From Molex to Graybar
How has SAP managed to stay at the top of the heap, and can it remain there?
By Dan Sussman, contributing editor and Kevin Parker, editorial director -- Manufacturing Business Technology, 6/1/2002 6:00:00 AM
While the Internet revolution raged and enterprise vendor stock prices floundered, executives at the world's third-largest software vendor, SAP AG, Walldorf, Germany, say they kept a firm grasp on reality. That meant taking the steps needed to maintain the company's enterprise market lead, the one it's held ever since shortly after its sales force's unexpected arrival in the boardrooms of major U.S. corporations.
Sales strategies aside, what SAP offers today, with its mySAP collaborative enterprise suite, is a more flexible system, broken into components and no longer married to the idea of a single database. SAP also entered new markets for supply chain management, product life-cycle management, and customer relationship management (CRM), among others. These solutions, while perhaps not having all the rich functionality associated with best-of-breed vendors, do have the powerful advantage of not needing custom integration when used with core mySAP enterprise components.
Just how powerful the "pre-integrated" suite story can be was recently demonstrated at Lisle, Ill.-based Molex, the $2.4-billion maker of electronic connectors. After spending upwards of $60 million since 1994 installing SAP's R/3 enterprise system, and subsequently migrating to mySAP in 54 manufacturing facilities in 19 countries, Molex turned again to SAP—this time for CRM.
For a CRM project that in total—software licenses, configuration, and implementation—cost between $5 million and $8 million, says Barry McGoldrick, director, global application development with Molex, "We saved in integration and other cost avoidance somewhere between $1.5 million and $2 million. Master data synchronization was accomplished within one week. It took less than 12 months to roll out the whole system globally."
Despite slowing of a torrid annual growth rate that in the recent past reached as high as 35 percent, SAP revenues were up from almost $5.6 billion in calendar year 2000 to more than $7 billion in calendar year 2001, according to preliminary results of the MSI Top 100, scheduled for publication in the magazine's July issue. SAP says it will make its 2002 target of 15-percent growth, a notable achievement in an enterprise market that according to analyst firm ARC Advisory Group is down 40 percent over the last two years.
Says Bruce Bond, who heads analyst firm Gartner's enterprise and supply chain management research group, "SAP has been both lucky and good. It maintained its focus on solving business problems, even at the height of the Internet boom. And when the boom collapsed, it turned out that's what users were really interested in. It realized early enough in the game that it needed to compete in best-of-breed markets, and with its R&D budget of $2 billion, it jumped into new markets quickly. When it did so, it was big enough to freeze the market. For example, when SAP said it had e-procurement, its installed base backed off from committing to Ariba."
'Net expectations
In July 2000, at the introduction of PeopleSoft 8, PeopleSoft President and CEO Craig Conway asserted that SAP's lack of a "pure" Internet architecture would give his company the opening it needed to possibly overtake SAP. Pleasanton, Calif.-based PeopleSoft is considered the third-largest enterprise suite supplier, behind SAP and Oracle. PeopleSoft certainly has done well during the high-tech industry slowdown. For calendar year 2001, annual revenues grew from about $1.7 billion to nearly $2.1 billion, again according to the MSI Top 100. But, so far at least, things haven't turned out quite as Conway hoped.
"The previous industry transformation—from mainframe computing to client/server in about 1990—completely changed the application landscape," says Conway. "At the time, Dun & Bradstreet and MSA were the largest vendors. Four years later, both were out of business. In 1990, D&B had 13,000 customers. SAP today has 13,000 customers."
PeopleSoft executives believed then that they had an opportunity to make headway against their larger competitor, because, says Conway, "they are particularly vulnerable at a time when customers are contemplating switching from one architecture to another, because that's when a switch in vendors also is considered."
Says Bond, "Oracle and PeopleSoft were first to get out with an Internet architecture and they were right about that. SAP missed it and it took them longer. But Oracle became so associated with the Internet that when the market fell, Oracle went with it. PeopleSoft is like Oracle in that it has focused on technology, but it is like SAP in that it's gotten away from the strategy that a single database is paramount. In doing so they've made the system easier to integrate with best-of-breed solutions."
Continued growth?
They say enterprise systems vendors never die, they just turn into service organizations. Looking ahead, students of the space might feel compelled to ask questions like, how much of SAP's revenue growth is based on companies feeling compelled to migrate to mySAP? How much is based on selling enterprise extensions into the installed base? In other words, what are the long-term growth prospects for the company?
"They might ask that question," says Ed Lange, newly appointed executive vice president, sales, SAP America, "but given the size and breadth of that installed base, the expansion of our offerings, and the integration and platform story we have to tell, we're in a unique position of being a real strategic partner to our customers. Today, about 25 percent of the worldwide customer base runs mySAP, and about 15 percent of R/3 customers have migrated to mySAP. When they do so, it's fueled by the benefits that they see in the functional extensions that integrate with mySAP."
SAP has stated that it believes about 90 percent of its customers would be running mySAP by 2005.
Bond states that it's "generally true" that the functionality of the enterprise suite vendors' extensions is not as rich as that of the best-of-breed vendors. "For example," he says, "if you look at CRM, SAP has not caught up to Siebel."
On the other hand, Lange maintains, "What you may gain from that extra five percent of functionality is minimal compared to the cost and pain of integration."
"The ability to sell extensions into their installed base is SAP's greatest asset," says Bond. "This is huge. Their clients are large companies with many licensed users. What will be telling will be how they do with brand new clients compared to Oracle and PeopleSoft." SAP public relations spokespeople point out that the company has more than 17,000 customers total, and that in the first quarter of 2002, 27 percent of its license sales were to new customers, as opposed to existing customers.
That the green-field enterprise market isn't completely farmed out can be seen from SAP's recent deal with Graybar Electric, a distributor of electric, communications, and data products and services, based in St. Louis. The $5 billion-a-year company recently announced that it selected mySAP.com for all of its business systems applications. SAP is touting the engagement—which includes software for customer relationship management, supply chain management, business intelligence, human resources, and enterprise portals—as one of the largest ERP projects ever undertaken in the U.S. More than 9,000 U.S. employees will rely on the system by the time it is completed, scheduled for late 2004.
The road ahead
Lange says he knows why SAP didn't fall by the wayside and has been able to maintain its lead in the enterprise space. "The development of mySAP reflects a number of decisions that were taken as the Internet revolution unfolded. SAP recognized in 1995 and 1996 that the Internet would open up these systems to a whole new class of users, and there would be a need for flexibility and integration with the non-SAP world. As we developed new offerings, we needed a componentized architecture, based on open systems, as the basis for new forms of B2B commerce."
To continue its success, says Bond, "SAP will have to walk the fine line between innovation and the 'fast follower' approach. It's not in SAP's culture to be an innovator. They have very smart people who approach things in a deliberate fashion. But if they can stay fast, with their installed base, they'll be fine."
| Vendors Mentioned in this Section | ||
| Baan: www.baan.com | Manugistics: www.manugistics.com | Microsoft Great Plains: www.greatplains.com |
| Oracle: www.oracle.com | PeopleSoft: www.peoplesoft.com | SAP: www.sap.com |
