SAP Remains One Of The Market’s Beacons Of Hope

Event Summary

On April 19, SAP AG (NYSE: SAP), the leading provider of business software solutions, announced its results for the quarter ended March 31, 2001. In Q1 2001, revenues increased 29% over the same period last year from EUR 1.2 billion to EUR 1.5 billion (See Figure 1). Net income in the quarter more than doubled (up 117%) to EUR 117 million compared to a year earlier when SAP had its worst quarter in its almost 30 years long history. Although aware of the current challenging environment, SAP remains confident about expectations for its operations through the first three quarters of 2001. For the nine months ending September 30, 2001, the company expects that revenue will slightly exceed the 23% growth rate achieved in fiscal 2000.

Figure 1.

"These results confirm SAP's leadership in providing complete e-business solutions that companies want," said Henning Kagermann, Co-Chairman and CEO of SAP AG. "Our organization is focused and energized. When you combine this with the growing customer understanding of the power of mySAP.com and our strong pipeline, 2001 looks like another very good year for SAP."

For the first time, the company has provided additional information on revenues from certain specific software solutions. In Q1 2001, software revenues related to mySAP CRM (Customer Relationship Management) reached approximately EUR 67 million, while mySAP SCM (Supply Chain Management) related revenues totaled around EUR 103 million, which proves that SAP's claims of becoming the No.2 SCM vendor a year ago were merely wishful thinking (see, SAP Declares Victory Over Manugistics, Takes Aim at i2). These figures include revenues from designated solution contracts, as well as figures from integrated solution contracts, which are allocated based on usage surveys.

In the quarter, revenues in Europe, the Middle East and Africa (EMEA) region increased 31% to EUR 796 million and in the Asia-Pacific region (APA) revenues were up 28% to EUR 178 million. Revenues in the Americas region rose 26% to EUR 550 million. At constant (adjusted) currency rates, revenues in the Americas rose a solid 20%. License revenues grew 24% to EUR 458 million while consulting revenues increased 38% to EUR 458 million. However, it should be noted that license revenues in the US grew only 7%, while at constant currency rates it would be flat. The number of full-time equivalent employees at March 31, 2001, was 25,218, a 14% increase over the number at March 31, 2000. Since December 31, 2000, SAP has added more than 1,000 new employees.

In the quarter, SAP announced it intention to acquire TopTier Software, an SAP partner that has market leading technologies and know-how in creating enterprise portals (for more information, see SAP Acquires TopTier To Further Broaden Its Horizons). SAP will create a new company, SAP Portals, dedicated to developing and marketing more comprehensive, open-enterprise portal and business intelligence products. SAP Portals will be a global company with headquarters in Palo Alto, Calif. and will initially employ more than 700 people. SAP Portals will combine TopTier Software with SAP's existing efforts in enterprise portals. One of the first assignments of SAP Portals will be to create a portal for the new joint venture between SAP and Yahoo!

Market Impact

SAP continues to be a stalwart vendor despite the gloomy prospects of the economy. It has broken away from its traditional ERP mindset and is moving in a direction to penetrate more prospective markets, such as e-Business, supply chain management (SCM) and Customer Relationship Management (CRM). It has even abandoned its proverbial stubborn policy of only developing functionally superior software in-house. To that end, SAP has become more focused on partnerships and working with other vendors that specialize in e-business software. The recent partnerships with Yahoo! and Ascential Software along with recently renewed wedding vows with Commerce One speak in that regard.

Possibly tarnishing this image, though, could be SAP's very recent decision to end the reselling agreement with Nortel's Clarify call center product for the missing pieces of its CRM solution. It only exemplifies how fragile partnerships in the market can be, and it leaves the existing customers confused and disconcerted. Prospective customers face the following choices: go for a currently inferior arrangement, wait for SAP's native functionality to be delivered, or opt for some other product at this stage.

Nonetheless, during its recent European Sapphire user conference, SAP articulated a sound e-business strategy that will have to be substantiated in the forthcoming period though. Its product's componentization, openness and outward-looking strategy should be appealing to both current and potential users. SAP's alleged humility and non-insistence on locking customers into its technology would leave Oracle as the only apparent proponent of the 'one-stop shop' mantra.

It appears as though SAP feels confident now that its software solutions outside core ERP can attract customers outside its humongous install base on a stand-alone basis. To that end, SAP has identified the following product lines as main pillars of its product strategy:

1. portals (through the TopTier acquisition and subsequent SAP Portals subsidiary)
   
   
2. trading exchanges (through its SAPMarkets subsidiary)
   
   
3. CRM, SCM, product life-cycle management (PLM) and ERP (through SAP Solutions subsidiary).

After years of wavering, SAP's SCM software, as well as PLM software seem to be catching up with the functionality of niche specialists. While SAP's aspirations of selling these, as standalone point solutions are still going to face fierce pure-SCM players competition, SAP can at least rely on a huge existing base to cross-sell to. The percentage of revenue coming from SCM (22%) speaks for the fact that resolving the 'nuts-and-bolts' collaboration problems that span multiple enterprises and multiple functional areas is becoming more important than ever.

While initially tardy in joining the e-commerce gold rush, SAP has recently exerted immense effort and expertise in delivering collaborative commerce business maps that define steps, roles, technologies and value statements of more than hundred collaborative business scenarios. The scenarios have been incorporated into the recently announced SAP Solutions Architects tool, which comprises a number of other integrated tools such as the e-Business Case Builder, AcceleratedSAP and Best Practices for mySAP.com.

The SAP Solution Architect is connected to the SAP Solution Manager, a portal for implementing the system operations infrastructure and supporting ongoing operations of an entire enterprise solution. Both the SAP Solution Architect and the SAP Solution Manager are connected to the SAP Service Marketplace, which provides a partner directory, catalog-based buying and selling of services, business collaboration with the SAP community and information exchange forums. These three elements together are devised to form SAP's service infrastructure covering the entire life cycle of an e-Business solution.

On a more down note, keep in mind that SAP's flat license revenues in the US were dismal compared to recent growth from its direct competitors (e.g., Oracle, PeopleSoft, i2, Siebel, Manugistics, and J.D. Edwards), which should indicate a possible loss of market share and incomplete US-organization transition. Also, the EMEA market contributed 52% of total revenue, which shows the importance of the European market to SAP's top line. Should the European market falter as a result of the current slowdown in the US, SAP may be hard pressed to meet its bullish predictions for 2001.

One should also account for the ongoing costs of cross training the SAP consulting force on new and still developing e-business applications from its traditional ERP functional orientation; the same holds for the sales force that has been reorganized around vertical industries in respective CRM, SCM, business intelligence and other product areas. Another caveat is that a significant part of the SAP US-based workforce has been with the company for less than a year owing to defections of a year ago and to recent recruitment. On the other hand, long-time SAP sales people are much more versed in selling large, 'the whole enchilada', ERP contracts and /or upgrades than they are in selling CRM, SCM and PLM point products. Lack of dedicated sales resources in these areas may impede SAP's proficiency to sell these products outside of its install base.

Therefore, SAP's unwieldy and scattered global development organization, disparate product components and their developments' coordination, and the lack of sales focus may hamper the execution of its otherwise attractive strategy. SAP should clearly articulate the delivery milestones of its recently announced e-business strategy. These should address time frames for all main product lines releases, and also, how customers can feasibly migrate piecemeal from individual components to the integrated whole. SAP R/3 Enterprise, the next major release of its flagship ERP suite, which is slated for general availability in 2Q 2002, and which will supposedly provide an R/3-based platform, upon which customers can incrementally deploy new mySAP.com and 3rd-party components without the need to update their core ERP systems, is the step in the right direction, but with the long way to go.

User Recommendations

SAP's viability and the business applications market's leadership remain unquestioned. More important will be how well the company will execute its ambitious vision. The market has often in the past witnessed how long the road between the vision and execution is.

One would be hard pressed to find a case where SAP should not be included on at least an initial long list of vendors in a global ERP selection. The depth and breadth of mySAP.com's offerings may be attractive to a wide range of companies, both industry- and size-wise. However, users should question the company's delivery fulfillment of its strategy and appreciate that integrating SAP's components to other software will remain painstaking despite SAP's commendable initiative in facilitating that. Non-SAP Top Tier customers should promptly clarify their support status and SAP Portals' product development strategy. The same holds for SAP users of the Clarify call center CRM product.

More comprehensive recommendations for both current and potential SAP users can be found in SAP - A Leader Under Reconstruction.