SAP’s flexible vision

5 May 2005

It was a relaxed and light-hearted Henning Kagermann (pictured) who presided over Sapphire, SAP’s annual global customer and media event, held in Copenhagen last week. The SAP boss had good reason to feel upbeat. A few days before, the business applications maker had unveiled a very solid set of results: total revenues for Q1 of €1.7bn, an increase of 11pc on the previous year, and software revenues up 17pc to €434m.

At the time, Kagermann attributed the growth to a consistent focus on innovation and maintaining a robust product portfolio. These two themes came through strongly again at Sapphire, where SAP underscored the strength of its existing product suite while giving plenty of airtime to its software roadmap over the next few years.

SAP, which employs 500 people in Ireland, develops the enterprise resource planning (ERP) systems that run key business processes such as finance, human resources and manufacturing within large organisations. However, the term ERP barely got a mention at Sapphire. Instead, the catchphrase was enterprises services architecture or ESA. In a nutshell, ESA is all about modular software. ESA allows SAP customers to swap and change software components as they see fit, thus allowing IT and the business to evolve together.

Kagermann said business flexibility and speed were driving SAP’s four-year ESA strategy roadmap launched in 2003. “Flexibility and speed become design imperatives for promoting IT to a strategic weapon,” he asserted. The objective, he said, was to make software a “strategic lever” for businesses by embedding it in their business processes rather than be something they view as a separate entity. He described embedded software as the “driver of innovation”, making products easier to use and integrate.

The SAP boss felt software would have to be delivered much more rapidly in the future and that the ESA, based on NetWeaver, SAP’s application integration or web services platform, would enable this to happen. Likening ESA to the Moore’s Law for software, he said it would “bring greater productivity to the software industry” by allowing innovation to happen faster.

According to David Bradshaw, a senior analyst at Ovum who attended Sapphire, the thinking behind ESA — to bring more flexibility into SAP technology — was sound because its software had traditionally been seen as less than flexible by its customer base. What worried him however was the execution of the plan. “If they pull it off, it will be a really smart move but I just have a slight doubt in my mind as to whether it’s going to be as simple as they are claiming,” he said.

Moreover, with SAP and the independent software community developing more pre-configured business process components for different industries and SAP software more malleable than before, Bradshaw also wondered what ESA offered the big systems integrators that have traditionally done extremely well out of tailoring SAP applications to particular industries and businesses. “We don’t know to what extent more [customisable SAP applications] will cut the margins of services companies,” he pointed out.

Kagermann’s earlier observations about the fast-changing business environment could just as easily been a reference to SAP’s own sphere of activity. Just a few years ago, SAP was one of the five ‘jbops’ (standing for JD Edwards, Baan, Oracle, PeopleSoft and SAP) that dominated the ERP market. Today, only SAP and Oracle remain; the others having fallen victim to industry consolidation. While players such as Microsoft and Sage will continue to make inroads in the SME sector, the battle between SAP and Oracle is set to dominate the enterprise applications market for years to come.

It is a market in which SAP currently has the upper hand, believed Bradshaw. He suggested SAP had benefited from the market “uncertainty” generated by the ongoing integration between Oracle and PeopleSoft. “SAP is currently doing very well in the US and UK markets while Oracle/PeopleSoft are not winning much new applications business in those markets. In the fourth quarter last year, PeopleSoft was selling its grandmother just to get business in and it has had a poor first quarter this year.”

He felt SAP had been helped by some poor judgement on Oracle’s part. “To my mind Oracle has made some missteps. For example, PeopleSoft was strong in HR and customer relationship management software and Oracle should have carried on selling PeopleSoft in those areas but it stopped.”

What will also worry Oracle are new signs of closeness between SAP and Microsoft. At one stage, Microsoft was believed to eyeing up SAP as a potential acquisition target. At Sapphire, it was announced that the two IT giants are jointly developing a new product, code-named ‘Mendocino’ — the first product to emerge from an agreement made by the two companies last year to build a bridge between their
separate technology platforms, SAP Netweaver and Dot Net.

Jeff Raikes, group vice-president of information worker business at Microsoft, said at Sapphire the new product would help link the “disconnected universes” of enterprise applications and desktop workers. “It will extend the reach of SAP processes on to the desktop and right into the hands of information workers,” he said. Mendocino, which is being jointly designed, developed, marketed and supported by the two software firms, is due for launch in the fourth quarter of 2005.

The development got the thumbs up from Bradshaw, who argued it made sense for both companies. SAP wanted to extend its enterprise footprint beyond its traditional areas such as sales, manufacturing and finance — integrating with Outlook would help it do that. Microsoft would on the other hand use Mendocino as a way of encouraging users to upgrade to the latest versions of Microsoft Office and Exchange.

Where once SAP was so territorial about it technology that it would perhaps have eschewed the notion of working with anyone else, the partnership with Microsoft served to underline the message that with the new SAP, flexibility is seen a key ingredient for success.

By Brian Skelly