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Profit Optimization

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Managing the Profit Stream

No big product news at Sapphire, but SAP does have a clear and logical new product stream. The integration framework/app server is released. The x-apps are announced. Maturity and revenue should follow by 2004 (perhaps earlier).

There's another, little-heralded product stream, the micro-apps. Industry councils are telling SAP, "Make me such and such." The insurance industry asks for claims management. Utilities look for help playing in the energy markets. There's no competition for these apps and potentially little cost of sales. And SAP is building them.

So here's the plan. Most sales to the installed base. Infill of SAP R/3 (SD, CO, PP) where needed. SCM and CRM (and someday, SRM). Business One where needed. New apps later and micro-apps coming in steadily. And gradually add in new customers. Not a bad plan.


SAP is scrambling to become the company that can execute this plan. Today, every part is at risk. Will the x-apps take hold? Can the micro-apps be built profitably? SCM/CRM are under-built. And the infill strategy requires a consultative sell.

This last problem is the most difficult one. SAP now sees it as a problem of account management. At least four different executives complained of this, and one executive in the Americas promised an up or out review of all account execs in the near future.

If that were the problem, bringing the hammer down might work. But the problem is deeper. My analyst friends say that SAP customers are digesting the installations. Wrong. A lot of the installations are being indigested.

Salespeople don't fix indigestion (they cause it). These customers need to do some careful work just to extract the promised value. Then they need more careful work to determine which new licenses are needed when.

SAP doesn't have the resources or the model to help with this work. They need more business consultants, and they need a model that returns revenue from the help their customers need.

(Right now, for instance, SAP gives away consulting services, as an investment in new sales, essentially trading service for license revenues to make all my financial analyst subscribers happy. Confused, but happy.)

Consulting, micro-apps, stomach pills. It's not a jazzy business. But it is the business SAP is in, and it's one that SAP needs to figure out how to run.

Can the consulting companies step in? They're no better equipped for this kind of value realization-incremental build consulting than SAP is. And they are viewed with suspicion. At Sapphire, all the Big 5 had smaller presences. And only PWC was crowded.

My guess is that SAP will eventually figure this out, but there will be a hesitation while they do it. In America, for instance, Leo Apotheker, who is known for his, er, realistic attitude toward performance, has been brought in to clean things up. Cleanup will happen, but the result will also be turmoil, and some needed changes will be slowed.

So I'm worried short-term, despite the real strength of the company.

I'm also worried long-term. This company is still valued as if it can just print software.

Look at the numbers. Roughly, SAP is valued at $33 billion. For simplicity's sake, let's assume that customers will have to spend $50 billion at SAP over the next 5 years to justify that. With the current business model, that means the customers will have to spend, conservatively, $125 billion on software, hardware and services. And that means that they will have to expect roughly $375 billion in benefit from this software over the next 7-8 years.

The 20,000 new and existing SAP customers will have to average $20 million in total benefit from new software. And SAP will have to operate as profitably or more profitably than it has to date.

I think this is out of scale. Something has to give. Either SAP has to operate much more profitably. Or they have to get a far larger percentage of the total spend (either by reducing hardware costs or getting service revenue). Or they have to improve the ratio of benefit to spend. Or the value of the stock has to go down.

I think the only reasonable approach to this is to get more revenue by helping companies to realize far more benefit. But I'm not sure that approach is within SAP's reach.

One final note. It will be a lot harder to track the performance of the mature SAP that I'm envisioning. You can't just count salespeople and multiply by x times quota or look at average sales price and multiply by deals. SAP will have to manage a much more complicated revenue stream and manage it profitably. In effect, they have to manage a profit stream. And that's a lot harder than hyping corporate miracle cures.

See also our other recent Short Takes.