Five Things About SAP’s Strategy That You Need to Know

Enterprise resource planning (ERP) systems are a career-defining decision for many IT executives. And yet, says an expert who follows SAP and its base of corporate customers, many of those executives don’t pay enough attention to the German software giant’s strategy for updating these bet-your-business applications.

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But here’s the thing: They should be.

As AMR senior vice president of research Jim Shepherd describes in a report from earlier this year, “The Five SAP Strategies That You Need To Understand,” few companies buy SAP for best-of-breed or one-off applications. More than likely, these companies (and the CEO, CFO and CIO who sign off on what is typically a multimillion-dollar contract with SAP) have “bought into the idea of deploying a broad, single vendor business suite,” Shepherd writes. (For the latest on SAP, see “News and Views from SAP’s Sapphire Show and User Conference 2008.”)

“These companies have a huge investment in SAP,” he says, “and they’re most likely going to keep it for 20 to 25 years or longer.” That likely commitment, combined with the fact that it takes a long time to realize value from an SAP implementation—and it’s prohibitively expensive to replace it once it’s in—mean that most IT executives are betting their careers, in a sense, that the rollout will work out, Shepherd says.

So with all that at stake, it behooves enterprises and their IT staffs to have a good understanding of exactly where SAP is headed—its upcoming product releases, areas of growth, evolving platform and partnership strategies, planned industry and vertical specialties, and new product suites on the horizon. Changes in any of those, Shepherd contends, could have significant implications for the business. (To see why companies don’t care, see “Why SAP’s Own Customers Don’t Know Enough About the Enterprise Software Giant.”)

“These kinds of vendor strategies will have an impact on them at some point,” Shepherd says. “And forewarned is forearmed.”

Five SAP Strategies to Know

1. Product Release Strategy. SAP has traditionally released products and made major changes to underlying functionality on a five-year schedule, Shepherd notes. So twice a decade, SAP’s customer base faced a tough decision.

“They could either ignore the product improvements that their maintenance fees had helped to fund, or they could invest a significant amount of time and money in an upgrade project that is often disruptive, expensive and deeply unpopular,” Shepherd writes. “It became quite common for companies to delay or defer releases. However, that approach carries enough risk and cost that most organizations didn’t dare go longer than eight to 10 years between upgrades.” (For more on SAP’s maintenance fees, see “SAP Raises Software Maintenance Fees for New Customers” and “The Man Behind ‘Half Off’ Third-Party Software Maintenance.”)

In October 2005, SAP finally started to fix this release gap with the shipment of its ERP 6.0 product, Shepherd notes. “Instead of bundling five years of product enhancements and technology improvements into one massive upgrade, SAP has now moved to what it calls a continuous innovation strategy,” he writes. “The major applications in SAP ERP and the SAP Business Suite will now be upgraded through enhancement packages issued every six to 12 months. These enhancement packages are shipped at no cost to customers on maintenance, and deployment is optional. Each enhancement package includes new and improved functionality across a variety of product areas and vertical industry applications.”

Overall, what’s important for SAP customers to realize is that “most SAP customers can upgrade their systems gradually without the kind of massively expensive and disruptive projects that have traditionally characterized SAP releases.” (The new approach is available for SAP’s ERP 6.0 product, Shepherd points out, which has shipped two enhancement packages already and is due to release its third in mid-2008.)

Shepherd says SAP executives have realized is that “companies with global deployments, multi-terabyte databases, and tens of thousands of users simply cannot afford to do monolithic upgrades anymore.”

2. Growth Strategy. In the AMR report, Shepherd writes that SAP has a business strategy that is fundamentally focused on organic revenue growth and that SAP has always been confident about its organization’s ability to develop new products and improve existing ones.

However, SAP execs also have realized that the company has needed to both expand its product offerings to its customers as well as move into new markets. Shepherd writes that this market expansion can be seen in getting new customers, expanding the product scope, moving into new geographies and industries, and going after not just the large enterprises but the SMBs as well. (See “SAP Pays Partners, Goes with Gusto for SMB Customers” for more on SAP’s SMB strategy.)

What SAP customers should realize is that, like its competitors, SAP derives most of its revenue from its installed customer base. “Its objective is to ensure that customers never stop buying licenses, maintenance, and services,” Shepherd writes. “SAP is constantly working to move ERP customers onto the full Business Suite, and it has invested heavily in products aimed at information workers who don’t necessarily use transactional applications.” (For more on software licensing, see “Software Licensing and Pricing Is Still Too Complex and Costly.”)

Therefore, customers should expect their SAP sales reps to be pitching: self-service applications, financial and business performance management, Microsoft Office integration, and much of the Business Objects’ portfolio of reporting, business intelligence, and analytics, Shepherd writes.

“SAP understands that its customers are inclined toward a single vendor strategy,” he notes, “and it intends to capitalize on this tendency.”

3. Platform Strategy. Shepherd traces the roots of SAP’s platform strategy back to 2003, when SAP packaged up its technology components and unveiled the NetWeaver product set. (For the latest on NetWeaver, see “SAP Unveils Its NetWeaver Business Process Management Tool.”)

“The idea was that this technology and architecture would no longer simply be the invisible engine that powered the application products, but that SAP could expose it as a platform and allow customers and partners to use it to extend SAP applications or even build brand-new applications,” Shepherd writes. “SAP had to build the platform anyway in order to develop its service-oriented architecture (SOA)-based product line. Management believed that making it publicly available would enhance SAP’s reputation as a technology leader, and it could potentially become an additional source of product revenue.”

SAP has continues to refine and market the idea of a “business process platform,” which is made up of SAP’s Business Suite applications, a repository of enterprise services, and the NetWeaver technology platform, Shepherd notes. “While there is no indication of a groundswell of demand for a business process platform,” he notes, “NetWeaver has been successful.” NetWeaver had sales of nearly $1.5 billion in 2007, according to the report, and more than $450 million in standalone software revenue.

What’s important for SAP customers to understand, notes Shepherd, is that SAP customers “have to use NetWeaver because their applications won’t run without it, and, over time, they tend to begin using the optional components, such as business intelligence, the portal, and integration,” he writes. “The attraction of tapping into the SAP installed base has encouraged a large number of other software vendors to incorporate enough of the platform to gain the coveted ‘Powered by NetWeaver’ certification. This market acceptance, SAP’s continued enrichment of the modeling and composition tools, and the services repository is building momentum.”

4. Industry Strategy. Shepherd attributes one reason for SAP’s success over the years was that executives realized the importance of offering products to key vertical industries that had unique needs in their applications.

“Using a combination of internal and customer sponsored development, partners and clever packaging, SAP now has 25 separate industry solutions across a range of industries from mining and manufacturing to higher education and financial services,” he writes. “Many of these are supported by product management teams, dedicated developers, and industry value networks (IVNs) of customers and partners that collaborate with SAP on defining requirements and building extensions.” This strategy has enabled SAP to garner tons of market share in the oil and gas, chemicals, and life science industries, according to the report.

Now, SAP is aiming to use the same “blueprint” in going after non-manufacturing industries, such as retail, insurance, education, banking and public sector. “Over the next several years we expect to see SAP devoting a great deal of effort to increase its presence and enhance the applications in these segments,” Shepherd writes. “It is also likely that SAP will use acquisitions, investments, and partnerships to address industry requirements and buy some customers and industry expertise.”

As SAP aims to solidify its offering in these industries, Shepherd predicts that customers in industries where SAP is very well established “may find that their enhancement requests have a somewhat lower priority than industries that SAP has designated as strategic.” On the other hand, he notes, “customers or prospects in those non-manufacturing industries are likely to find SAP very willing to commit resources and sponsor joint development projects in order to fill holes in industry applications. Companies in these industries that are willing to be highly visible lighthouse accounts will have lots of negotiating leverage if they are willing to tolerate applications that are still rather immature.”

5. Product Strategy. Before 1999, SAP was known as a one-product company, which a much less confusing naming convention for its products and releases (R/1, R/2, R/3).

“Since then, SAP has accumulated dozens of products with a bewildering set of options, variants and names,” Shepherd writes. “One of the reasons for this product proliferation is the software industry consolidation that has resulted in large ERP vendors like SAP competing in many other adjacent software categories, such as CRM, supply chain management, and product lifecycle management.” SAP has also brought to market other complementary products not named ERP and not aimed at the CIO and IT but at the business users, he notes, in areas like performance management, regulatory compliance and analytics.

It’s critical that large enterprises, especially, must take a very long view of their application strategy. “One of the important issues for large customers is knowing what happens after 2013,” Shepherd writes. “The SAP Business Suite looks stable until then, and [customers] like the idea of regular enhancement package releases rather than major upgrades. That said, they live in fear that after 2013 they may be faced with another product transition like the one from R/3 to mySAP.”

Shepherd predicts that the current Business Suite will remain SAP’s flagship product line well beyond the 2013 maintenance window. “While the mySAP.com product was officially launched in 1999, development just recently completed on a fully SOA-based suite, and there are still a significant percentage of customers that haven’t upgraded from R/3,” he notes. “Launching another new product would unduly jeopardize that very important base. Furthermore, SAP is under no pressure from its customers or its competitors to move to a new technology and it is unlikely to be in the next few years.”

As to SAP’s Business ByDesign on-demand software offering targeted at SMBs, Shepherd writes that SAP has many large customers that need a smaller and simpler application that can be easily integrated to the Business Suite. “CIOs regularly face the question of what to do about autonomous divisions, smaller sites in remote locations, new acquisitions, and joint ventures. Incorporating them into the global, single instance of SAP is often an unpopular option that may be financially or technically impractical.”

Shepherd adds that “Business ByDesign, in either a hosted or on-premise form, should be much more attractive to the users than the corporate system and yet much easier to integrate than a third ERP application.”