SAP Keeps Traction On Some Tires Of Its Omni-Wheel-Drive Part 1

Event Summary

At the end of April, SAP AG (NYSE: SAP), the leading provider of business software solutions, announced growing momentum for mySAP Customer Relationship Management (mySAP CRM) among companies seeking to leverage SAP's understanding of global business, industry-specific business solutions, and CRM functionality for the chemical industry. SAP claims that because mySAP CRM provides a flexible foundation well suited to a changing business environment, chemical companies have adopted it to integrate their entire business, global supply chains, and partner networks.

Supporting this claim, chemical companies that have selected mySAP CRM include The BOC Group, Dunn-Edwards Corporation, Marsulex Inc., Millennium Chemicals, and Rohm and Haas Company. These leading companies join the ranks of other global customers from other sectors who have chosen mySAP CRM to deliver improved customer service and value, and they may be providing further proof of SAP's gaining market momentum.

Earlier in the year, SAP announced that, since the introduction of mySAP CRM to the market at the end of 1999, more than 1,500 companies around the globe have selected the CRM solution. In 2001 SAP reportedly generated revenues in CRM totaling EUR 445 million, making the software company the No. 2 CRM vendor and the No. 1 in its installed customer base. Other well-known companies that have decided to implement mySAP CRM, include the pharmaceutical vendors AstraZeneca Germany and ratiopharm, plus COOP Norway, IDS Scheer CEE (Central and Eastern Europe), Nestl Nordic, Norsk Hydro Gas & Chemicals, Osram, and Siemens ICM (Information and Communication Mobile).

The most recent endorsement to its CRM offering happened on May 15, when Deloitte Consulting, one of world-leading consulting firms, announced an expansion to its strategic alliance with SAP to jointly deliver mySAP CRM solutions for Fortune 1000 and enterprise organizations. Since SAP has established a rapidly growing presence in the global CRM marketplace with its mySAP CRM solution, this software will be the focus of the joint effort. Deloitte Consulting is reportedly committed to growing its global mySAP CRM practice to more than 1000 consultants in the next year. The firm claims to be is a leader in SAP implementations globally, with a dedicated SAP practice of more than 5,000 professionals, and more than 1,000 current projects serving many top-tier global clients.

Customers are reportedly praising the ability of mySAP CRM to integrate with existing applications, such as ERP, as well as the transparency of processes, its scalability, and analytical functionality. The software solution mySAP CRM provides for the management of integrated business processes in the core areas of customer relationship management, such as marketing and sales automation, services, and analytical CRM as well as multi-channel management, including Internet, customer interaction centers (CICs), and personal contact. The current version of mySAP CRM also tends to provide for fast implementation through more than 100 pre-defined business processes with operational, analytical, and enterprise-wide CRM functions.

SAP believes mySAP CRM offers chemical companies a strategic advantage since its operational, analytic, and collaborative features empower employees to respond more quickly because they have a consistent view of their customers. mySAP CRM enables collaboration by distributing relevant information to internal and external communities of interest, informing customers and partners about new products, special offers, updates on new site features, and upcoming events. This improves marketing efficiency and speeds communication. Additionally, mySAP CRM helps chemical companies to grow top-line revenues by enabling more effective up-selling, cross-selling, and identification of new sales and delivery channels. Capabilities such as predefined buyer profiles, commonly sold product terms, up-to-the-minute information about pricing and availability, customer-initiated tracking, and automatically updated financial and inventory data should reduce purchasing cycle time and, therefore, the cost of transactions.

Renewing its pledge to open its products, on April 18, SAP announced it would accelerate the delivery of open, collaborative application solutions, which use open integration technology and enable customers to maximize the return on their existing IT investments, even in heterogeneous environments. The company announced it has created a new business area to focus on the next generation of collaborative solutions and that Shai Agassi, in his new role as a member of the SAP Executive Board, will be responsible for this business area.

By extending the SAP Executive Board to focus on the next generation of collaborative solutions SAP intends to demonstrate their strategic significance to the company. The business area will include development, market strategy, professional services, and business development personnel of the formerly independent SAP subsidiaries, SAP Markets and SAP Portals, as well as strategically built field initiatives and solution centers. It will focus on providing an open integration platform that unifies people, information, and business processes. On top of this platform, which combines portal, business intelligence (BI), knowledge management (KM), and exchange technology, the new business area will supposedly deliver collaborative, analytical, and commerce solutions that should run within and across business boundaries.

This is Part One of a two-part analysis of recent SAP announcements. Part Two will further discuss the Market Impact of these announcements and make User Recommendations.

Financials

On the same day, SAP also announced its preliminary results for the first quarter ended March 31, 2002. In Q1 2002, revenues increased 9% from EUR 1.52 billion in the same period last year to EUR 1.66 billion (See Figure 1). While product revenues in the quarter rose 6% to EUR 999 million from EUR 943 million in Q1 2001, license revenues notably dropped 12% to EUR 402 million from EUR 458 million a year ago. More notably, net income for Q1 2002, adjusted for the TopTier acquisition costs and the Commerce One impact, was EUR 65 million, a 40% drop compared to EUR 109 million in Q1 2001. In the quarter, revenues in the Europe, Middle East and Africa (EMEA) region increased 11% to EUR 886 million and in the Asia-Pacific region (APA) revenues were up 4% to EUR 185 million.

Figure 1.

Even revenues in the Americas region rose 7% to EUR 587 million, and, at constant currency rates, revenues in the Americas would have risen 5%. Still, the continued tightening of IT budgets, especially in the US and Japan, have given raise to disappointment, particularly as license revenue in the US was down 28% (down 30% in Americas) and in Japan was down 56% (down 32% in APA). Also interesting is the fact that while the license revenue in the EMEA market was up 1%, it dropped 4% in its domestic German market.

SAP continues to take market share in sales of specific software solutions, and it also increased its personnel 3% in the quarter, mostly in Europe. In Q1 2002, software revenues related to mySAP CRM reached approximately EUR 74 million, representing a 10% growth and accounting 18% of total software license sales. Even recently considered unexciting products, mySAP Financials and Human Resources, grew at a steady 6% rate to EUR 172 million, representing 35% of license sales.

On a less positive note, the steepest revenue declines come from other newer mySAP initiatives, including mySAP SCM (with a decline of 23% to EUR 79 million), mySAP PLM (with a decline of 28% to EUR 33 million), and mySAP Portals and Exchanges (with a decline of 45% to EUR 44 million). Although the conditions for software purchases are challenging, the company still expects a much stronger second half of the year, and still anticipates revenue for the full year to grow by around 15%. SAP anticipates that the improvement will become more evident in the second half of the year as software license performance improves and the company benefits from ongoing cost curtailment measures.

Management Changes

Finally, as to bolster its performance in North America and to get itself in a better shape for impending intensifying bloodbath in the CRM market, on May 23, on the eve of its forthcoming SAPPHIRE user conference at the beginning of June, SAP announced that it has appointed Lo Apotheker as president of Global Field Operations. In this newly created position, Apotheker and his management team will realign SAP's worldwide sales force around the needs of global customers for consistent processes and seamless operations across geographies. The realignment will also decouple some of SAP's regional organizations to create more homogenous market segments to enable the field organization to better meet customer needs regardless of the size of their businesses. Formerly president of Europe, the Middle East and Africa (EMEA), Apotheker will oversee all SAP field operations worldwide, reporting directly to SAP Co-chairman and CEO Henning Kagermann. Apotheker joined SAP 14 years ago and launched SAP France, serving first as managing director and eventually assuming responsibility for SAP's southwest Europe region. In 2000, he was appointed to SAP's Extended Board and named president of EMEA.

Apotheker will serve as acting head of the North American region of SAP, gaining hands-on experience in SAP's largest potential market, since Wolfgang Kemna, current president and CEO of SAP America, Inc. is assuming the role of executive vice president, Global Initiatives reporting directly to Henning Kagermann. Kemna will build on the success of SAP's global strategic initiatives in CRM and Supply Chain Management (SCM), leading a new organization dedicated to these and other future strategic initiatives.

Market Impact

While SAP might not resemble a furiously fast sport sedan, it remains a sturdy sport utility vehicle (SUV) whose at least two wheels' traction should be able to pull it through a muddy terrain. Most recently, the traction has been on the CRM and, somewhat surprisingly, on the venerable ERP wheel, with likelihood that the other wheels will get needed traction in the future.

With its ever-growing large footprint and scale of on-going product development, SAP is set to keep on rolling. Make no mistake - SAP is Europe's largest software vendor and the third largest software vendor in the world, with subsidiaries in over 50 countries, and with over 17,000 companies in over 120 countries that run nearly 45,000 installations of its software. The company is also well entrenched as the world's largest provider of enterprise e-business applications covering almost all the bases of extended-ERP such as supply chain management (SCM), product lifecycle management (PLM), CRM, supplier relationship management (SRM), e-procurement (for both direct and indirect (MRO) materials) and many other collaborative commerce components through its mySAP.com suite, that can be regarded as both portal application and e-business platform at the same time.

Furthermore, SAP products are used in virtually every industrial sector and, as of late, within companies of all sizes. While large enterprises are handled via direct sales force and the big five (soon to be four) and other renowned consultancies, the mid market is tackled through resellers, with specific industry templates and as hosted applications if required. Lately, SAP has increasingly been targeting companies of all sizes, with different solutions from its mySAP.com stable (see SAP Tries Another, Bifurcated Tack At A Small Guy).

Its focus in the future is likely going to be on the lower-end of the market, currently still being a lesser part of SAP's total revenues. With its over 20 industry-focused solutions (including, e.g., aerospace and defense, automotive, chemicals, financial institutions, consumer packaged goods (CPG), high-tech, mill products, mining, oil and gas, pharmaceuticals, etc.) and its sheer size, SAP is able to claim almost total industry coverage and all the manufacturing styles from simple to complex discrete and from batch to continuous process manufacturing. Still, 2002 is slated to see a more vertical industry approach with specific effort being put into small to medium enterprises (SMEs), primarily through the VAR organizations.

Consequently, SAP will remain an absolute applications leader for a long time to come, as it has performed by and large well throughout the gloomy economic times. SAP was also fortunate to a degree, in addition to its good execution (since 'fortune favors bold'). Indeed, SAP's initial tardiness in addressing the needs of the Internet revolution may now prove to have been a blessing in disguise. While the company has taken heat for looking hopelessly remiss during 1999/2000's 'dotcom' frenzy and for delivering a muddled initial mySAP.com Internet-enabled product strategy, it has come back with a vengeance with the crash of the Internet hype.

Rather than investing much of its own resources to deliver applications for the Internet marketplaces gold rush that never took place, SAP maintained its focus on solving 'down-to-earth' business problems and on positioning itself as a strategic partner to its customers. Particularly during these times of risk-averse customers, SAP's aura of a stalwart vendor and its prudent approaches to solving customers' business problems have become even more attractive and assuring both to its huge customer base and to new prospects. SAP's current posture is also the result of several years of a painstaking effort to radically change its business philosophy, to reinvent itself into a more nimble setup, and to reverse bad market perception. The company has by and large made the right strategic decisions - it has embarked on making its proverbially unwieldy R/3 product more granular and open, and it has delivered attractive ERP-adjacent components.

SAP has also been pursuing the right avenues to technologically keep its product abreast of the latest market trends. Its recently unveiled Internet-based product architecture roadmap that includes Web services, portals, exchanges and Web Application Server (WAS) (see SAP Opens The 'Miss Congeniality' Contest), bundled with its knowledge of business processes bode well from promoting it into one of a few vendors that will be able to provide applications infrastructure foundation (an enterprise equivalent of operational systems upon which other applications would be able to be grafted). As for technology, all of the above-cited SAP's decoupled applications now run on mySAP.com technology platform (meaning web-based and XML, SOAP, J2EE, Microsoft BizTalk and .NET compliant), and there are laid out upgrade paths for the user base from old instances of R/3 product. At the same time, OS platforms can be a plethora of Windows NT, Unix and IBM iSeries (AS/400), up to mainframe systems; the similar holds for database platforms. The company plans to deliver later in the year an integration broker embedded into its J2EE-based application server, which is also in development.

Also, to diffuse customers' anxiety and possible discomfort of time-compressed migrations, SAP is wisely extending maintenance on R/3 release 4.6c for another year -- to the end of March 2006. SAP is also extending maintenance on many even older releases of R/3 (e.g., 3.1i, 4.0b, 4.5b, and 4.6b), at no extra charge, by four months to the end of December 2003, and thereafter with a 2% extra charge to December 2004. The reason for the above is the fact that the forthcoming release of SAP R/3 Enterprise, its future architectural foundation that should transition many old R/3 releases to mySAP, is scheduled to start shipping en mass in January 2003. Given that, based on past user experiences, it would sometimes take them nearly a year to upgrade to R/3 4.6.c release from 3.x releases, one should expect same effort for the upgrade to R/3 Enterprise. Without the above maintenance extension provision, users would then be forced to either start their migration to R/3 Enterprise prior to its general availability or to upgrade to 4.6c release, which would defeat the purpose for both them and SAP, since R/3 Enterprise represents SAP's future architecture. Therefore, repeating similar moves of its foes, Oracle and PeopleSoft, SAP is wisely taking care of its users and, at the same time, is gaining itself a popular image in the public's eye.

This concludes Part One of a two-part analysis of recent news from SAP. Part Two will continue to discuss the Market Impact and make User Recommendations.