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SAP - A Leader Under Reconstruction

Written By: Predrag Jakovljevic
Published On: August 14 2000

SAP - A Leader Under Reconstruction
P.J. Jakovljevic and A. Turner - August 14, 2000

SAP AG Genesis

Founded by five former IBM employees in 1972 and based in Walldorf, Germany, SAP AG is the No. 1 vendor in the Enterprise Business Applications market, (with approximately 30% of worldwide market), and one of the largest independent software companies in the world. The Company consists of SAP AG and its network of 62 operating subsidiaries and has a presence or a representation in over 100 countries.

For the year ended December 31, 1999, the Company's revenue was approximately Euro 5.1 billion, as compared with Euro 4.3 billion for the year ended December 31, 1998 (See Figure 1). Approximately 80% of its revenue comes from the international market (outside Germany). Although SAP experienced a drop in net income during the first half of 2000, it continues to be profitable (See Figure 2). Net income was Euro 601.0 million and Euro 526.9 million for fiscal 1999 and 1998, respectively.

Figure 1.

Figure 2.

SAP's first generation of software was introduced in 1973 and consisted of a modest financial accounting operation. In 1981, the Company introduced its second generation of application software, the R/2 System, that had the capacity to be installed enterprise-wide on mainframe computers. SAP's primary product is the R/3 System for client/server (distributed) architectures that was brought to market in the early 1990s.

In response to the impact of the Internet, SAP undertook a significant revamp of its product offerings during 1998 and 1999. The first step, initiated in 1998, was to finalize the EnjoySAP development initiative to improve the user-friendliness of its products. In parallel with that effort, the Company advanced its New Dimension products initiative to create independent, modular business solutions and sharpened its focus on the rapid development of Internet-based products. SAP has unified all of these initiatives under its comprehensive Internet strategy, mySAP.com, which was announced in May 1999.

Recent Developments

The Company launched mySAP.com in October 1999.

In addition to dividing the system into components, SAP has begun development of a series of pre-configured R/3 templates ("AcceleratedSAP") for use within specific industries. By using pre-configured applications known as SAP Accelerated Solutions, SAP offers small to medium sized organizations inter-enterprise solutions. Today there are seven certified partners offering application hosting for the Internet solution "mySAP.com". The accelerated solution verticals are:

  1. Automotive

  2. Consumer Products

  3. Enterprise

  4. Financials

  5. High Technology

  6. Human Resources

  7. Public Sector

  8. Retail

  9. Service Providers

  10. Chemicals

On December 14, 1999, SAP announced the addition of procurement functionality. Available through SAP's Business to Business Procurement framework, the "mySAP.com Buying Solution" supports real-time purchasing transactions directly or via the mySAP.com Marketplace. The Marketplace is SAP's on-line trading community supporting a business directory of over 2,500 companies. The procurement tool is based on an open standard and designed to support back office systems - SAP and non-SAP - running in parallel.

With the Buy side covered and a partnership with Requisite Technology to deliver content management and a catalog-finding engine, SAP partnered with INTERSHOP Communications, Inc. to provide Sell Side Solutions.

The mySAP.com Selling Solution and its "Internet Sales component" links buyers and sellers via the "SAP Business Connector". The connector leverages XML to transmit orders, invoices and other documents through personalized workplace portals.

An additional component is the Internet Sales application which complements existing SAP sell side solutions, including the Online Store which extends SAP R/3 to the Internet. Also available is the Internet Pricing and Configurator component that allows companies to sell simple and complex configurable products over the Internet.

In addition to the core ERP capabilities and the buy/sell-marketplace functionality, SAP announced a Supply Chain Management Solution. The solution is designed to cover all major functional areas, including demand and supply planning, distribution and production planning, manufacturing scheduling, materials and inventory management, production control and maintenance, transportation management and warehouse management.

In December, 1999, SAP announced Internet enabled Supply Chain Management applications. The Advanced Planner and Optimizer (SAP APO), Logistics Execution System (SAP LES) and Business Information Warehouse (SAP BW) are designed to integrate information and decisions from the entire supply chain into an automated infrastructure.

The Supply Chain Management applications offer features such as:

  • Collaborative Planning, Forecasting and Replenishment (CPFR), which enable buyers and sellers to collaborate on demand and order forecasting and to update their plans based on the dynamic exchange of information over the Internet.

  • Internet-Enabled Vendor-Managed Inventory (VMI) enhances collaboration with suppliers and customers via the Internet to allow a manufacturer to proactively replenish orders.

  • Collaborative Supply Planning enables a manufacturer to use its supply network planning model to derive supply chain production requirements and publish the results to suppliers.

  • Promise to Be Available supports dynamic sourcing and commitment of orders, taking into account information about availability across production plants and distribution centers.

  • Shipment Tendering enables shippers and carriers to exchange detailed information about planned shipments, bids, rates and conditions in order to negotiate an agreement.

SAP is delivering the mySAP.com components through personalized functionally rich portals based on the mySAP.com Workplace. The portals tie together market intelligence, sales execution, groupware, product information, order fulfillment and engineering-to-order information.

The interface is designed to provide users access to the internal and external applications, business content and services required for their jobs. Individuals can customize their interface by choosing news feeds, research, and stock portfolio information. By selecting the content and layout individuals can personalize their "dashboard" to maximize their information-to-time ratio.

To round off the mySAP.com offering, interested prospects can test-drive solutions using the SAP Internet Demonstration and Evaluation Service (IDES). This allows customers to evaluate, implement and operate mySAP.com solutions online. Once a purchase decision has been made, customers can choose to implement their solution in a hosted environment, from SAP or one of its partners. Customers who choose applications hosted with an SAP application service provider also have the option of receiving their SAP solutions and upgrades via satellite.

By the end of 1999, the Company had more than 12,500 customers, and more than 10 million users all over the world. With more than 900 partners that offer complementary software, services and hardware, SAP has established a wide-ranging SAP partner system. The Company's customers include multinational enterprises as well as medium- and smaller-sized businesses, with approximately 60% of SAP customers greater than $200 million in revenue. SAP went public in 1984 (1998 on NYSE) and its shares trade on the New York, Frankfurt, and Stuttgart stock exchanges.

SAP Trajectory and Strategy

Like many Enterprise Resource Planning (ERP) companies, SAP has recognized the Internet as the next medium for business success. In 1999, with its mySAP.com initiative, SAP embraced the web-based software market. Continuing through 2000, SAP has expanded the scope and coverage of mySAP.com, assuring its customers that SAP systems are keeping up with the changing Internet marketplace.

SAP's efforts to participate in this market began in January 1999 with the announcement of "Application Hosting With mySAP.com". On February 24, 2000, SAP AG announced that it would form a new company - SAPHosting - dedicated to the rapidly growing Internet application service provider ("ASP") and application hosting business. The new internationally operating hosting solutions company will combine the experience of SAP and its partners in offering best-practice hosting services for the hosted configuration as well as mySAP.com and third-party Internet business solutions along their entire life cycle. The focus of the new company will be to offer hosting services from SAP and to provide support and quality benchmarks to the expanding network of mySAP.com ASP and hosting partners.

SAP strategy is to increase its profitability and market share by offering e-business software solutions through mySAP.com to its large existing customer base and to new prospects. The Company's product solution strategy is to offer customers integrated one-step e-business solutions for competitive advantage in the Internet economy.

SAP AG is also reorganizing its software division into three separate units ("product", "consulting", and "training") allowing the CEOs to restructure and streamline their divisions. Breaking down a large organization into smaller, more manageable and responsible units should give SAP a better chance to be more flexible and focused. It is planning a radical revamp of its software development operations in an effort to gain dominance of the North American market.

In the U.S. division, the new head of American operations, Wolfgang Kemna is planning some internal changes to cut several layers of management. These cuts are to address the perception that the company is not flexible enough to respond quickly to customer's demands in the new Internet savvy economy. By paring down a large, unwieldy organization, the company can streamline operations and bring SAP closer to customers.

At the company's customer conference in May 2000, SAP's Chief Executive Officer Hasso Plattner acknowledged that SAP would be working with partner companies to add depth to its mySAP.com suite.

SAP is forming partnerships and alliances as SAP reinvents itself from a large, inert business applications software company to an Internet leader. SAP is recognizing that it cannot build in-house all the necessary components for the comprehensive global e-commerce solutions businesses are demanding.

SAPMarkets, A New SAP Subsidiary

SAP announced a yet-to-be-named marketplace suite that promised to revolutionize business by offering companies one-stop shopping for the entire range of e-business marketplace services. On March 15, 2000, SAP announced that it would form a new subsidiary - SAPMarkets, with its headquarters in Palo Alto, CA, USA - to consolidate all of the current mySAP.com Marketplace efforts to provide customers with the technology and cross-company integration expertise they need to bring marketplaces to fruition at Internet speed.

SAPMarkets is dedicated to creating and powering globally interconnected business-to-business marketplaces on the Internet. As such, SAPMarkets will be responsible for all existing and new vertical and horizontal marketplaces. The solutions offered by SAPMarkets will combine the best of mySAP.com and third-party technology, applications and services. The new company will leverage SAP's global system of partners and consultants, as well as SAP's global field operations personnel. It is also anticipated that SAPMarkets will cooperate with other marketplace providers. Based on a common architecture, these services will range from collaborative design through fulfillment, including industry-based content services and business intelligence.

To accomplish this goal, SAP has announced the following:

Some other notable developments to support SAP initiatives include:

ANALYSIS

SAP Strengths

Viability: SAP has a very sound financial situation (growth and profitability track), with sustained investment in R&D (13% of revenue, 22% of workforce, and outspending its five closest competitors in terms of raw dollars R&D Investment), and very strong and efficient direct sales force (measured in revenue per sales employee ratio), and traditionally strong management and congenial informal corporate culture that nurtures creativity of employees.

Brand Recognition and "Mind Share": Since it's beginning SAP has been providing leading business application solutions. With an install base of over 12,500 and sustained revenues of ~$5.1B, SAP is recognized as an absolute leader in the Enterprise Resource Management market.

User Base: With an extensive user base spanning industries such as aerospace, automotive, retail, financial and manufacturing (to name but a few), SAP has a wealth of industry verticals to develop, pilot and deliver solutions.

Product Breadth and Depth: SAP's solutions within Enterprise Resource Planning, eProcurement, Supply Chain Management and Marketplace functionality provide a wide scope of features. Few, if any, vendors can provide tightly integrated applications of this magnitude under one umbrella. Furthermore, SAP has possibly the strongest product technology (in terms of support for almost all industry relevant platforms and/or middleware standards), together with a reputation for in-house development and innovation. Until recently the entire product suite was developed in-house, thereby eliminating integration problems, experienced by competitors in their acquisitions' aftermath. However, recognizing that to succeed in the new economy, it cannot manage everything on its own at this stage, SAP has fostered partnerships and alliances to expand and enhance its mySAP.com product suite.

Partnerships and service & support infrastructure: mySAP.com is the result of industry leaders forming alliances to deliver a full range of Internet based solutions. SAP recognizes these partnerships are essential. From hosting and infrastructure to joint development initiatives, continued strategic alliances will contribute to mySAP.com's success.

SAP Challenges

Product Cost and Complexity: Despite its notable effort in developing its pre-configured Accelerated Industry Solutions, SAP has been doggedly trailed by a bad reputation for protracted (very often over 18 months) and costly implementations (often 7-10 times software license costs), as well as a complex, rigid product that often imposes radical change on customers' business practices. This remains an impediment to SAP's ability to penetrate the much-coveted Small-to-Medium Enterprises (SME) market. Very often, these find the SAP installation to be more complex and costly, and do not realize the same level of benefits had they chosen a less complex, more focused solution.

While SAP has more functionality than most of it competitors, it is so spread over a range of industries that it is susceptible to focused attacks of some competitors within a certain industry. Further, the incorporation of products from other vendors has added another level of complexity to this mix. While SAP has benefited so far due to a monolithic, tightly integrated product, the current market trends are product componentization and granularity.

Tardy and/or unconvincing e-commerce vision articulation: SAP has recently begun to feel and be hurt by the fierce competition for web-based products, particularly in the US. Its core ERP product R/3, while still functionally superior, is not sufficient any more for sustained corporate financial success. SAP is stumbling, particularly in the United States, where competition from more nimble point solutions vendors like i2 Technologies, in the supply chain management (SCM) market, and Siebel Systems in the customer relationship management (CRM) market is taking its toll.

Some "New Dimension" products have been either late-to-market ("SAP B2B") or still have inferior functionality ("SAP APO"), or both (in-house developed CRM product suite), compared to equivalent niche players' products (Ariba, i2, Siebel, respectively). It is also feeling additional pressure from direct competitors Oracle and PeopleSoft, who have been touting their extended ERP products that are allegedly integrated with their core ERP systems. SAP revenue is recently driven by service and maintenance, with almost flat license revenue. Steady growth from previous years will be very difficult to maintain, simply by virtue of the Company size.

Dubious Partnerships: While SAP may have so far failed in its attempt to transition quickly to new CRM and e-commerce technologies, it has recently been making moves in the right direction to remain competitive in the new economy. We endorse SAP's recent willingness to partner with other vendors for software components it cannot develop efficiently in-house. However, this is a notable departure from its previous strategy and will require a significant mindset change. Being a behemoth, SAP's ability to change course quickly is difficult. Also, SAP has not established a good record for strategic partnerships and therefore some may doubt its long-term commitments with Commerce One and Nortel/Clarify.

Pricing: Companies with existing licenses who are interested in SAP's internet based solutions will need to upgrade to R/3 version 4 to support marketplace functionality. With Commerce One offering an e-procurement solution, access to their marketplace AND connectivity to SAP R/3, clients may be looking at cost effective alternatives. (See our news article: "Commerce One: Connectivity Improved" )

Leadership: SAP America has also experienced a massive exodus of key personnel. It lost more then 300 staff members in the past year, including top executives, to companies like Siebel and Oracle, primarily due to its tardiness in granting stock options. Personnel loses included the departure of Kevin McKay, head of US operations, a significant loss as he guided the American operations during a particularly difficult period. We believe that his successor, Wolfgang Kemna, until recently managing director of SAP's German subsidiary, is only a temporary solution until a better-attuned CEO for the American market is found.

In January, the Wall Street Journal reported the names of key members within SAP's United States Internet development group leaving for greener pastures. Noted was the failure of SAP Headquarters to understand the market and equity opportunities available to the U.S. Internet team. We have learned an equity position has been offered to the remaining employees, but is linked to the success of a German financial index. SAP will need to back fill these positions and identify and maintain attractive equity packages if it wishes to maintain a U.S. based Internet division.

Availability of upgrades: Timeliness and availability of upgrades have always been a concern for SAP clients. As the SAP system is responsible for a company's mission critical data, upgrades must be scheduled in advance. SAP will need to work closely with its customers to provide a detailed upgrade timeline. As the Internet will increase SAP's ability to distribute upgrades, (i.e., hosted applications) it will also introduce competition in the form of compatible offerings from Commerce One, Ariba & i2.

Sales force orientation: The SAP sales force will need to embrace a "service" sales model as the company begins supporting hosted applications and Internet solutions. This is a departure from the license-based architecture the company has traditionally sold.

Performance: Dynamic pricing, Personalization, real-time Collaboration, Complex Product Configuration and Virtual Live Caching all require high bandwidth, efficient networks and hardware optimization. This challenge is not SAP centric. Any application run on a network or across the Internet is limited by its narrowest point. SAP will need to work with each customer to establish appropriate performance benchmarks in an effort to set customer expectations.

BOTTOM LINE

SAP Predictions

SAP will continue to experience modest annual growth globally (10%-20%) in the next 18 months, however this is higher than those of most competitors. Market share is expected to remain at 30% by year 2003 (70% probability), based on the potential of mining its humongous customer base. However, there is 60% probability of losing up to 2% of share within the North American market to Oracle and PeopleSoft.

Major acquisitions are very unlikely (25% probability); the focus will be on strategic alliances with renowned VAR and ASP companies in order to penetrate SME market via outsourcing offerings, especially for "SAP HR" and "AcceleratedSAP" vertical industry solutions. SAP will also continue to complement mySAP.com solutions with tightly integrated applications from SAP partners for marketing planning and campaign management, catalogs, push technology and Internet connectivity solutions (70% probability).

Within the next 4 years, more than 75% of SAP's revenues will come from outside of the German market (70% probability), with the license revenue contributing more than 35% of its total revenue within the same period of time (60% probability). "mySAP.com", "New Dimension" and "Industry-Specific" products (particularly "SAP BW" and "SAP HR") will be significant contributors to SAP sales revenue (up to 50% within the next 3 years, 60% probability).

SAP Recommendations

SAP must continue its effort to penetrate Small-to-Medium Enterprises (SME) market segment with the entire product portfolio of component applications, mainly through indirect channels and outsourcing arrangements.

SAP must use its direct sales force to expand business in its existing large customer base, both by increasing number of seats and offering mySAP.com, New Dimension, and Industry-Specific products, as well as by helping existing customers improve the economic value of their R/3 installations (ValueSAP initiative).

SAP must remain committed to speedy and fully functional new product introductions and to reduction of product complexity and implementation price (continue the delivery of the revised GUI and CRM initiatives), by at least maintain R&D budget from 1999.

SAP should also carefully reevaluate its mySAP.com product migration strategy from current R/3 instances, in order not to alienate and disillusion its loyal customer base. mySAP.com has allegedly met resistance because SAP's licensing model requires that existing customers re-license its R/3 software. Some customers may see this as only another hefty investment with little added value other than improving a previously drab user interface. SAP competitors are only begging for a surge of similar news.

SAP should more clearly define product upgrade requirements: With many components to choose from it is difficult to understand what R/3 versions are required to run the new applications. It should also further facilitate connectivity to external exchanges: While the mySAP.com white paper details planned connectivity to non-SAP marketplaces, we suggest addressing this feature sooner rather than later.

While SAP may have lined up all the right components, it still needs to tie all those together into a cohesive e-commerce message. The real value of mySAP.com is that it addresses end-to-end e-business processes. Talking about the product from the process down vs. bottom up may emphasize the value of full business, not which module can do what.

SAP has to be willing to be more flexible and humble in its strategy if it is going to succeed in the new economy. With the excess of integration products on the market and improved interconnectivity, users are becoming much less wary of piecing together best-of-breed solutions. Ground-up development of a complete end-to-end e-business solution spanning all functions of the front and back office is undisputedly a major mission. While SAP can effectively manage large human and financial resources functions, it may not suffice; coordination and time constraints play a major role too.

User Recommendations

One would be hard pressed to find a case where SAP should not, with a good reason, be included on at least an initial long list of vendors in a global ERP selection.

SAP should be on a short list in any enterprise application selection process for enterprises with over $500 million in revenues within the following industries: chemical, oil and gas, pharmaceuticals, engineering and construction, aerospace and defense, high-tech, fast-moving consumer goods and retail, utilities, service providers, financial institutions, and public sector.

SAP might not be a strong contender in a case of time- and/or budget- constrained ERP implementation with a narrow functionality scope (e.g., shop floor control, HR or financial module only), particularly for enterprises with less than $200 million in revenues.

Companies with no current SAP investment:
SAP's solutions are worth exploring. The depth and breadth of mySAP.com's offerings are attractive. Remotely hosted Internet solutions may offer cost effective applications to small or mid-sized organizations. Consider all options. Most importantly identify what needs are "must have" requirements and a timeline for additional components. Once identified, comparison-shop and use the related information to negotiate the best price for the solution.

Companies with existing SAP applications:
Talk with your sales representative. Understand what functionality you're interested in and investigate what mySAP.com can offer. Consider the current release version. Identify the requirements and related costs are to upgrade your systems to support the added functionality. Be wary of pre-selling efforts.

Use the existence of other alternative, e-procurement, marketplaces and CRM applications to leverage the best price. If your CRM strategy calls for a lower-customer-volume, transaction-oriented system, and you already have significant investment in SAP technology, then pursue the SAP options. However, do not hesitate to venture elsewhere. Improvements in products interconnectivity make going beyond R/3 a more viable option than in the past.

If SAP is the final choice, future SAP clients should consider the following:

  • Negotiate the license fee per module if the entire R/3 breadth is not needed

  • Provide for future incorporation of "New Dimension" components by bundling them into contract now at negotiated license fees

  • Stay away from consulting partners who don't follow SAP's ASAP implementation methodology, the best scenario would be to use SAP Company's consultants or partners belonging to TeamSAP initiative

  • Prerequisites for successful SAP implementation: commitment of top-level management, proper end-user training, close monitoring of project progress, and molding R/3 in order to accommodate business processes (not the other way around).

Figure 3.

Figure 4.

 
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