The Software Sales Cycle Bites SAP: Q3 Bravado Vanishes

It’s just a fact of life in the enterprise software business: Many deals close at the very end of a quarter. Customers know this. ERP and CRM vendors know this. And Wall St. analysts know this. It’s just the way it is.

Six days after the close of Q3 2008, SAP gave notice that the sauerkraut was about to hit the proverbial fan: SAP’s sales had seized up and the German software giant would not meet revenue expectations for the quarter. More “guidance” (i.e., “bad news”) would be forthcoming on Oct. 28.

“The market developments of the past several weeks have been dramatic and worrying to many businesses,” said Henning Kagermann, co-CEO of SAP, in a third-quarter earnings pre-release on Oct. 6. “These concerns triggered a very sudden and unexpected drop in business activity at the end of the quarter.”

But why all the shock and awe over the “very sudden and unexpected drop,” Henning?

First, a case can be made that SAP executives should have seen, at the very least, a softening in the market coming from miles away. But instead, in reporting Q2 results in late July, SAP execs brightened the full-year forecast to the “top end” of its previous financial guidance. “Throughout the third quarter we felt quite positive about our ability to meet our expectations,” Kagermann added.

Compounding the problem is the long-known reality of the software business: quarter-end sales can be make or break. “While this may not be healthy, it is a fact of life in this market,” notes David Mitchell, SVP of IT Research at Ovum, in a recent report on SAP. Mitchell has “seen situations when 50 percent or more of the [software] revenue in a given quarter is booked on the last two to three days,” he writes.

So as the summer progressively worsened, and September turned in one abysmal day after the next, the SAP sales channel must have looked pretty bleak. And then it got even worse.

“Over the last two weeks, the tone has shifted,” Bill McDermott, CEO of SAP’s global field operations, told the Wall Street Journal. “Customers decided to postpone their decisions.” (When there’s not enough credit to finance multimillion-dollar purchases, then customers have to say no. See “Help! We Need ERP and CRM Software, But We Can’t Afford It Right Now!” for more on that topic and an alternative strategy.)

But here’s my question: Is it possible that SAP (and, perhaps other software companies, as we’ll soon see) thought that the month of September was going to get better even as the economic malaise continued to drift over the U.S. during the summer? If I’m not mistaken, even before the mid-September collapse, the economy was not in tip-top shape.

And is it possible that SAP execs thought that some miracle would happen during the final days of September because, hey, that’s when we typically close a lot of deals?

While cliche, this seems apt now: You live by the sword, and you die by the sword. And it looks like the software cycle has come back to stab SAP right in the gut.

SAP’s stock price got pounded when it announced that it would not meet its expectations. And, unfortunately for SAP, it’s not just the financial meltdown that’s going to be trouble, which I wrote about in “SAP: Financials Are Rosy, But Trouble Is Brewing in the Ecosystem” in early August: corporate scandal and embarrassing lawsuits (courtesy of Oracle, and the suit that won’t go away, and Waste Management), outrage from SAP’s own customer base (sparked from maintenance fee increases), failings in new business models (see TomorrowNow debacle and Business ByDesign troubles), drastic need for SAP skillsets in the ecosystem (related to classic supply and demand talent shortages) and the near constant marketing wars with No. 1 competitor Oracle, which still maintains higher margins than SAP.

As Ovum’s Mitchell notes: “The cliff edge can appear very rapidly” for software vendors, if sales don’t rush in at the end of a quarter. It’ll be fascinating to see how many fall over during the next several weeks.