24 Hours With SAP

SAP brought close to 200 employees to Boston for the company’s Fifth Annual SAP Influencer Summit. The audience consisted of 340 analysts, journalists, bloggers, academics, customers, and software and services partners. Given how closely we follow SAP and how much we write about the company, I can’t say there were a lot of surprises for the AMR Research analysts. Nonetheless, there is still plenty to write about for this week.

My primary interest in attending was to hear the morning keynotes, followed with one-on-one meetings with the top SAP executives, including CEO Henning Kagermann, Dr. Peter Zencke, and the members of SAP’s executive council. Mission accomplished. I was able to squeeze all of the keynotes and the meetings into a single day.

While past summits have been held in Phoenix and Las Vegas, this year’s event was held in Boston at the Westin Hotel, a 15-minute walk from our offices. In exchange for not having to fly to the event, how did we return the favor? Our city greeted the mostly German and Bay Area visitors with a snowstorm upon arrival, followed by subfreezing temperatures for the rest of the week. I wouldn’t be surprised if next year’s event is held in Orlando or returns to Las Vegas.

Rather than risking reader fatigue, I’m going to focus on three core ideas gained from the summit:

- Business ByDesign is the foundation for SAP’s next-generation application platform. It will ultimately replace the SAP Business Suite, albeit gradually and maybe transparently over a 5- to 10-year horizon (or more).
- In the interim, SAP will retain customer loyalty through Enhancement Packs and continued NetWeaver investments that move SAP Business Suite closer to Business ByDesign.
- The business user, critical to SAP’s future revenue stream, may be placing it in a potential showdown with Microsoft.
“I’ve seen the future of SAP software, and its name is Business ByDesign”

In 1974, Jon Landau wrote a memorable line in Rolling Stone that music fans still remember more than 30 years later: “I’ve seen the future of rock and roll, and its name is Bruce Springsteen.”

As you watch Business ByDesign develop, you see the future of SAP software. That’s not only my view, but also the perspective of SAP customers who attended the event. At lunch, I sat with executives from various SAP user groups based in Australia, Mexico, the Netherlands, and the United States. One of the first questions we asked each other was “What did you think of the Business ByDesign presentation?” Within minutes, we had achieved near unanimous consensus that SAP will use Business ByDesign’s model-based development framework to develop the next wave of applications.

Dr. Zencke’s keynote did not focus much on SAP’s future plans for Business ByDesign. He did say that he planned to deliver new model-based applications in 2009, though he did not say whether it would be a new human capital management (HCM) suite or one more closely linked to a specific process (such as trade promotion management and fulfillment). He also said that some of the initial announcements could come as early as next spring during the two SAPPHIRE events (May 4–8 in Orlando; May 19–21 in Berlin).

Business ByDesign continues to evolve. The newest feature to be unveiled was the software’s ability to record, in real time, all the steps and documents in a business process (order to cash or procure to pay, for example). This can be used for visualization, monitoring, analysis, and auditing. For example, how long did it take to fill the last 10 open sales positions, from initial interview to start date? And how long did it take until they closed their first substantive deals? You can model that or use the search capability. That assumes, of course, that all the data is in SAP and not in a third-party application or tied to a manual process.

Of course, maintaining that data increases the overhead. As customers add more users and functionality, we could be looking at significant data volumes and larger data transfers. What will this mean for performance over a hosted, on-demand network? Users may be willing to tolerate relatively slow performance when updating a sales prospect’s record, but they won’t accept it for more mission-critical applications. SAP is well aware of the need for sustained high performance. One executive told me that it was exploring 64-bit caching appliances to better match on-premise performance.

Enhancement Packs: “100,000 man-days” in every bite

SAP has a delicate balancing act between old and new. More than 99% of its 44,000 customers run on one of its three core systems. The company continues to invest a large part of its $2B annual R&D budget into delivering new functionality for the core SAP Business Suite base through Enhancement Packs (EhP) and continued investment in the NetWeaver platform.

The initial idea behind EhP was to deliver continuous innovation to customers without forcing them to undertake costly and time-consuming upgrades. When the concept was first unveiled, SAP pledged that there would be no new ERP release until 2010.

The EhPs are delivered through a “switch framework” that’s analogous to the lights in your office. Customers have the option of turning the new features on or keeping them off. While this might suggest somewhat “lite” functionality, Dr. Kagermann surprised most of the audience by stating that the average EhP required more than “100,000 man-days.” That’s a lot of coding and testing.

A galaxy of side-by-side innovation

On the NetWeaver front, the most exciting news was the new business process management (BPM) suite. Code-named Galaxy, the BPM products are part of the NetWeaver Composition Environment. The tools include a process composer, process server, web editor, rule builder, rule management, rule analytics, and a rule engine. Galaxy will be part of the core NetWeaver platform and will be used for SAP Business Suite, SAP All-in-One, and SAP Business ByDesign.

The continued investment in NetWeaver across all three platforms is part of Mr. Kagermann’s vision of “side-by-side innovation,” where SAP continues to invest in existing and new areas, with the intent of cross-fertilizing the best of both. This will extend to the user interface (UI) strategy. SAP said it hopes to have one primary UI for SAP Business Suite and Business ByDemand within 18 months. This is long overdue. I lost track, but I would estimate that we saw more than 20 different UIs between the demos and the canned screen shots.

How will SAP customers get to the new architecture?

Life was much simpler when SAP launched R/3 at SAPPHIRE in 1991. While R/3 replaced R/2, that was not the original positioning. The new client/server was slotted as software for smaller companies or for remote divisions of larger enterprises that needed a new ERP system. Over time, nearly all R/2 users replaced their mainframes with R/3. Of course, there were at least five years and three major releases before R/3 was close to functional parity with R/2.

Likewise, in the mid to late 1990s, SAP launched the New Dimension products to fill unmet needs around the pillars of customer management, supply chain management (SCM), and the like. Later, these were added seamlessly to the Business Suite. The new upgrades are delivered through the EhPs.

Is Business ByDesign the replacement for SAP Business Suite? It’s not that easy. Today’s SAP Business Suite is designed for dozen of verticals as well as for companies in more than 120 countries. Business ByDemand has minimal vertical capabilities and is only available in a few countries and languages. Yet, the convergence is starting.

Today, the SAP Business Suite and Business ByDesign share the common NetWeaver platform and Enterprise Services Repository and related infrastructure components. Dr. Zencke may well be delivering the 2009 equivalent of New Dimension products using the Business ByDesign development framework. This will give SAP Business Suite users the ease of use, deployment flexibility, and rapid configuration that they want, too.

Here’s the next question: In five years or so when Business ByDesign has reached functional, vertical, and geographic parity with SAP Business Suite, are the Business Suite customers already on Business ByDesign thanks to EhPs, NetWeaver, and new model-based applications? Or, do we begin the next wave of replacement projects designed to reduce the total cost of ownership (TCO)?

In either case, I’ve seen the future.

SAP to battle Microsoft over the “business user”

I suspect SAP will be ecstatic once the Business Objects acquisition closes. The current expected date is January 23, 2008. Business Objects will be a key part of SAP’s plans to sell to the “business user,” a goofy title for what might normally be called “knowledge workers.” The point, though, is that many employees without an SAP seat still need access to information generated by or stored in an SAP application.

SAP has already begun targeting customers that rely on Oracle’s Hyperion for business intelligence (BI) and performance management (PM). The company recently started a one-a-day program with the goal of replacing 100 Hyperion installations in 100 days. Given that there are an estimated 3,500 to 4,000 SAP customers using Hyperion today, this program could have a run that rivals that of Cats on Broadway.

To date, the primary way to touch that business user has been through SAP’s portal. Some companies have also deployed Duet, the software SAP has been developing with Microsoft to link SAP software with MS Outlook.

While Microsoft has a near stranglehold on office automation, SAP acknowledged that it will have to work closely with others, including IBM’s Lotus software, Google applications, and Yahoo!’s Zimbra applications. SAP also said that it is looking at supporting OpenSocial, the proposed widget standard for social networks that’s being promoted by Google, LinkedIn, Plaxo, Oracle, and salesforce.com. Clearly, the desktop is the key to getting to the business user.

One challenge for SAP is the plethora of competition. There are the ubiquitous Microsoft applications on one side, and free Web 2.0 products on the other. SAP is going to have to come up with some very clever pricing and licensing schemes and value propositions to reach the business worker.

…or does Microsoft buy SAP?

You may have seen the recent Reuters headline, “SAP Shares Climb on Microsoft Bid Talk.” A Microsoft-SAP link first surfaced during the U.S. Department of Justice antitrust lawsuit against Oracle. During the trial it came out that Microsoft had initiated discussions with SAP after Oracle made its bid for PeopleSoft. Nothing came of those initial talks.

Talking to the reporter about the latest rumor, I said “Re: one giant buying another … while all things are possible, I don’t see Microsoft buying SAP. Microsoft is more fixated with Google than Oracle. It’s looking for businesses with enormous growth/volume opportunities; SAP doesn’t provide that. Plus, if [Microsoft CEO Steve] Ballmer bought SAP, he would have to continue to invest in SAP’s costly direct sales and service model. That’s counter to his high margin needs.”

Jim Maniscalco, founder and CEO of Nobilis Software, e-mailed me with a contrarian view. Here’s his take:

On the surface I do agree with you that [Microsoft] is most likely focused on acquiring high-growth companies that are on the frontier of Web 2.0 rather than “mature” companies like SAP. Microsoft has a lot to lose with that strategy—namely the dominance it has enjoyed for 20 years. Microsoft overestimates its actual position in the market. If it does not buy SAP and secure its place in the enterprise through SAP’s maintenance revenue, Microsoft and its executive management risk following the same trajectory that Lotus Development Corp. had in the late 1980s through early 1990s. Virtualization, open source, and the commoditization of tools are adversaries that Microsoft can’t defend against with its current business and product model. Only the addition of SAP’s enterprise footprint can extend its leadership role. If not, it is a different company in five to seven years.

I welcome your viewpoint, too.

Coming up: social networks and enterprise software

Next week’s weather forecast includes a flurry of vendors. All of our conference rooms are jammed these days as software vendors rush in to brief us on their 2008 plans. Social network vendor LinkedIn must be watching The Weather Channel. Instead of braving Boston’s subfreezing temperatures, the executives have offered to update us via telephone instead. We will bring you some of the highlights of all the briefings, so look for our analysis next week.

In the meantime, do you think Business ByDesign is the successor to R/3 and the SAP Business Suite, or is it destined to be a midmarket only product? Does SAP have to take on Microsoft directly in order to be successful in the business user market? Or, do the two companies end up merging as Mr. Maniscalco suggests? As always, I welcome your feedback and ideas—brichardson@amrresearch.com.