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,
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
See also our other recent Short Takes.