SAP AG - ERP Leader with a "New Dimension"

Vendor Summary

Founded by five former IBM employees in 1972 and based in Walldorf, Germany, SAP AG is the No. 1 vendor in the Enterprise Resource Planning (ERP) software arena, (19,000 employees, 31% of worldwide ERP market), and one of the largest independent software companies in the world, currently present in 107 countries. The Company's revenues increased from DM2.6 billion in 1995 to DM8.4 (US$5.1) billion in 1998 (see SAP AG Annual Results Chart). The Company posted a $631 million net profit in 1998, while the majority of its main competitors encountered major financial difficulties. 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. Today, SAP is in the process of completing one of its most aggressive new product launches in its history by introducing its "New Dimension" products line, which initially includes independent business applications for Supply Chain Management (SCM) - ("SAP APO"), Client Relationship Management (CRM) - ("SAP Sales", "SAP Service", "SAP Marketing"), Business Intelligence (BI) - ("SAP BW", "SAP SEM", "SAP KM"), and e-Commerce ("SAP B2B"). 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 the end of 1998, the Company had licensed more than 19,000 system installations to more than 10,700 customers worldwide, with approx. 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.

Fig. 1

Vendor Strengths

  • Commanding market position and brand recognition, very sound financial situation, sustained investment in R&D (13% of revenue, 25% of workforce), very strong direct sales force (18% of employees), excellent informal corporate culture that nurtures creativity of employees.

  • Strong technology, very broad and deep core ERP solution (R/3), together with an excellent reputation for innovation (very healthy new product flow) and formidable support & maintenance infrastructure.

  • The entire product suite has been developed in-house, thereby eliminating integration problems, experienced by competitors in their acquisitions' aftermath.

Fig. 2

Vendor Challenges

  • 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 could be a possible impediments for SAP's ability to penetrate the much coveted Small-to-Medium Enterprises (SME) market.

  • Increasingly competitive market; SAP revenue is recently driven by service and maintenance, with steep deceleration in license revenue (only 13% total revenue growth in the last 2 quarters with only 1% growth in license revenue and 7% drop in net profit compared to the same period last year - see SAP AG Quarterly Results Chart); Steady growth from previous years will be very difficult to maintain, simply by virtue of Company size.

  • Some "New Dimension" products have been either late-to-market ("SAP B2B") or have poor functionality ("SAP APO"), or both (CRM product suite), compared to equivalent niche players' products (Ariba, i2, Siebel, respectively).

Fig. 3

Vendor Predictions

  • Slower annual growth (10%-20%) in 1999 (see ERP Vendors Annual Growth Chart), however higher than those of most competitors, market share expected to grow to 35% by year 2003 (70% probability).

  • "New Dimension" and "Industry-Specific" products (particularly "SAP BW" and "SAP HR") will be significant contributors to SAP sales revenue (up to 30% within next 3 years).

  • Acquisitions very unlikely, 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.

Fig. 4

Vendor Recommendations

  • Penetrate Small-to-Medium Enterprises (SME) market segment with the entire product portfolio of component applications, mainly through indirect channels and outsourcing arrangements.

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

  • Remain committed to speedy and fully-functional new product introductions (complete CRM and BI product suites) and to reduction of product complexity and implementation price (TeamSAP, EnjoySAP, and ValueSAP initiatives), by increasing R&D budget for 1999 at least 10% over the 1998 level ($640 million).

  • Exercise moderate sales, marketing and administrative cost cutting in order to keep total operating expenses for 1999 under 10% increase compared to 1998 ($4.1 billion).

Fig. 5

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 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. HR or financial module only).

  • 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).

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