Whenever the effects of the new Internet economy are discussed, someone always sketches a profile of the sort of company that will not survive the e-revolution. Typically, those tipped to go to the wall are huge, slow-moving corporations, not given to collaboration and resistant to change. Which is why the seers might just as well go the whole hog and call this nameless, doomed organisation SAP: these attributes are the ones most commonly associated with the $6bn software corporation.
Clearly, these attributes have so far served SAP well. The company has led the enterprise resource planning (ERP) sector since the early 90s, and now has 35% of the market, according to Gartner Group. The achievement is even more impressive given that SAP concentrates its efforts on the top tier of the enterprise market.
But the Internet has presented SAP with a huge challenge. Concentrating on software with the enormous task of bringing together every department of a corporation (accounting, finance, procurement, supply chain, stock inventory and all) has given SAP a business culture seemingly at odds with today's market. What customers have always wanted is choice, but in the early 90s the only choice users could make about ERP was which brand of proprietary software to buy. As market leader, SAP was like IBM in its heyday: it was the best of its kind and refused to have any truck with any software module not develop by its own experts.
Now, however, the Internet has changed the ERP market in the same way that personal computing gave customers the choice of someone other than IBM. "Gone are the days when SAP could dictate market direction," says John Hagerty, vice president of AMR Research. "In the 90s, SAP had the market clout to steer enterprise computing in whichever direction it saw fit. But its power was sapped as users grew tired of waiting for the company to deliver on promises that businesses were demanding. SAP brought many of its problems on itself."
Nor are these problems going to disappear overnight. SAP is a massive organisation whose software is at the heart of some of the biggest corporations in the world, and with a finger in the pie of every industry sector that matters. Though customers are unlikely to throw out the millions they've already invested in SAP implementations, their impatience with the company could lead them to consider other suppliers in the future. The guaranteed licensing, support and maintenance revenue SAP can look forward to in the next five years will keep the company ticking over, and its sheer size makes it highly unlikely to be taken over. But in the long term the suitability of its business culture for the Internet needs to be addressed. "SAP's management gradually realised that customers these days don't want everything from a single supplier," says Hagerty. "SAP always wanted to be all things to all people, and to build its own software in response to customer demand. Now it's finding that people can't wait that long."
SAP's UK spokesman Simon Harrison says the one-stop-shop model has always been regarded as one of the company's strengths. Customers are reassured by the integrity of the product, and the fact that a single development team has produced the entire system inspires confidence. When a huge corporation puts a business system at the heart of its operation, it's reassuring to know it was integrated and tested to within an inch of its life by a single team of developers, all of whom share the same goals and working methods.
And sure enough, few IT managers would trust a mission-critical system to a mish-mash of crudely cobbled together software routines produced by competing teams of developers. "Customers want to know who takes responsibility in these situations," says Harrison. "That's something only a single supplier can give a convincing answer to."
But the problem now is that the Internet has opened up the scale of the development task to such an extent that even SAP cannot compete on all fronts. SAP produced a great ERP system that the market loved, but then the Web changed perceptions and everything that had gone before got kicked into touch.
"The thing about ERP systems is that they are inward-facing," says Hagerty. "These are internal systems for employees of the company to access. But the Web opened things up and suddenly companies found they wanted to be outward-facing, to use IT to disclose more information about themselves."
The debate about how ERP systems could be Web-enabled, so that companies could use their IT infrastructure as a tool for marketing and issuing product information, was one all the big suppliers had to participate in. But whereas Baan, Siebel and Intentia all faced the same challenge, SAP had a unique problem. The company had branded itself on its ability to fight on all fronts. If it stuck to this philosophy, it would inevitably fall behind in the race to develop Web-enabling modules for its R3 systems. If SAP was to bring these new solutions to market quickly enough to satisfy its customers, it would have to rely on partnerships.
The early signs were that SAP was about to change its philosophy. "Tight integration is still important, but it's easier and less costly to get that level of integration through partnerships," SAP CEO Henning Kagermann told a SAP utilities conference.
But having pledged a Web strategy, SAP then sent out confusing messages to the market, which didn't inspire confidence in its ability to deliver. "The SAP Web strategy was launched with a lot of hoop-la, but it was difficult to find anyone who could talk about it very effectively," says Hagerty.
The few tangibles that did emerge from its Saphire user conferences in Europe and Philadelphia seemed at odds with each other. The Internet was something all corporations would need in the future, Kagermann told the first user conference, but it was not designed for storing data or huge transactions. "It cannot be substituted for the business applications companies have in place today," he told the European users. A few months later, in January 1999, he told the US user conference of the company's faith in Mysap.com, SAP's new electronic marketplace.
Another version of the future appeared to be on offer. "It all seemed incredibly amorphous at first," says Hagerty. "They told one group of people one thing, which was presumably whatever it was they wanted to hear. Then they told the next people something else. By about September last year they were starting to get their story together. The execution is still lacking though."
With Mysap.com, SAP aims to provide a trading portal to serve the industries of its existing customers. By putting itself at the hub of an industry in the same way as its systems used to be at the hub of its customer operations, its Web strategy appears to mirror its product strategy. A very brave decision, says Johan Berg, president of ERP rival Intentia. "Our Web strategy is to have an open interface to e-market," he says. "SAP has chosen to provide the market itself. It wants to be a trade portal and put itself at the centre of the market but we have customers who want to start their own e-markets and meet their own industry's manufacturing and logistics needs. We don't want to compete against our customers." Intentia and SAP, incidentally, compete at different levels of the ERP market. SAP's R3 system typically runs bigger and more complex operations which Berg believes accounts for their higher failure rate and longer installation time, while Intentia operates at the second tier. Intentia has a lot more customers (5,000 installations worldwide) but on a much smaller scale.
If the Internet is to rob SAP of one of its selling points at the high end of the ERP market, it could well compensate by opening up new vistas of opportunity. Application service provision promises to make SAP installations far easier and faster, which Durlacher Research predicts will entice many SMEs to take advantage of R3's proven cost savings.
The ASP market is some years from coming to fruition, however, and in the meantime SAP's traditional customers will anxiously follow developments of Mysap.com.
Gartner Group advises end-users not to wait for the dust to settle while ERP suppliers get their Web functions, (such as those for customer relationship and supply chain management) up to speed. Users can't afford to wait for the competitive advantages these functions will give them. In which case SAP's customers are likely to stick with their trusted supplier, and use the new front-end partners, such as ITNet, to do the necessary integration. Meanwhile, SAP has the added bonus of being able to address the SME market, when application service provision becomes a reality.
The next three years will be crucial in turning the company culture around, predicts Mil Milojevic, director of SAP services for one of the new SAP partners, ITNet. "To deliver e-business through Mysap.com SAP needs to transform the core values that made it strong - namely, control, integration and homogeneity. These values are out of step with the Internet economy."
Timeline: Sap's Year
May 1999: SAP unveils its Internet strategy. The strategy, Mysap.com, has four elements: employee workplace, business scenarios, a portal site offering an online marketplace, and a Web-based application hosting service aimed at SMEs.
July 1999: SAP's Q3 results show revenue up 7% to £722m but profitability down. SAP blames low licensing revenue in Japan and US and poor UK sales.
September 1999: SAP files 'predatory hiring practice' lawsuit against rival Siebel Systems, claiming Siebel is systematically poaching employees to gain trade secrets.
October 1999: SAP's Q4 results show profits down 64% on previous year. Chairman Hasso Platner "disappointed".
February 2000: SAP creates online utilities marketplace, claiming it can drive down procurement costs.
16 March 2000: SAP announces it will invest £308m in setting up a company to provide Internet marketplaces for the business-to-business market.
21 March 2000: SAP drops lawsuit against Siebel. No reason given.
13 April 2000: SAP launches XML-based interface repository, as part of its Net offensive.
20 April 2000: Kevin McKay, CEO of SAP America, resigns.