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Can software giant SAP survive the IT revolution?

Category: Business

Published: 28th Apr 2011 04:31:40

SAP is one of the world's most important but least known software companies - so can it adapt to the IT revolution at the start of the 21st century?

Have you ever used SAP software? Let me answer this for you: Yes!

The German company's 53,000 staff make the software that underpins the operations of many of the world's largest companies - from BMW, Coca-Cola and Disney to Unilever, from the Body Shop, Sony and Starbucks to Wal-Mart.

Some 109,000 firms are SAP customers. If you buy their products or services, especially if you shop online, chances are that you make use of SAP software.

But SAP, one of the world's largest software companies, has a raft of problems.

Many perceive it as a lumbering giant: specialising in complex and expensive software for big business, but playing technological catch-up.

Last November, it suffered a serious setback in its battle with arch rival Oracle; a jury in California found one of SAP's subsidiaries guilty of data theft and ordered the German firm to pay Oracle a hefty $1.3bn fine (the ruling is being appealed).

Then there was leadership trouble. For a while the firm had two chief executives, Henning Kagermann and Leo Apotheker. According to SAP insiders the working relationship of the two soft-spoken men was fraught at best. Mr Apotheker took full control just as the global economic downturn began, and was told in February 2010 that he had to go.

SAP's board was forced to make another gamble: Yet again, it appointed two co-chief executives, and shocked Germany because neither was German.

One year on, Bill McDermott, a 49-year old American, and Jim Hagemann Snabe, a 45-year-old Dane, are keen to tell the world that they are making a difference (beyond changing the company's logo).

SAP, they promise, is at the forefront of a "new wave of IT" that is fundamentally changing the way companies do business.

Information technology, says Mr McDermott, is now much more than "buying the latest cool gadget."

Chief executives use it as "a strategic business weapon to lower cost and improve the operating structure of their company... to free up capital, to go after new markets, and innovate, and improve supply chains."

Three drivers are changing the technology of business: real-time computing; cloud-computing, and powerful mobile devices.

Combine all three, argues Mr Snabe, and companies can use IT to cope with an "unpredictable" world full of economic shocks and natural disasters.

"After [the] 9/11 [terror attacks] companies were shocked; now when things happen companies deal with it, they're becoming better and better at responding to new situations," he says.

Unsurprisingly, Mr Snabe and Mr McDermott believe that under their leadership SAP is finally offering solutions for all three challenges.

Where SAP executives once derided cloud computing as not fit for the enterprise - too insecure, too unreliable. Now both CEOs argue that cloud solutions will be a key element of the corporate IT mix, especially for small and medium-sized firms. SAP offers a full suite of cloud-based applications.

Then there is the corporate data deluge, with companies getting ever more detailed information about their products, staff and customer behaviour. SAP is pushing its Hana software, which does away with data bases accessing traditional hard disks and replaces them with ultra-fast in-memory computing.

One consumer products giant is using the technology to track its customers' 400 billion retail transactions a year - in real time.

Then there is the mobile revolution of smartphones and tablet computing.

"The mobile business will change everything," says Mr McDermott. "There are lots of brilliant applications inside [enterprise software] suites that want to come out and be liberated on the device. Even if you use old SAP software, if you provision it to the iPad or other tablet computers, you'll have a good user experience."

He taps on his Mr Snabe's iPad: "Jim and I run the company essentially from an iPad."

"When I showed this [real-time information] to the CEO of a big bank, he said it takes him seven to eight weeks to get this kind of information, and that 'by the time I get it I'm so pissed off I don't want it anymore'," reports Mr McDermott with a chuckle.

Global economic timing is favouring Mr McDermott and Mr Snabe. Corporate profits are rising sharply, and companies are making long-delayed investments in IT systems. "Companies have started spending again," reports Mr Snabe.

But giving the BBC a rare joint interview, both CEOs argue that there is more to the four consecutive quarters of double-digit growth they have delivered.

While at pains not to be dismissive of their predecessors, they speak of a "fresh start", "refocusing the business", and "exciting staff and customers again".

Since he and Jim took over, says Mr McDermott, "all people in the company now can give you a clear picture where SAP is. That hasn't been the case before."

And Jim Hagemann Snabe is even more outspoken: "If you look at SAP in the past, we were not fast enough in innovating. It took 18 months for a new product. Now our innovation cycle is six months."

Real-time computing software Hana, for example, was "envisioned in March last year... and delivered in November."

Given SAP's past experience with co-chief executives, can a Dane and and American rub along well enough to deliver results?

It may help that there is a clear division of labour, with Mr Snabe in charge of innovation, and Mr McDermott looking after sales and marketing. Big decisions are taking jointly.

In conversation, both operate like a well-rehearsed tag team, careful to give each other equal share of voice. "Our families get on very well ... we enjoy each others company," says Mr McDermott. "We came in this together, and we are sticking on this together."

Mr Snabe, meanwhile, offers this analogy for how it works: "Are you married? Yes? I say no more."

Still, SAP's image problems are deep-seated.

Operating SAP software was once akin to a dark art, and SAP's very size and success is putting off many small firms.

"There is this perception [that we are not right for small companies] because we were so successful with big companies," acknowledges Mr Snabe.

"But it's not the reality, he says and points to software like Business One and Business by Design, both geared towards smaller customers.

Quite apart from perception issues, SAP has to face a rapidly growing number of aggressive competitors.

There is Oracle, which built its enterprise software business through a string of huge takeovers.

Microsoft is - yet again - pushing into the enterprise market.

Then there is a bevy of start-ups, some now giants in their own right - like cloud computing specialist Salesforce.com.

Both CEOs bristle when confronted with these challenges.

Without naming Oracle, they speak of rivals offering "past technology stacks" that ignore the cloud and real-time computing.

Salesforce.com is dismissed as being able to bring the "consumerisation of IT" to just "one department" [sales] rather than the whole company.

And both repeat and repeat the mantra that companies need "end-to-end consistency" of the IT experience.

If you want to have all corporate information work together, says Mr Snabe, you need an integrated suite of applications, not a patchwork of software that each claim to be best-of-breed but doesn't really work together.

He points to a global food company that following the earthquake in Japan could identify and fix problems in its supply chain in real-time - only because it used an integrated software system.

However, this software philosophy is at odds with much of today's IT thinking.

The "app store" approach of the smartphone world is coming to the enterprise, say many chief technology officers. And IT services firms like Infosys and TCS of India are at the ready to provide cloud service integration, weaving together the multitude of software and data sources.

Mr Snabe scoffs at the suggestion. Such patchwork systems "fundamentally don't fit together... lack agility and instant visibility" - and cost more.

Controversially, both SAP bosses say the pay-as-you-go "software as a service" model of many of their rivals rarely makes economic sense.

It may work for small companies who can't afford big capital investments, concedes Mr Snabe, and SAP offers the option.

But most firms would be better off buying a software licence and taking out a maintenance contract, because "that delivers a lower [total cost of ownership] in under 12 months."

Investors are still sceptical, though.

SAP's share price may be at a 52-year high, and Goldman Sachs and Commerzbank recently released favourable analysts' reports, but compared to rivals like IBM, Oracle and Salesforce.com it looks rather static.

Mr McDermott prefers to talk about SAP's price-earnings ratio, which he says proves that SAP is delivering the profits.

Mr Snabe seems to suggest that the market doesn't quite get the new SAP yet.

He compares SAP to Apple in the years before the launch of the first iPod. "Apple didn't buy a number of companies," he says in a dig at Oracle, "they innovated."

"Look at what happened to their market capitalisation since they started innovating."

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BBC News, 2011. Can software giant SAP survive the IT revolution? [Online] (Updated 28th Apr 2011)
Available at: http://www.ukwirednews.com/news/149448/Can-software-giant-SAP-survive-the-IT-revolution [Accessed 24th Jul 2014]

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