Is SAP's tap running dry?

Discussion in 'Information Technology' started by vishal sharma, Jul 29, 2004.

  1. vishal sharma

    vishal sharma New Member

    Jul 23, 2004
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    vishal sharma

    found this great article about sap by Alorie Gilbert....
    so here it is

    SAP may not be a household name, but it's the third largest independent software company, and has a powerful franchise. Yet a confluence of economic trends, new competitors and technologies threaten SAP's enviable position.

    Among the threats to the German company are software interoperability standards called Web services, the entry of Microsoft into SAP's market and growing interest in alternative software licensing models from upstarts like In addition, some securities analysts say SAP's core market--major corporate software overhauls--has peaked, causing several of them to question the company's growth potential.

    Deutsche Bank analyst Kevin Ashton voiced his concerns in a recent research note that cited a general reluctance among corporate customers to significantly increase software budgets this year. "We believe SAP's license revenue target of 10 percent stated growth in 2004 will be difficult to achieve," he wrote. He declined to comment further.

    Analysts will no doubt be looking for signs of weakness when SAP discusses its first-quarter earnings on April 22, given that the market value of the company is nearly 40 times its 2003 earnings, a higher rate than many of its peers'. For Oracle and Microsoft, the price-to-earnings ratios are about 25 and 31, respectively.

    SAP has come a long way since it was founded in 1972 by five former IBM employees who pioneered a then-novel concept for businesses: stop reinventing the wheel and paying loads of programmers to build and maintain basic programs for bookkeeping and order processing. Instead, SAP offered a set of prebuilt software programs and promised it would reduce the hassle of installing information technology.

    In the early 1990s, the company was among the first to redesign its software to work with distributed client-server networks. The release of the resulting application suite, R/3, shot SAP into the global corporate mainstream. Excluding hardware-maker IBM, Microsoft and Oracle are the only companies that sell more software than SAP.

    But Microsoft is hitting SAP in one of its weaker spots--the largely untapped market for business applications software geared toward small and midsize companies. A new software rental model also appeals to this segment.

    Additionally, Web services enables large companies to stitch together otherwise incompatible applications, lessening the appeal of a monolithic system like SAP. Adding to this trend is the availability of low-wage software programmers in Asia and elsewhere, ready to build programs to specification.

    A question of growth
    While these challenges are daunting, no one is ready to write off SAP. With more than 21,000 customers--among them the global giants of commerce--SAP is practically guaranteed a steady stream of lucrative maintenance revenue for years to come.

    SAP is still at the top of its game after one of the harshest periods in the computer industry's history. According to AMR Research, SAP rakes in more than a third of the $20 billion or so that companies spend each year on enterprise resource planning applications--software designed to automate corporate tasks such as billing, payroll and customer service.

    Last year, its two closest competitors--Oracle and PeopleSoft--tacitly conceded they'd been spanked by the German software machine. After losing ground to SAP over the past several years, PeopleSoft gobbled up its next smallest competitor, J.D. Edwards, in a bid to grow market share. And Oracle launched a hostile bid for PeopleSoft--a move that appears to have foundered.

    "(SAP co-founder) Hasso Plattner has made (Oracle Chief) Larry Ellison, (Siebel Chief) Tom Siebel and (PeopleSoft Chief) Craig Conway all look like school kids with dunce hats on," said Marc Benioff, chief executive of and a former Oracle executive. "Do not underestimate SAP."

    The question is whether SAP can continue to grow and innovate as it confronts major shifts in technology and new buying trends. The answer wasn't immediately forthcoming--SAP executives declined to be interviewed for this story, citing quiet period rules in advance of its earnings announcement.

    Others weren't so reticent. Some observers say the company has already lost its edge. Since taking the market by storm in the mid-90s, SAP has been slow to recognize and capitalize on new trends, letting newer companies, including Siebel Systems and Ariba, set the innovation agenda, said one former SAP executive.

    "They wait for a certain market segment to reach a certain size and importance with their customers before they react," said Achim Voermanek, who left SAP several years ago to join rival Ariba and is now between jobs.

    "That's what they did when i2 Technologies entered the market; it's what they did when Siebel entered the market; and it's what they did when Ariba entered the market," Voermanek said. "They are loved by their users, but there is no innovation anymore."

    Still, SAP is helping pioneer a new generation of radio frequency identification technology, and analysts predict RFID will fuel a new cycle of IT investment. SAP took an interest in RFID several years ago, when it was still under wraps at the Massachusetts Institute of Technology.

    "Is SAP an innovative company? The short answer is 'yes,'" said Michael Raynor, co-author of "The Innovator's Solution," the follow-up to Clayton Christensen's "The Innovator's Dilemma." "It would've been hard for them to be as successful as they have been without being innovative."

    Seeking new markets
    Raynor and other observers agree that SAP's core market--big corporate software overhauls--is saturated, leaving little room for growth. "I think their Achilles' heel is that the days of customers spending $50 million up front and doing those big deals is over," said Jason Maynard, securities analyst at Merrill Lynch. "They were one of the perpetrators of that model."

    SAP is not clueless, however. Last month, the company invited local technology scribes to its posh Silicon Valley outpost and explained its expansion strategy.

    Flanked by executives from Visa, an SAP partner, and Whirlpool, a customer, SAP executive board member Shai Agassi explained how his company intends to take on IBM and Microsoft, among others, in the so-called middleware software market with a new product dubbed NetWeaver.

    NetWeaver, which SAP first introduced last year, is a collection of programs designed to make its line of business applications easier to modify and better able to work with other systems.

    Touting middleware is an unusual move for SAP, which built its fortune convincing blue-chip companies, including Dow Corning and Coca-Cola, to toss out the hodgepodge of software they used to run their businesses and replace it with one system. All the data about a company's operations would be kept up-to-date and available at the click of a mouse, SAP's pitch went.

    Now, the company is telling businesses it will give them the tools to patch together systems using Web services, convincing different applications to get along like one big, happy digital family.

    But the middleware market already has well-entrenched players, including IBM, BEA Systems and Microsoft. The move to tools puts SAP in conflict not only with those companies but also with a host of partners on whom it has traditionally relied to make its programs work.

    One critic, a former SAP executive, said the company would do better to address its customers' longstanding complaint: that SAP's software is difficult to upgrade and modify quickly.

    "Instead, they want to do everything Microsoft wants to do," said Paul Wahl, who left his post as chief executive of SAP's North American subsidiary in 1998 and later joined rival Siebel Systems. "That's a lot of work to cut out for yourself."

    SAP's move toward Web services is a double-edged sword, said Joshua Greenbaum, analyst at Enterprise Applications Consulting. "You invite a plug-and-play market to come in and steal your customers," he said. "Every new application that SAP builds could have a competing application from someone else. Because NetWeaver is open, there is no customer lock-in at all."

    The term "lock-in" refers to the tendency of software suppliers to make their programs incompatible with those developed by other companies, although many predict that model is doomed because of the advent of Web services.

    Another former SAP executive-turned-competitor said SAP is not comfortable with Web services, which makes software providers interchangeable. "They can't resist the challenge of saying to customers, 'We'll do that for you. You don't need another partner,'" said Jeremy Coote, president of SAP rival Manugistics and a former president of SAP America under Wahl.

    And new markets created by Web services are likely to be in smaller niches, in which nimbler competitors have an advantage over the enormous SAP, wrote Bob Liao, analyst at Dresdner Kleinwort Wasswerstein Research, in a recent research note. Liao, who declined to make further comment, has a "sell" rating on SAP's stock.

    Sitting it out
    One of those nimble competitors is The San Francisco company, expected to offer its shares for public trading later this spring, offers applications that require only a Web browser.

    But what really has people talking about Salesforce and companies like it is the economics. Companies pay recurring monthly fees for Salesforce's software. By contrast, most customers of SAP--and Oracle, Siebel and PeopleSoft--pay up front, sometimes millions of dollars, to license the software. In addition, Salesforce updates and maintains its customer's software at its own data centers, using its own hardware, sparing customers that hassle.

    However, even proponents of this subscription model do not believe Salesforce is an imminent threat to SAP. That's because large, conservative corporations that buy software from SAP are unlikely to unplug their complex, customized systems for tracking inventory and logistics for a pay-by-the-month service. SAP's Agassi recently told CNET that the buzz around subscription software companies is "more hype than reality."

    But SAP may be missing out on future growth by ignoring the subscription model. According to a March report from researcher IDC, 43 of 100 software makers it polled believe they will derive a majority of their revenue from subscription agreements, rather than perpetual licenses, by 2010. And AMR Research says subscription software is on a growth trajectory in the customer information systems arena, while demand for software sold under the traditional model will remain relatively flat.

    Analysts say SAP is playing it cautious--it's unclear what adopting the rental model would do to its profits. One risk is "churn," customers switching software services--more easily done when the client hasn't sunk a bunch of money into its existing system, and won't have to lay out a lot for the new one. Salesforce called this out in its pre-IPO regulatory filing as a risk factor.

    Nevertheless, SAP will suffer for its reluctance to adopt the subscription model because it's the way companies will increasingly buy software, said Salesforce's Benioff. "Five years from now, (SAP) will mostly be living off their maintenance revenue," he predicted.

    The Microsoft threat
    Although SAP dwarfs Salesforce in revenue, the latter does particularly well at signing up small businesses, a segment SAP is eager to target. For that reason alone, SAP would be wise to get in on the subscription software act, as competitors Oracle and Siebel have done, said Ray Lane, a partner at venture capital firm Kleiner Perkins Caufield & Byers, and former president of SAP rival Oracle.

    SAP recently relaunched an initiative to tackle smaller accounts, but not with subscription pricing. Instead, SAP has developed a cheaper, scaled-down version of its software and is striking up reseller partnerships with computer dealers that cater to small businesses. The company has tried this before and met with limited success, but the stakes are higher this time--Microsoft has entered the picture.

    Microsoft scooped up two smaller SAP competitors for $2 billion a couple years ago and has set to work redesigning the programs to incorporate Web services and tie-ins to other Microsoft technology. The company's goal is to make its business applications unit a $10 billion business by the end of the decade. "SAP's No. 1 worry is Microsoft, not," said Robert Wenig, founder of TeaLeaf Technology and a former director at SAP's Palo Alto, Calif., research center.

    It remains to be seen how the SAP-Microsoft rivalry will play out, but analysts agree the small and midsize business market is a critical one for SAP. "That market is just as big, if not bigger, than the market they have," Lane said. "I think they risk not maintaining the market share they have today" if they lose that fight.

    While SAP has serious challenges, none of the competitors, former executives or analysts interviewed for this story would count the company out. After all, SAP has in its favor enormous capital, legions of skilled engineers, a coveted customer base and a track record of prevailing in its endeavors.

    "SAP is a persistent company," Merrill Lynch's Maynard said. "They haven't always been the fast first mover, but once they decide to go after a market, they'll get it right eventually."

    more later....
  2. alok

    alok New Member

    Jul 24, 2004
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    S/W Engg
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    one more Microsoft step to monopolise in IT World.but beating Sap is not taht easy .
    AM i right

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