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).
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
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
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
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.
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?
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
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.
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