changing fast and SAP is a big, cumbersome company that needs to find a way to become more agile.