B2B Analysts
About the Company   Services   Research   Pressroom  
Short Takes
Profit Optimization

Walldorf and Cambridge

SAP's September II

In the second of two consecutive Short Takes about SAP, we look at SAP's September. It's presented as a dialogue between our ever-cynical European Correspondent (EC) and our ever-sunny US commentator (US).

The Numbers

EC: Very senior SAP management has reportedly been worried since mid-month about a hostile takeover if SAP does not make its numbers. Remember, the pooling agreement that had protected SAP from this was cancelled.

US: Clearly, it's more of a danger than it was. But who would buy? Microsoft? An LBO team would be forced to take on SAP's culture, and that's a fearsome prospect.

EC: SAP Radio (the internal network), broadcast on Monday that management is holding to its profit forecasts. There will be no profit warning this quarter. In other words, hang on to your stock, you nervous SAP employees. Our usually accurate sources concur with management. Numbers will be made, but it is not clear how.

[US] In the US, our contacts in the sales force are very cautious, but not downbeat. "We made our low target, rolled a couple of deals over to next quarter, but they'll be richer next quarter." Another said, "They're doing better in Europe than here; the last two European salespeople I talked to had made their numbers."


EC: I don't believe in the SAP-projected margin of 21%. I think 17-18% is more like it.

There is much debate about the off-balance sheet costs of Commerce One.

US: Rumors have been flying that SAP will just buy Commerce One out. This is after the huge Q2 writedown (315 million euros, roughly the same as the operating income for the first half) on the Commerce One investment. (Remember, folks, margins are reported exclusive of this writedown.)

EC: More important are the real costs. SAP SI (SAP Systems Integration) is laying off 200 people. And Gerd Oswald has announced that a port of Business One to non-MSFT platforms will be delayed until there is demand.

US: In the US, too, there are rumors of cutbacks. But right now, the visible cutbacks are in things like eliminating discretionary travel, cutting back on consultants, and taking cell phones away from administrative assistants. Not enough to get back 3% of margin.

EC: All external contracting is at a halt. Somehow, it feels like the wrong approach. SAP is saving money by holding its breath. And the colour of the skin has a bluish tinge.

Business One

US: Speaking of Business One, we're hearing nothing about Business One in the United States. Does it have any impact in Europe?

EC: I had another look at Business One. It is the proverbial fat client — an anachronism these days. Explains why nobody really wants to host it.

There is another low-end ERP solution out now in Germany called Semiramis. It is all Java, very scalable, 10 installations, 3 verticals. It is what SAP should have done. Who would have thought that [engineering-oriented] SAP would touch such a thing?

Bill McDermott

US: There's a new CEO in the Americas, Bill McDermott, formerly of Xerox, Gartner, and Siebel.

EC: Yes, I was wrong. I thought they'd hold off hiring somebody.

I'm pretty sure that he's been hired to kick the sales people into their bun. (That is what he learned well at Xerox.) And it may be required. He will not excel at comprehending the complexity of ERP. He will not be a visionary, given where he came from.

US: He's gotten a fair amount of undeserved abuse here. One analyst said, roughly, "Every company he's been to, he's left in worse shape than when he started. Xerox? In collapse. Gartner. Downhill. Siebel? We know that story. Why should it be different at SAP?"

EC: Typical analyst talk. The earthquakes at those companies were due to tectonic shifts, not the mistakes of one individual. Particularly at Siebel. This is a company that is passionate about sales; if there has been a failure there, you have to start blaming the guy at the top, Tom Siebel, not pin it on Bill McDermott.

US: We know some people who had worked with him. Former employees at Gartner and Siebel were quick to be positive: "Decent person." "Likable." "Supportive." The most common negative was, "ineffective," but this was followed by a recognition of the difficulties of the jobs he has held. Clearly, he is not a savior, but so what.

EC: But then you have to ask what his charter is.

US: There seem to us to be two possibilities. One, he was hired to give a boost to CRM sales in the US. If you're looking for a rational reason, that has to be it (aside from the dubious pleasure of hiring somebody from a company that took Paul Wahl and Jeremy Coote from SAP).

EC: But isn't there something bigger? From the European point of view, cost of sales is very high. Switzerland returns 85% of its revenues to Germany, but the US returns only about 50%.

US: You're ahead of me, as always. SAP has to hate the high cost of sales in the US. With very few megadeals these days, I can see them reasoning, why have a cost structure designed around superstar salespeople. Why not move to a sales force structured more like Gartner's or Xerox's: paid reasonably well, not at levels beyond the dreams of avarice.

So possibility two would be that he was hired to restructure sales in the US along these lines. It's an appealing idea, though probably a bad one.

EC: I'm with you. With his background, for instance, he will have a hard time mastering the issues of international account management — an area that needs addressing very much.

US: It all depends upon how much you think the rules of the game have changed.

Maintenance and Shelfware

EC: We think it's a good idea for SAP to increase its maintenance, which we expect them to do next year. For one thing, we think they can get it. For another, there's some justice to it; it helps fund innovation, pays for the cost of supporting increasingly complex software.

US: At the same time, we're seeing plenty of evidence that some companies are asking for givebacks on maintenance. Either they don't want to pay for seats that they're not using, or they think the fee is already too high.

EC: The best answer is, "Use the seats." But of course people are deterred by the overall cost of implementation, even if the seats are free.

US: It's certainly an opportunity to play hardball with the customers. Say you paid for 10 factories worth of seats and are now paying maintenance on all 10, but you only implemented two. Even though your maintenance for the 10 is almost the cost of license for the two, you could be forced to pay it, when the alternative is shutting down the factories.

The experience at Pfizer, of course, might be relevant here. As we understand it, when Pfizer acquired Warner Lambert (a major SAP user), they chose to replace the entire SAP installation in the pharmaceutical divisions with point solutions. (W-L also makes consumer products like Listerine, and that division (which may be sold off) was not affected, as we understand it.) Why? Sheer cost. The new systems had a lower total cost of ownership than the already paid for and installed SAP.

EC: SAP is trying to do something about these costs to the customer, but it will take a long time to implement.

To see other recent Short Take, click here for a listing.