Gosh, They Kill Partnerships, Don't They?

Event Summary

The soap opera-like saga of breakups and heartbreaks in the enterprise markets seems to be going in full force. On January 17, SAP AG (NYSE: SAP), a leading provider of business software solutions, announced that it was scaling down the scope if its Internet exchange division, SAP Markets' partnership with Commerce One, Inc. (NYSE: CMRC), one of the leading e-commerce applications providers.

The partnership, which began in June 2000 and has until recently been touted by SAP as a proof of its new approach to true partnerships (see SAP Gives Up, Declares Victory. Again.), was formed to target the online e-procurement and then booming electronic business-to-business (B2B) marketplaces. As a part of the deal Commerce One and SAP combined their on-line marketplace efforts into a single offering called MarketSet and pledged to jointly sell each other's e-procurement software.

In June 2001, SAP even increased its stake in Commerce One to little over 20% by injecting up to $250 million in new investment capital into the company. Inevitable speculation over whether SAP would then acquire the partner, has, however, now done an about-face; instead of getting closer, the vendors could be competing head-to-head competition in the near future.

The competition has apparently already begun. The move may reflect SAP's waning infatuation with the alliance possibly due to the market's poor acceptance of public trade exchanges. And this comes on the heels of recently alleged comments by SAP executives in Europe on that Commerce One should seek business independently from the partnership.

In December, Commerce One, somewhat tactlessly, announced Commerce One Source, its online sourcing application which it developed independently of SAP and which is the first product to have been developed solely by Commerce One since they initiated their partnership. SAP Markets 'retaliated' somewhat hastily by unveiling mySAP SRM earlier in January (see SAP To Take Care Of All Suppliers), which competes directly with Commerce One Source. SAP might have possibly wanted to make its statement before then upcoming (and likely dreaded) dismal Commerce One 2001 financial results announcement (these were announced on January 22). Commerce One was also expected to announce then a change of focus with increased emphasis on selling point applications rather than end-to-end exchange backbone technology. It plans to split the all-encompassing MarketSite suite into two products and sell separate Sourcing and Procurement applications.

As a result, the two companies will end joint marketing of software for e-procurement so that each can focus on selling its own product. The joint brand product, which will be discontinued, was a combination of SAP's Enterprise Buyer Professional, a high-end purchasing software that focuses on the procurement of materials and services that go directly into the end product, and Commerce One's Enterprise Buyer Desktop, a more generic procurement offering designed to give individual employees and departments the ability to buy primarily indirect materials. Commerce One will now market Enterprise Buyer Desktop Edition, the e-procurement application previously known as BuySite, under the new Collaborative Procurement name.

Later the same day, as the vendors tried to clear up the confusion and the bad publicity of the announcement, both companies reiterated their commitment to the remainder of the partnership. The companies will reportedly continue working on the joint MarketSet Internet trade exchanges platform as well as on common integration technologies and standards. As a matter of fact, the exchange infrastructure of mySAP Technology still incorporates B2B integration capabilities from Commerce One, as pointed out by SAP during the earlier launch of mySAP SRM product.

Market Impact

That the half-life of software vendors' partnerships is shorter than those of the fastest dissipating radioactive elements has become a matter of course, and not many tears have been shed for their ill fate. The alliance in case, however, may hold more stakes for both companies and the users than meets the eye. Even if the justification of breaking up the Enterprise Buyer product into two distinct products that will be sold by two distinct sales forces is plausible, the complicity of the relationship remains. The love triangle between Commerce One, SAP Markets, and SAP has long baffled the market and analysts as well. Even the fact that SAP Markets develops and maintains Enterprise Buyer Professional Edition and mySAP SRM separately from other mySAP.com products can be confusing to end users, if not to the respective parent/child sales and support forces. The announced consolidation of SAP Markets and SAP Portals into a single division might be the first step in resolving the organizational maze.

Although both SAP and Commerce One maintain the right to resell each other's e-procurement technology and believe that by offering broader enterprise application suites that they can sell independently, they will be able to enhance their market opportunity. Past similar experiences teach us that the companies will inevitably compete in the hot area of sourcing and integrating purchasing with the supply chain management and ERP functions. Things can only get more acrimonious over time, and it is undisputable that the strained partnership will have damaged Commerce One quite gravely.

The first punishment came from the stock market that wiped almost 30% of Commerce One's value almost instantly. While the idea of Commerce One forging new relationships/customers as a result of this partial separation could even benefit SAP through its 20% of stake in the partner, Commerce One's success on its own is very unlikely - the market has in the meantime got used to the idea of its success only via piggy-backing on SAP and by being eventually acquired by the giant. The fact remains that a lion share of Commerce One's revenue comes from SAP's customer base.

SAP, on the other hand should not be that indifferent either. It might be too cumbersome and/or too costly for SAP to disentangle itself from this sort of a 'common property' marriage because of the product based co-development work between the two when it comes to Commerce One MarketSet marketplace software. As SAP has already vocally licensed the kit to bundle into its MySAP Technology, it is unlikely that the relationship will dissolve in the short term. SAP is still seemingly unable to deal with the trade exchange platform on its own, and, therefore the two will continue to work together on the development, design and marketing for joint solutions. With almost 4,000 joint staff involved in the global effort, single call center contacts located regionally, and an escalation process in place the vendors should continue to remain aligned. SAP also lacks experience in the trading community management field, which it still can leverage through once-close and now close-to-defunct relationship with Commerce One.

Also, in the pure numbers, with 20% ownership of Commerce One, SAP's results get indirectly affected with Commerce One's ballooning losses. SAP seems to be in a 'between a hammer and an anvil' situation - it cannot just acquire the part of Commerce One it still needs, but the total acquisition of a company that might possibly become the Enron of the software market (we do not imply any dishonest business practice, but rather the magnitude of losses), could cost SAP dearly.

There is also the lingering market perception problem for SAP. Namely, SAP might thereby be building a history of partnering with vendors and assimilating value before breaking off the relationship and discarding them like a sucked orange.

In 1997, it slighted in a similar fashion the erstwhile supply chain management (SCM) software partner i2 Technologies when, instead of embedding i2's Rhythm constraints-based planning engine into SAP R/3 as planned, it chose to offer its own software SAP APO. Some may recall the similar stealth practice with Siebel, as no official announcements of either 'happy alliance' or 'sour parting' have been made by anybody. More recently, SAP ended an agreement with Nortel Networks to promote the Clarify CRM call center software, which Nortel owned at the time, to SAP customers when it enhanced its own CRM capabilities. SAP might have had decent intentions at the time of partnerships' beginnings though, but the zest for being 'all things to all people' must have become too overwhelmingly tempting over time to incite the killer instinct. Enter the recent tacit cold relationship with Microsoft, and some might even see angelic wings growing on Oracle.

One should also imagine the fast heartbeat of Baan's executives, whose product strategy is crucially dependent on the portal technology now owned by SAP. Consequently, some value-added trading network providers such as IBM, General Electric GXS, or Sterling Commerce, that might be approached by SAP for a partnership could find themselves in a quandary - whether to turn the potential gold mine opportunity down or to end up feeling taken advantage of.

As a summary, without intentions of sounding like a talk show counselor, regardless of who of the partners is to blame for the loss of love in the family, nobody seems to be a beneficiary from a rocky or failed relationship; look for both SAP' and Commerce One's 'threading on eggs' kind of walk in the near future.

User Recommendations

While the relationship will continue, it will not likely be lavishly nurtured. Involved users should be wary and wide-eyed. It is likely that the vendors will work together on a project-by-project basis with SAP increasingly acting on distancing itself from Commerce One, until gaining enough expertise in the exchange technology. Commerce One customers are in a much tighter spot. While its existing customers should not jump ship prematurely, they should observe cautiously the vendor's financial viability.

Until this unsettled situation is resolved, either through an entire acquisition or fallout, potential users should minimize risk by decoupling the applications (where the Enterprise Buyer decoupling comes in hand), keeping implementation scope limited and phased, ensuring everyone's accountability for service & support and product upgrades, and evaluating all available competitive products in the respective application areas. SAP customers should not be particularly disconcerted and should continue with the business as usual. However, account for challenges with external product integration and product upgrades, despite the viable upcoming product releases blueprint. Any fallout before SAP masters the marketplace technology would certainly not expedite delivery of new SAP products and technology.

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