There has been a flurry of acquisitions in the SAP consulting market, as both large services vendors and smaller SAP specialists attempt to round out their integration expertise and expand their geographic footprints. As the demand for SAP services stays strong, this trend is likely to continue and could very well involve some of the notable Indian outsourcers.
UK-based SAP consultancy Axon Group Plc has been one of the busiest consolidators, having bought four firms in the US alone in the last two years to become the largest pure-play SAP specialist in the States, according to Mark Hunter, Axon’s chairman and CEO. The company posted some $270m in revenue in 2006.
Hunter said the SAP consolidation wave hit Europe first, where SAP adoption was earlier on than in the US. Axon was formed in 1995, and around then, there were maybe 10 or so small SAP start-ups in the UK. Now we’re the only one left, he said, noting that the same consolidation has taken place throughout Europe in countries such as Germany and France.
But in the US, the SAP wave hit later, and now there are plenty of small mom-and-pop SAP services outfits with between $5m and $10m in revenue, Hunter said. So the US market now breaks down between the big players such as Accenture, Deloitte, and IBM at the top. Then there’s us, and then a lot of distance between us and the smaller players, Hunter said.
Overall demand for SAP currently outstrips supply, but rates have only ticked up slightly, according to Hunter. He added: The environment is more stable, and companies are more long-term in their view, looking past just the year ahead. So rates have been undulating rather than a rapid shift.
Diagonal Consulting, which became part of UK services provider Morse Plc in 2004, has also seen the increase in SAP demand over the past year not necessarily translate to higher pricing, said Melvin James, Diagonal’s enterprise services director. There’s a more competitive supplier field, and the offshore component is also keeping prices down. There are lots of requirements now for blended delivery models.
In the US, Affiliated Computer Services Inc made one of the largest SAP buys with its $65m takeover of Systech Integrators last October, immediately giving it a strong position in the SAP mid-market in the US. Gary Gauba, president of ACS Systech Integrators, said that there was an enormous amount of untapped business in the mid-market – SAP has announced plans to grow its SAP Americas business to $10bn by 2010, and half of that growth will come from the mid-market, which SAP defines as firms with less than $1.5bn in revenue.
Of course ACS does SAP work for its enterprise accounts too, including Lennox, ConAgra, and ConocoPhillips. Gauba said the focus in the enterprise sector was more on specific products and upgrades, as well as post-production opportunities.
ACS’ mid-market focus is in North American and includes comprising sectors such as high-tech, chemical, mill products, medical devices, and services, Gauba said. Right now we’re focusing on the US and Canada, he said. In North America there’s no leader in the mid-market. We want to become the dominant player.
So how will the next wave of SAP consulting consolidation shape up? James believes the future depends on the Indian companies, who can perhaps use their available cash to buy an SAP specialist and then offer the support services from offshore. But right now, the Indian firms aren’t competing in the full SAP space; instead they partner with firms such as Diagonal and handle the offshore portions of the deals with their cheaper, lower-skill base, James said.
But this isn’t to say that offshore isn’t a vital piece of SAP providers’ strategy. In fact, the numerous small US consultancies that Axon’s Hunter mentioned are likely to struggle if they don’t have an offshore component, he added. Axon, for example, currently has 20% of its delivery offshore, about 350 to 400 employees, and Hunter thinks the company can add another 10%. He said more sophisticated SAP integration work is starting to go offshore, including functional testing and applications management, but acknowledged that there’s a limit to the extent of work that can go to India.
Hunter said it was probably too late for established SAP consultancies to boost their offshore numbers by scooping up Indian outfits, which are facing skill shortages, high attrition, and wage inflation. But he does expect them to improve their positioning in the SAP space by buying, for example, small US outfits to give them the necessary local presence to win deals.