SAP: An Awakening Giant?

It’s easy to criticize SAP these days. SAP is not a high flying growth stock anymore, it’s had some visible executive departures and users complain about the complexity, cost and lack of flexibility of its products. What’s more, SaaS competitors like NetSuite and Salesforce are licking their chops at SAP’s installed base. The company faces the classic innovator’s dilemma – how to maintain on-premise license and maintenance revenue while transitioning to a software-as-a-service model.

SAP is not the first company to face such issues. Microsoft, Oracle, IBM, HP, Intel and EMC are good examples of companies that have weathered the storm of change. That there are so many high-profile transitional “failures” – Sun, Digital, Compaq, Lotus, Novell, Peoplesoft, Baan, Netscape, AOL, Yahoo, etc – only serves to underscore SAP’s challenges. But the fact remains that SAP is a major player in the software business. With nearly $11B in annual revenues, a $50B+ market cap and a phenomenal customer base I wouldn’t count SAP out of the mix just yet. Consider that in the last three years, despite a difficult 2009, the company has grown revenues $1.3B, the size of an entire Salesforce.com.

What’s most interesting to me is the bigger picture and what it means to SAP. Oracle’s desire to vertically integrate and own the IT industry is a threat to several companies, including SAP. However it’s also an opportunity. Why is that? Because over the years, Oracle has made legendary partnerships with infrastructure companies, most notably HP and Sun, which have created powerful go to market forces. By alienating such firms (e.g. replacing HP with Sun hardware for Exadata), Oracle’s strategy creates a vacuum that SAP and other ISV’s can surely exploit. SAP is the most interesting because of its sheer size and market position. SAP has already partnered with Microsoft and certainly could do more with IBM. Intel, VMware, Citrix and storage suppliers such as EMC and NetApp are good candidates for partners too. As well, system integrators such as Accenture have made truckloads of revenue installing SAP over the years and relationships with such companies remain strong.

So what does SAP become? My advice is to SAP is become what you already are…a company that is very good at automating business processes. SAP became a monster by exploiting three leverage points: 1) Mainframe downsizing – R/3 integrated with more cost-effective Unix platforms and SAP partnered with Unix hardware players to gain momentum; 2) Client/server integration. SAP, like Peoplesoft capitalized on the installed processing power and simpler user interface of the PC to dominate its markets by making it’s software work well with PC’s; 3) An ecosystem of partners and system integrators. Through a willingness to share opportunities with resellers, integrators and other channel partners, SAP dramatically expanded its reach; and those relationships remain strong today.

How does this playbook from the 1990’s translate to the 21st century? The path is clear for SAP in my view:

1. Simplify. The customer experience must be less complicated. SaaS vendors exploit the fact that SAP’s products have a zillion knobs and dials. SaaS suppliers follow the 80/20 rule– deliver 80% of the requirement using 20% of the features and cut out the rest. SAP’s SI partners love complexity because it means revenue– and they will pressure SAP not to change. But SAP must flip its mindset and deliver simplicity in both its SaaS and on-prem offerings.
2. Integrate. Virtualization is the new Unix and client/server. Make your products virtualization friendly with VMware, Hyper-V and Citrix. Personally I would start with VMware because that’s where the action is in the data center but don’t forget about the other platforms. Oracle is distancing itself from virtualization players in an attempt to dominate with OVM— this is another opportunity for SAP to partner for momentum and leverage the industry’s distribution channels.
3. Think Small to get Big. Google has perfected the art of looking small and simple but scaling to enormous size. SaaS players are following a similar play. SAP needs to organize its sales channel and incentive structure to embrace selling SAP in smaller chunks as oppossed to the “ERP Package that Ate Manhattan.”
4. Get Agile. Insiders complain that SAP still pays only lip service to agile development. This is a hard one culturally, especially for a firm that has had such tremendous success. SAP execs talk SOA and the need for speed but the company’s new co-CEO’s must re-double efforts to change the software development culture of SAP.

The other key point is that SAP has the marketing pathways to application owners and business leaders. Increasingly, this community is influential in technology decisions ranging from applications to infrastructure. As the IT world becomes more integrated, driven by virtualization, the application development constituency will exert its buying power to demand that SLA’s are preseved. What does this mean? It means that companies which integrate and ensure that performance, security and manageability goals are met – from the application perspective – will win. As Oracle pursues its not-invented-here, vertically integrated, us against them strategy…SAP can leverage the assets of a partner ecosystem that wants it to win.

I’m thinking about heading to Orlando to check out SAP’s Sapphire show later this month. If I can get an invite to see some of the executive presentations I think I’ll go for it. The software landscape is changing, driven by virtualization, the Googlization of IT and the continued consolidation of IT industry stacks. SAP is a major player that bears watching and has an arsenal that with some modernization could do some serious damage in the years ahead.