An ERP Vendor Soap Opera: A Close Look at SAP's Purchase (and Attempt to Sell Off) TomorrowNow

When SAP acquired cut-rate ERP service provider TomorrowNow, observers scratched their heads. How would the two work together? Then Oracle sued, alleging stolen information. SAP isn't waiting for its court date. It's ready to entertain buyers for TomorrowNow.

SAP has cleaned house in the managerial ranks at its troubled TomorrowNow subsidiary and, in the process, has raised many questions for customers about its future—and theirs. But so far, the German software giant isn’t offering any answers, just a big fat “For Sale” sign on TomorrowNow’s front lawn.

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The ABCs of ERP

On the Monday evening of a Thanksgiving holiday week, typically a slow period for business news, SAP announced that the CEO and senior executives at its TomorrowNow subsidiary had resigned. “TomorrowNow CEO Andrew Nelson and several members of his senior management team are leaving the company,” said the press release, which was distributed on Nov. 19. Mark White, who was appointed TomorrowNow's executive chairman in July, appeared to be the sole senior executive survivor, as SAP said he would remain in that post.

The announcement was not a shock to many in the industry due to several factors. First, industry insiders and analysts say there has always been tension in the SAP and TomorrowNow marriage because of their competing business models.

While enterprise software vendors like SAP and Oracle (and its subsidiaries, J.D. Edwards, PeopleSoft and Siebel) historically have charged annual software maintenance fees that equal 20 to 25 percent of the software’s price, startups such as TomorrowNow and Rimini Street have provided IT executives the same important maintenance services for typically half the price.

One Big Headache for a Little Acquisition

TomorrowNow, with its customer base of about 300 companies, must have seemed like a small pickup for SAP, which has more than 43,000 customers in 120 countries and a market capitalization of more than $60 billion.

And if the inherent competition between SAP’s licenses and TomorrowNow’s cut-rate pricing didn’t pose a problem on the surface, something else did: In March, SAP’s archrival, Oracle, filed a federal lawsuit in San Francisco alleging that TomorrowNow employees had illegally accessed Oracle’s proprietary software products and materials, and had downloaded those materials onto TomorrowNow’s computers.

In court papers, Oracle alleged that TomorrowNow had “engaged in systematic, illegal access to—and taking from—Oracle’s computerized customer support systems.” And as a result, “SAP has compiled an illegal library of Oracle’s copyrighted software code and other materials,” the suit stated.

It took almost four months for SAP to respond in public to Oracle’s suit. Then, in July came this response:

SAP said in court papers that TomorrowNow was authorized to download materials from Oracle’s website on behalf of TomorrowNow customers. At the same time, SAP acknowledged that some inappropriate downloads of fixes and support documents occurred at TomorrowNow.

Importantly, SAP affirmed that what was downloaded at TomorrowNow stayed in that subsidiary’s separate systems. SAP did not have access to Oracle intellectual property via TomorrowNow.

Henning Kagermann, SAP’s CEO, added: “Even a single inappropriate download is unacceptable from my perspective. We regret very much that this occurred. I want to reassure our investors, customers, partners and employees that SAP takes any departure from the high standards we set for all of our businesses very seriously, regardless of where it occurred or how confined it may be.”

Kagermann added: “When I learned what happened, I promptly took action to strengthen operational oversight at TomorrowNow while assuring that we maintain excellent service for TomorrowNow’s customers going forward.”

That policy held until a Monday night in the fall, when SAP announced the departure of TomorrowNow executives and added one more important thing: It was “considering several options for the future of the TomorrowNow business, including a possible sale.”

So while TomorrowNow’s customers are left to deal with a lack of direction (at least publicly) from SAP, others (including prospective customers) are left to ponder the uncertainty of this new business arrangement. IT leaders will always be drawn to lower prices for their enterprise software and support, but can they ensure that relatively new, relatively untested, cheaper third-party service providers will be allowed to do the work?

Whatever the case, observers say this whole saga—including the purchase itself—has seemed out of character for SAP, which historically has focused on its own internal products, technologies and service organization, and has sought to project clear, well-defined strategies.

Recalling TomorrowNow’s Origins

Andrew Nelson and Seth Ravin were the two PeopleSoft vets who set up TomorrowNow in 2002. Nelson had spent years in high-level roles with PeopleSoft’s installation and upgrade division; Ravin had served in senior customer service and sales positions. Ravin said that he and Nelson teamed up to take on support services four years after Nelson started a small consultancy with the TomorrowNow name.

Both Ravin and Nelson went to work for SAP after it bought TomorrowNow for an undisclosed sum in January 2005. SAP’s thinking at the time was that TomorrowNow could provide a conduit of former Oracle customers into SAP’s web of products.

The duo entered a mature, consolidating and fiercely competitive field for enterprise resource planning software.

For example, Bruce Richardson, the chief research officer at AMR Research who’s closely followed the SAP and TomorrowNow union, said that at the time of SAP’s acquisition, SAP had 2,000 customers that were using packages from PeopleSoft, a subsidiary of Oracle. SAP christened the “Safe Passage” program to transition Oracle customers over to SAP.

Richardson speculates that SAP might have been trying to “throw a grenade into Oracle’s party” with the TomorrowNow acquisition. Oracle at the time was crowing about its Fusion product that, when finally released, is supposed to stitch together all the software packages Oracle has acquired over the years. (Oracle recently announced Fusion’s release date is now late 2008.) “It was either a brilliant marketing move or a gimmick,” Richardson says of SAP’s action.

Ray Wang, a principal analyst at Forrester Research, says that for its part, TomorrowNow, which focused exclusively on Oracle support services, was two to four weeks away from adding support services for SAP when it was acquired by SAP.

Former TomorrowNow President and COO Ravin said he cannot comment on specific TomorrowNow plans (due to confidentiality agreements). But Ravin points out that TomorrowNow “publicly commented about its intent to continue adding new product lines when the market and product opportunity were right.”

Nelson ended up sticking around at SAP, while Ravin lasted just three months. “I’m an entrepreneur,” Ravin says, “and while Andrew decided to stay on, I decided to go and build something new.”

The Alluring Business Model for Low-Cost ERP Service Providers

After leaving TomorrowNow, Ravin intended to start a new software company. But he kept coming back to TomorrowNow’s allure: With the big vendors getting up to 90 percent margins on enterprise software maintenance fees (meaning just 10 percent going toward actual support costs), even half of that still would provide a nice revenue stream to another TomorrowNow-like company, he says.

“It’s an unbelievably profitable business model,” Ravin says. So in September 2005, Ravin launched Rimini Street with a familiar-sounding mission: “To redefine enterprise software support using innovative, next generation support services delivered at more than a 50 percent savings in fees compared to a software vendor's annual support program.”

Rimini Street started out by supporting Siebel products and, as Ravin’s noncompete agreements have expired, his company has added PeopleSoft and J.D. Edwards applications to the mix.

Today, Ravin likens TomorrowNow and Rimini Street to fiercely competitive cousins. TomorrowNow has more than 300 customers, while Rimini Street has more than 50. During this past year, in particular, both companies were able to persuade more and more CIOs to buy into their enterprise software support plans.

And they did it with Oracle’s lawsuit looming over TomorrowNow—and SAP.

A Black Eye for SAP

For SAP, Oracle’s lawsuit has been a black eye and an unwanted public relations nightmare. Wang, the Forrester Research analyst, says he believes part of TomorrowNow’s problem was that it was a new and growing business, and not everything was explicitly spelled out for employees.

“They were entering into new territory, in terms of rules, and how third-party software was maintained by someone else and protecting intellectual property,” Wang says. “There were rules being tested, and one would assume that not all the rules were clear.”

The lawsuit has also provided Oracle with an atypical public perch in its fierce rivalry with SAP. “It does give Oracle the higher ground for a change,” says Richardson.

In a July interview with CNet, SAP CEO Kagermann wouldn’t speculate on the scale of the problems or TomorrowNow’s fate, saying only that SAP would “do whatever it takes” to examine the problem. Kagermann acknowledged that since the lawsuit, “attracting new [TomorrowNow] customers is more difficult than it was before we were in this discussion. Retaining existing customers, I would guess, is not a matter of concern.”

Kagermann added, “If you ask me about the impact on SAP, I don't see an impact. If there is a certain impact to TomorrowNow, please have in mind that the TomorrowNow business is a very, very small fraction of our entire business.”

However small a financial impact the suit may have on SAP, Richardson of AMR says, “It’s been consuming Henning’s time ever since” the suit was filed. “I don’t think they can get rid of this business unit fast enough.”

What About TomorrowNow’s Customers?

For TomorrowNow’s customers, who have bought into its business model and have been caught in the middle of a legal fight between TomorrowNow’s owner (SAP) and its software vendor (Oracle), the announcement that TomorrowNow’s core leadership had left and SAP was considering a sale must have given them an early dose of Thanksgiving heartburn. (Several CIOs who are TomorrowNow customers turned down interview requests.)

TomorrowNow customers shouldn’t have been completely caught off guard, however. In a copy of an e-mail to customers obtained by CIO, former TomorrowNow CEO Nelson informed customers on Nov. 1, 2007, that there were some big changes ahead. “During the past two months,” he wrote, “our sales and services teams have reached out to individuals within your organization to discuss the establishment of a new software support environment on your computers and premises for use by our maintenance and support engineers.”

The e-mail continued: “On Wednesday, November 21, 2007, TomorrowNow will permanently shut down TomorrowNow service team access to, and use of, your software support environment that we built on your behalf on TomorrowNow computers and premises. To avoid potential disruption to your TomorrowNow Support Services after November 21, 2007, your organization will need to provide a new support environment that is not on TomorrowNow computers or TomorrowNow premises.”

According to AMR’s Richardson, the e-mail was most likely a proactive safeguard for SAP to legally ensure that there was “no Oracle code on TomorrowNow computers.” In addition, now that TomorrowNow was for sale, it showed potential suitors that TomorrowNow was complying with best practices and there weren’t any more “sloppy policies.”

Forrester’s Wang reports that he has received lots of client inquiries from TomorrowNow customers who had received a letter from TomorrowNow that gave customers a 60-day window to cancel their contracts and now wanted to know why this was happening. “At some point, we figured there would be a change in management,” Wang says.

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