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:
- Automotive
- Consumer
Products
- Enterprise
- Financials
- High
Technology
- Human
Resources
- Public
Sector
- Retail
- Service
Providers
- 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.
