SAP Heads for the Cloud

Stephen DeAngelis

December 7, 2011

One of the first groups that attempted to deal with the problem of integrating incompatible data included five former IBM employees – Dietmar Hopp, Hans-Werner Hector, Hasso Plattner, Klaus Tschira, and Claus Wellenreuther – who, in 1972, formed a startup company known as SAP Systems Analysis and Program Development (now SAP AG). According to the company’s website, their vision was “to develop standard application software for real-time business processing.” It is no surprise that SAP originated in Europe, where unification was progressing rapidly in spite of its many languages and diverse monetary systems. The second version of SAP’s software (SAP R/2) was able to handle different languages and currencies.

 

SAP’s rapid growth highlighted the need for systems integration business software. In 1988, SAP was named “company of the year” by Germany’s renowned business journal, Manager Magazine. SAP’s big breakthrough, however, occurred with the release of SAP R/3 and its use of relational databases as well as the ability to run on computers from different vendors. This release ushered in a new of generation of enterprise software – now commonly referred to as Enterprise Resource Planning (ERP) software. ERP software integrates departments and functions across a company into one computer system, enabling various departments to share information and communicate with each other.

 

ERP systems comprise function-specific modules designed to interact with other modules, for example, accounting, purchasing, etc. This all sounds elegant, but it wasn’t. I received an email a couple of years ago from a “veteran of thirty-five years of Systems Engineering work with IBM, and a graduate of MIT’s Sloan School,” who claimed “Enterprise Resource Planning drove several international firms to the brink of disaster and Chapter 11 – almost entirely by itself.” He insisted the reason this occurred was that decision makers trusted in “oversimplification, over dependence upon assumptions, and a rush to automate before underlying processes were thoroughly examined, understood, and integrated into the scheme.” It’s true that only exhaustively trained personnel could actually understand and use the software – but the possibilities were evident. The other important breakthrough with SAP R/3 was the introduction of the client-server concept (which was invented at Xerox’s Palo Alto Research Center in 1973), an architecture that continues to be a standard in business software.

 

SAP was started, however, in the era when the companies believed that the best business model was to create standalone, proprietary systems that would make customers for life. The business landscape, however, began changing rapidly. Oracle, for example, adopted a standards-based approach to create middleware as a platform to run whatever applications a company may have, including SAP. At its height, Oracle reported that 72 percent of SAP customers relied on Oracle’s middleware. By adopting it standard-based approach, Oracle and its customers were able to take full advantage of the next evolution in systems architecture, service-oriented architecture.

 

The next big advance appears to be cloud computing. Cloud computing has the potential to relegate traditional standalone software vendors to the dustbin of history. As Ben Worthen and Christopher Lawton write, “SAP AG’s $3.4 billion agreement to acquire SuccessFactors Inc. shows just how big a threat online products are becoming to the kings of conventional software, and points to the possibility of more such acquisitions.” [“SAP Deal Shows Rise Of Online Software,” Wall Street Journal, 5 December 2011] The Financial Times wrote that the deal shows that “SAP does not want to be left behind.” [“SAP/SuccessFactors: a long-term punt,” 5 December 2011]

 

Worthen and Lawton assert that the deal “should bolster SAP’s portfolio of Web-based software. The urgency SAP felt to do that, industry watchers said, was apparent in the 52% premium the German software giant agreed to pay for the relatively small Silicon Valley company.” They continue:

“‘It’s a defensive move,’ said Peter Goldmacher, an analyst at Cowen & Co. The shift toward software that runs online—or in the cloud, in industry parlance—began in the late 1990s with the emergence of companies like Salesforce.com Inc. and NetSuite Inc. The products let companies avoid the cost of installing and maintaining software on their own server systems and personal computers. Instead, they offered functions that employees could tap on demand through a Web browser. Many analysts assumed that business-software giants like SAP and Oracle Corp. would eventually buy smaller cloud-based vendors, just as they snapped up smaller suppliers of conventional business software. Analysts also assumed that they would wait for their targets to mature and for valuations to come down. But businesses are buying online software at a faster rate than anyone predicted, and so ‘the run is starting to happen,’ said Frank Gens, an analyst at research company IDC.”

Worthen and Lawton point out that SAP isn’t the only traditional software vendor moving to the cloud. They report that Oracle has also indicated that “it would make new versions of its programs available online.” It also acquired “RightNow Technologies Inc., which makes online customer-management software.” Worthen and Lawton note that SAP’s acquisition of SuccessFactors is not the company’s first venture in web services. They explain:

“SAP has offered a version of its widely used business-application software via the Web since 2007, but the product sold slowly, in part because the company initially targeted it mainly at companies with fewer than 500 employees. Its decision to buy SuccessFactors is an indication that SAP couldn’t build a sizable position with internally developed products fast enough, said Paul Hamerman, an analyst at Forrester Research. Bill McDermott, SAP’s co-chief executive, acknowledged as much. … ‘This is clearly one of the areas we had to go get,’ he said. ‘At the end of the day, our customers want to consume the value of the software in many ways. They all want the flexibility to run certain apps in the cloud.’ … Mr. McDermott said SAP would use its scale to boost SuccessFactors’ revenue.”

SAP’s cautious advance into cloud computing reflects a general concern that its customers have had about “managing critical business information” online. Worthen and Lawton report, however, that “many IT departments have gotten over those concerns. Now they see cloud software as a way to save money and simplify operations.” They indicate that the ubiquity of mobile devices is also forcing companies to the cloud. They explain:

“‘Mobile devices are going to force the shift to cloud apps,’ said [Frank] Gens, the IDC analyst. All of these factors have combined to put pressure on traditional software companies like SAP and Oracle. … While such companies have their own online products, they have tended to be lightweight versions of the programs sold for on-site installation.”

Worthen and Lawton note that the cloud has also changed revenue stream models. Companies like Oracle are “accustomed to reaping revenue upfront from licensing fees” and, therefore, have had “little incentive” to adopt the cloud computing which is based on “a subscription model.” Even though the Financial Times estimates that the SAP/SuccessFactors deal will “be earnings neutral” over the next couple of years, it says “it is good to see a company making a strategic long-term deal.” Matt Marshall agrees that, despite the high price paid for SuccessFactors, the deal makes strategic sense for SAP. [“SAP-SuccessFactors: 9 reasons why this is a smart acquisition,” Washington Post, 5 December 2011] As the headline of his article states, Marshall believes there are nine good reasons this is a good deal for SAP. They are:

1) Talent management is the future — Talent management is a key area of growth in the economy going forward. … With the Web, people can boost their profiles, and they become more accessible, and thus poachable. That means companies need to protect their valuable employees more aggressively. …

2. Talent? Well, SuccessFactors has that too — Lars Dalgaard, SuccessFactors’ CEO is considered a passionate, savvy leader, and SAP picks him up with this deal. …

3. Employee Performance gives SAP a leg-up on competing products — SuccessFactors is the undisputed leader in its field. Recently, Forrester rated the Plateau Systems talent management software the best in its sector, and Plateau is now owned by SuccessFactors (SuccessFactors bought it in April). …

4. It fills a big hole in SAP’s own offering — With the acquisition of SuccessFactors, SAP can now boast it covers the four top segments where cloud providers offer software: CRM, collaboration, procurement and human capital management (HCM). …

5. SAP and SuccessFactors have complementary customer bases, allowing for cross-sell — There is reportedly little overlap between SuccessFactors’ 15 million users (at 3,500 customer companies), and SAP’s huge base of users. This allows for a significant opportunity for SAP to cross-sell into SuccessFactor’s customer base. …

6. Seamless integration at SAP back-end could make SuccessFactors more compelling — Granted, this point may be true only for SAP’s wealthy enterprise customers that can afford SAP’s on-premise offerings. But because SAP is the leading on-premise software provider, it’s had a lot of experience learning how to integrate cloud software offerings with on-premise software. …

7. SuccessFactors is free from the chains of SAP’s enterprise software sale legacy. This could herald a bigger break at SAP in the future. — SAP says it is going to let SuccessFactors run independently, with a SaaS subscription model. Could this be the first move by SAP to free itself eventually from such reliance on its costly on-premise business model? …

8. This is a huge cloud play, steals the initiative over the other full-stack providers — Among the companies [that] are considered full-stack software providers — SAP, IBM and Oracle — this is appears to be one of the biggest moves yet from any of them to embrace the cloud. …

9. It’s a nice complement to SAP’s analytics and mobile strategies — SAP has kicked off two key initiatives lately, namely the building of an in-memory database computing technology (called HANA), to speed up analytics within applications, and a move to allow software to work wirelessly on any device. These two initiatives were boosted by SAP’s purchase of business intelligence giant Business Objects for $6.78 billion in 2007, which SAP now powers with HANA, and SAP’s acquisition of Sybase last year for $5.8 billion, which lets SAP go mobile with its software products. SAP will also have SuccessFactors run on HANA, to turbocharge its performance.

For companies like mine, Enterra Solutions®, that have already embraced cloud computing and a SaaS revenue model, moves by the big three (IBM, Oracle, and SAP) simply confirm that we’re heading in the right direction. Cloud computing and the era of big data are here to stay.