How SAP became the world’s third largest independent software supplier

"We are nowhere near best-in-class, but we are making progress," says Steve Rogers, UK managing director of SAP to an audience of his customers at the German applications firm's annual user gathering at the end of last year. It's not the kind of comment that you expect from a senior executive at a leading software firm.

"We are nowhere near best-in-class, but we are making progress," says Steve Rogers, UK managing director of SAP to an audience of his customers at the German applications firm's annual user gathering at the end of last year. It's not the kind of comment that you expect from a senior executive at a leading software firm.

Rogers was talking about the company's relationship with its users - something which he clearly finds to be wanting in several respects. "When I joined, I was surprised at how remote SAP felt from its customers," he admits. "It didn't have the customer at the centre of its universe.

"A little complacency had crept in to the way we managed relationships with customers. We have focused hard on overcoming that in the past 12 months. Customers are seeing more of SAP and SAP is trying to be more proactive in how we support customers and helping to leverage the assets. We have seen customer satisfaction scores trending in the right direction."

Such sentiments are clearly to be applauded especially as market dynamics over the past few years have placed SAP in an ever more commanding position in the applications industry and indeed within the wider software industry. The firm's lead in the applications market varies according to which research firm's numbers you're paying to believe, but all agree that SAP is ahead of the pack.

It was 1972 when five former IBM employees set up Systems, Applications and Processing in Data Management - thankfully shortened to SAP - in Mannheim, Germany. Their intention was to "develop standard application software for real-time business processing. The first fruit of this ambition was R/1, followed by R/2.

It was the 1990s when the firm introduced what is probably still its best known product, R/3, on the back of the client-server revolution complete with three-tier architecture of database, application and user interface. It was during this period that SAP really rose to prominence among enterprise users through a series of alliances with the leading systems integrators, most notably Accenture. Recommendations by the major consultancy firms took the German company into the boardrooms of corporate America which had traditionally had its doors firmly closed to European software suppliers.

This was also the period when a number of popular perceptions about SAP were firmed up. SAP was arrogant. It was difficult to do business with. R/3 was horrendously complicated. It was a nightmare to install. You would end up paying up to $20 to Accenture for consultancy for every $1 you spent with SAP on the actual software. But none of this halted the firm's relentless domination of the enterprise resource planning (ERP) back office market and provided it with an installed base from which it would expand into other areas, such as customer relationship management (CRM).

So to today when SAP is the third largest independent software supplier in the world with more than 12 million users, 121,000 installations worldwide, more than 1,500 SAP partners, over 25 industry-specific business solutions, and more than 41,200 customers in 120 countries. The firm is now committed to moving towards a full service oriented architecture (SOA) with underlying Netweaver integration platform and is aiming to move down into the mid-market user base with its long-awaited software as a service (SaaS) push through its recent Business Bydesign announcement.

But there are issues to be addressed. Most notable has been the firm's inability to get its users up onto the latest releases of its products. Customers have been loathe to run at SAP's pace and the firm is having to make concessions and pitch its wares more effectively. "SAP has a delicate balancing act between old and new," says Bruce Richardson of analyst firm AMR Research. "More than 99% of its 44,000 customers run on one of its three core systems. Life was much simpler when SAP launched R/3."

The good news for SAP is that users do seem more open to upgrades this year. According to a December 2007 survey by Gamma Enterprise Technologies of 175 SAP customers from 23 countries, 37% plan to upgrade in 2008 while a further 17% have similar intentions for 2009.

"A year ago we had a planning horizon of 12 weeks and falling," concedes Rogers. "We are strategic suppliers and we were trying to convince customers to spend money that was not necessarily linked to business benefits with 12 or six week's notice. If there really is no business value from an upgrade, let's have a conversation. If you are not leveraging the Business Process Platform or Netweaver as a starting point, I feel you are missing something."

There are certainly those that are open to such a message and such conversations. In 2004, Harrods began its mission to replace legacy back-end silos with one SAP system. With the migration completed in late 2006, the retailer has been running a master data system where invalid entries on stock are down to 0.01 per cent on 1.4 million stock keeping units (SKUs).

As a result, shrinkage - lost, missing or damaged stock - has been kept at 0.7%.

"We are a SAP house when it comes to ERP and back office and plan to extend our SAP portfolio," says David Llamas, CIO at Harrods. "At the moment SAP provides our ERP system and within that environment everything that we buy is from SAP. We now have a single SAP backbone as opposed to having legacy systems for particular retail areas like food and beverage or home shopping. Before upgrading to any new version of SAP, we wanted to migrate all legacy systems onto that."

"I can categorically state that we have an extremely healthy relationship with SAP. It's a strong collaborative relationship. SAP places a strong emphasis on having a strategic relationship with CIOs. We have very senior level discussions with the firm about their roadmaps. We contribute very definitely in communicating the issues that we have to face. To date,it has been a good exchange of information."

Facing the enemy

As SAP has grown, its relationship with Oracle has become ever more problematic. The first releases of R/3 were built around the Oracle database, a commitment the US firm rewarded by launching its own rival range of applications. Since then the two firms have been on a remorseless collision course, exacerbated in recent years by Oracle's decision to buy its way to second place in the applications market through the takeover of firms such as Siebel and Peoplesoft.

This has led to some direct conflicts between the two vendors, most notably when the two went head to head to snap up retail applications specialist Retek (Oracle won). But on the whole SAP has prided itself on increasing market share through organic growth rather than buying it - until recently when it launched its surprise bid for business intelligence firm Business Objects.

"SAP's direction has always been clear delivering innovative and market-leading products to our customers and profitable growth to our shareholders," says SAP CEO Henning Kagermann. "In the end, our ambitions will be reached primarily through organic growth. SAP has shown that we can outperform the market with significant organic growth, and we will continue to do so.

"While the offer for Business Objects is for much larger acquisitions than we have done in the past, the concept behind this acquisition remains the same, enabling our customers to benefit from an even richer portfolio of innovative products and solutions. It's not about acquiring customers, market share or maintenance."

Maintenance is another area of conflict with Oracle. When Oracle bought PeopleSoft, SAP hoped to lure away sceptical users by snapping up third party maintenance and support firm TomorrowNow to ease migration fears of those who wanted to move over to SAP. This has backfired spectacularly: firstly because the reality was that very few Peoplesoft customers ended up making the leap and secondly because Tomorrownow is at the centre of horribly embarrassing intellectual property theft allegations relating to "inappropriate downloads" of Oracle material.

Barring some last minute developments it will end up in court - and the public spotlight - in February. In the meantime SAP, which has been distancing itself from its subsidiary, might well try to offload it once and for all. Whether that solves the longer term bad publicity and the impact on SAP's reputation, remains to be seen.

"Ultimately I think SAP Is going to sell it off," says David Bradshaw, principal analyst at research firm Ovum's software group. "Tomorrownow was all based on a misreading of what was going to happen. There was a sense that lots of people would be so annoyed with Oracle that they'd dump Peoplesoft and go elsewhere. But people realised that it would be more difficult than that and also Oracle has done rather well in bringing Peoplesoft customers around, even if there are a lot of people who would prefer that Oracle hadn't bought Peoplesoft in the first place."

Bradshaw argues that there are pros and cons associated with Oracle and SAP's increasing domination of the market. "From a CIO point of view, it makes choices easier as you basically have two sets of people you turn to," he notes. "It makes life easier as you have a smaller range of vendors with a larger group of applications to buy from.

"There will also have to be more accommodation between SAP and Oracle. Obviously SAP thinks you should buy everything from SAP, but outside a few places that isn't likely. In the long run, there might be a third choice that comes out of the blue. Microsoft might be considered a third party or someone like Infor. There are potential third choices, although none of them yet has the presence of SAP and Oracle."

Making SaaSy moves

The rise of software as a service (SaaS) start-ups like has not gone unnoticed by SAP, even if its initial strategy was to rise above it. But the mid-market is critical to SAP meeting its growth targets and SaaS is now seen in SAP circles as a way of cracking a sector that has long remained elusive for a vendor associated with "big ticket" implementations.

The result was the announcement of Business Bydesign, SAP's long delayed on-demand offering which was finally formally announced late last year. "Announced" is the operative word as to date it's available by invitation-only and only in certain geographies. But expect to see a significant ramp-up of SaaS activity in 2008.

After its slow start in the SaaS game, SAP is brash in its claims for the eventual offering. "What we have today is much more competitive with, as well as anything else that's out there," claims Bob Stutz, SAP senior vice president for CRM."We have an advantage because we own the back end."

But others are less convinced. "SAP has talked a lot about improving its CRM offerings, but it has yet to show that it understands the on-demand CRM market," says Rebecca Wettemann, vice president of Nucleus Research. "It has also yet to prove that it understands the needs of the mid-market."

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