The Cat that Ate the Canary
Every month, every quarter, SAP draws away
from the pack, and this month's events
clearly gave them an extra push. At Sapphire,
executives were going around like the proverbial
cat that ate the canary. Who could blame
them?
I'm going to cover Sapphire in three
pieces. The first reports what happened, including
some major news that most commentators
apparently missed. The second talks about
Netweaver--what it is and isn't. The third
talks about SAP's long-term prospects (good)
and what it has to do to justify its valuation
(a lot).
First Impressions
Three distinct impressions from the SAP user conference:
- The Leadership Is There. We've seen much too much of
too many software CEOs in the last few weeks. Unlike his counterparts,
Henning Kagermann comes off as straightforward and interesting,
the sort of person you'd like to have over to the house. "Trust
us" is SAP's message these days, and Henning is an excellent
spokesman for this.
- Netweaver makes money through mySAP ERP.
SAP will monetize its huge investment in Netweaver by
ending the traditional R/3 product line. People who want
what used to be called R/3 4.7 will have to buy a mySAP license.
4.7 (oops, mySAP ERP) will run on top of Netweaver, and
the applications will use Netweaver capabilities.
- More of the IT wallet to SAP. SAP does not
expect to grow over the next few years by introducing
new classes of software. Instead, it will
grow by taking an increasing share of the IT spending on existing
applications and infrastructure.
My colleagues thought Sapphire '03 was
boring and flat. I didn't, but I like to
think it's because I was looking deeper. With software companies
relentlessly on-message these days, you can't just
get your news from the keynote and go home.
I spent most of my conference talking to mid-level SAP
people. In dozens and dozens of conversations, I began to see a company
that was slowly, painfully,
going through a second rotation, and
that I thought that was big news.
The Second Rotation: from Visionary to Partner
When SAP developed R/2 and R/3, it had a vision
of how software could work and should work.
The people who bought R/3 wanted
what the vision promised, and they wanted
to be led. The customers looked
to people like Hasso Plattner to
understand technology and exploit it
for their benefit.
Alas, the vision was flawed. SAP
found, to its sorrow, that it couldn't
build the single piece of
software that served all companies in all industries.
When SAP figured this out, it gradually, painfully
went through its first rotation, from a horizontal
company with one product, to a verticalized company
with many products.
During that first rotation, SAP developed its
mySAP product suite--first APO and Business
Warehouse, then CRM and the portal. But slightly
preceding that, and equally important, SAP organized
itself around industry verticals: automotive, high-tech,
oil and gas, etc., etc., etc.
For much of that period, the new products--both
horizontal and vertical--were quite bad. Long-time
readers know my story of the company that had bought
APO four years after it was introduced, the same
year that Hasso promised it would be comparable
to i2 and Manugistics. That
product was so unstable that the IT staff boasted
(ruefully) to me that it had spent the last
year "doing product testing for SAP."
After experiences like that, I developed a
rule of thumb for new SAP
product announcements. It was "NOT!" The product would
NOT work properly. It would NOT provide much value.
It would NOT be stable. I couldn't publish this view
--my company then took a lot of money from SAP--but
it was not terribly inaccurate. (Mind you, it wasn't
terribly inaccurate about other companies' products, either.
I think that era is gradually ending, and SAP is going through a new rotation, again
slowly and painfully. One sign of this is that some of the
products really do work. I can't check every product,
of course, but I did spend quite a bit of time talking
with product managers in areas that had been problematic.
I was encouraged by several things. First of all,
some really hard stuff has been developed and is
now in use. Here's one example. Only serious manufacturing dweebs
like me actually know what sequencing is, but it's the
life blood of industries like automotive and
high-tech box-making. (What they have
in common is that they make many different
things on the same line.) In these industries,
you often want to order products
from suppliers in sequence, that is,
if the cars coming down the line had RED, BLACK,
RED interiors, you wanted RED, BLACK, RED leather
steering wheels. But if you had R/3 MM, you
created the sequence specification off line,
then fed the
results back to SAP for bookkeeping purposes. Now,
several automotive factories (BMW in North Carolina
is the reference) actually use SAP to create
sequenced orders.
It's real and important progress. (A lot of automotive
factories can use this.) It's not gigantic. And it's
not complete. And it's pretty slow.
(I had first heard serious promises that SAP would
fully support sequencing about the same time I met
my wife to be, and I'm a father now.) And that promise
is still not entirely met. But the people do understand the
issues, and they are slowly moving forward.
Another encouraging thing--and another sign of the
rotation--is that SAP is deploying teams that
make sure new products succeed. At one of these
I'm-a-customer-and-I-love-SAP presentations, this time
by portals customers, what was remarkable to me
was the presence of a person from the SAP
Netweaver Advisory
Office, a group devoted to making portals customers
successful. Devotion of significant resources
to this kind of function is an unusual thing at
SAP, a good thing, and a sign of change.
So what is this rotation I'm speaking of?
It's a rotation from a company that leads
with technology to a company that says, "OK,
Mr. Customer, you do this, and I'll do that,
and we'll split the benefits."
My friend Michael Treacy would call it
a shift from a product-focused company to
a customer-focused company. Customer-focused
companies do what their customers want
them to do and take a cut for doing it.
They measure themselves on their customer
satisfaction (not
an SAP hallmark, in the past) and perceived quality.
They are not operationally efficient, but their
customers stick with them.
In the technology space, one sign that a company
is customer-focused is that they follow their
customers; they don't lead. This was perhaps
the most striking feature of my conversations
with product managers in several areas. Even
in areas where software companies are still
driving innovation (like SRM),
SAP is content to figure out the market slowly and let
customer demand (and willingness to pay) drive
innovation.
If confronted with this observation, the leadership at SAP might
well quibble over semantics. Henning, for instance, in public and
in private, says that SAP is
a technology company that brings innovation
to customers. Agreed. But what I'm arguing is that for the next
5-7 years, the way in which technology is developed and brought
to the customer is changing.
SAP is still interested
in providing innovation, but it does not seem to be innovating.
Instead, it takes other people's ideas and puts
them on the SAP platform.
And why not? As Henning rightly said at the news conference, this
shift in role is really the only way SAP can grow.
More of the Wallet to SAP
Let's face it. For the foreseeable future, there
are no big new business applications. GLs are done.
CRM, SRM, and SCM are not done, but the broad
brushstrokes are laid in. In that environment,
it's fair to ask,
where is SAP's growth coming from?
For the next few years, it's coming from saving the customers money,
particularly money in IT.
In his keynote, Henning said, 90% of IT spending
goes for consolidation and operations. SAP
would like reduce this to something like 60%.
ASAP will grow, clearly, by getting some share of the benefit.
When you look at total IT spending right now, the amount
going to SAP is very low. According to SAP's
figures, 7% of IT budgets go for license revenues.
Henning would like the total amount going to SAP
to increase to 10% or beyond, something he
can do just by reducing other costs. "We need to
get more of the customer's wallet," he said in the
press conference.
Some of this "more," will come at the expense
of hardware vendors. Some will come by reducing
IT staff. And some, I think, despite protestations
to the contrary, will come from extending a
helping hand, a la the Netweaver Advisory Council.
This isn't a bad thing, and besides it's necessary.
Most technologies are used much less than optimally.
To achieve the savings Henning foresees, customers
must learn how to use the technologies they have and
are getting more effectively. And you don't do that
just by sending them a CD or two.
This doesn't mean that SAP is planning to become
a services company, nor does it mean that it's
trying to take out its partners (though the hardware
partners might be shuddering a bit). It does
mean things like a gradual increase in advisory
services, more paid engagements as part of delivery
of innovation, perhaps even some ventures into
developing or taking partial responsibility for
web services. (A lot of web services involve
content.)
"More of the wallet" does mean more
license revenue from customers (as a percentage of
total spend), because SAP is doing more of the work.
But it also means more work on insuring that customers
extract the value that is available from the software.
And who better to help customers with this than SAP?
What is this rotation? SAP is turning into
a customer-oriented company that is taking
more responsibility for the value the software
provides and is getting paid for
taking that responsibility. It
is less interested in leading
customers and more interested in
helping them out. No, it's not
jazzy, but it's a good thing.
If this rotation still seems a little baffling
to you, just step back for minute. It is very clearly
symbolized by the change in leadership.
At this conference, Hasso, the embodiment
of technology vision, wore
the resplendent white suit of a
an aging German count at his keynote,
did not have a prepared message, and
talked about golf
at the cocktail parties. Technology vision,
evidently, is grand, but past. Henning,
by contrast, talked about TCO at his keynote
and P/E ratios at the cocktail parties. I didn't notice his suit.
Monetizing Netweaver
If this discussion makes financial analysts
nervous, well, it should. Yes, it's a
tremendously successful company. Yes, its
competitors are committing seppuku. But
will improving the mySAP products and
staking out a claim on the customers' wallet
really drive enough
growth?
SCM, SRM, and CRM won't do it. Neither
will selling to the mid-market. To make
this work, the key is Netweaver, but
Netweaver is still more of a marketing idea
than a product. So how will Netweaver drive growth?
Part of the answer, I think, is in an
announcement that most commentators seemed
to miss.
SAP is upgrading its ERP product line, adding
new modules and new functionality and changing
its underlying platform. It is not calling the upgrad
Version 4.7 of R/3 Enterprise. It is calling it
mySAP ERP.
Excellent marketing. But there's a kicker. Customers
will have to buy mySAP licenses in order
to get mySAP ERP.
To an ERP customer, this can sound nasty. They're
already paying for upgrades. Why is there a not-so-small
charge for this one?
There are three answers to this, and none is pretty.
-
One, you're really paying for mySAP components
that are now embedded in mySAP Enterprise, e.g.,
the portal, business intelligence, and
the integration framework.
- Two, there are a lot of new modules, not
enhancements, included in mySAP ERP (for
which you'll still have to pay seat prices)
- Three, you pay a relatively low maintenance
fee, and that doesn't pay for a total
revamp of the platform, which is what
you're getting with Netweaver.
In effect, this is what Microsoft does
with operating systems. You pay for the
upgrade, because you get more stuff, et c'est tout.
The trouble is that SAP customers already
pay for the upgrade with their maintenance fee.
If the upgrade now bundles in a lot of new
stuff, which
their maintenance fee paid for developing, and
they then have to pay for the bundle, aren't they
entitled to feel put upon?
Well, so far, not as put upon as I might have
expected. The
press has not seized on this. Customers I've talked to have
been noncommittal or mildly positive. There actually
seems to be more customer objection to the recently
raised maintenance fees for obsoleted versions
than there is to paying extra for mySAP ERP.
And if the customers don't rebel, SAP may have figured out how to grow. Only
30% of the customer base now has mySAP licenses.
Force the rest to buy
some of the new products developed during the
previous rotation, and the money for SAP will
be pretty good.
Of course the growth is limited by how fast
SAP can make the upgrades happen. Even if customers
aren't squawking like a snared parrot
about this upgrade, they can still be passive
aggressive and move slowly. I imagine that
SAP is offering some significant inducements
to help speed this up, but these are not a matter
of public record.
With SAP, of course, neither
prodding the sullen customer, or persuading
the merely stupid one is something they do very well.
Handed
out at the conference were little memory sticks
devoted to the upgrade and upgrade process.
I went through all of it, and I'm not at all sure
I get it. I don't think it's a case of "The message
is unpleasant so obfuscate." I think they've
made it really complicated. Maybe they need
a mySAP ERP Advisory Office to help people out.
One thing did come out quite clearly. In order
to upgrade to mySAP ERP, customers will first have
to upgrade to R/3 4.6C. To get the new version, which
you pay for, you have to go through two upgrade cycles.
Back in my QAD days, I was partly responsible for
making a mistake that has eerie similarities.
We told customers that they
would have to upgrade to 7.0 "on the way" to 7.5. Two
upgrades.
The customers reacted with fury. Fury. Anger, nastiness,
midnight phone calls. All unnecessary of course.
If we had just had the common sense to tell them that it
was one upgrade and just made it seem that the upgrade
process took two steps, we would have
saved ourselves untold grief. Well, maybe SAP
customers are more tolerant or more perspicacious.
In any case, this kind of fan isn't quite ready for any
flying objects from customers. Not all the products
have yet been rewritten using Netweaver as the base.
(The interface changes, among other things.) The
target is Q1 2004. Only then will people be able
to see everything that mySAP ERP gives them.
I will talk more about Netweaver in the next Short
Take. You are getting a lot with it. But right
now, it appears that getting people upgraded and using
the product in a way that saves them money will be a significant
test for the new SAP.
The Cat and the Canary
We have to close with a quick look on the sales side.
Some representative notes.
Question for Bill McDermott. "I was under the
impression that you were brought in to reduce
the cost of sales in the Americas, but here you're
hiring all this executive talent?" Answer. "I was
brought in to reduce S, G & A. And I got a lot of
savings in G & A, which I'm using to fund the
increases in S.
Question for Leo and Henning (reported by
another industry analyst). "How's the quarter?" Answer.
"They went through every geographic region, and
except for Germany and Latin America, it looks very good."
From a small competitor. "We won one recently
against JD Edwards, thanks to all the turmoil.
We've run into SAP, too, and they buried us."
And that, I think, pretty much says what's
happening there.
To see other recent Short
Takes, click for a listing.
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