SAP has enjoyed the top spot in the enterprise resource planning applications market for several years now and until recently was the undisputed sweetheart of the market.
The supplier has became a multibillion dollar corporation on the back of selling its R/2 mainframe and R/3 client/server applications suite to run the business of Fortune 1,000 companies. But about a year ago, the bubble burst. Influential US analysts Forrester Group criticised the supplier?s flagship R/3 applications for being too monolithic, too inflexible, too difficult and costly to implement and for lacking Internet support.
The report sent the firm?s shares crashing on the German Stock Exchange and shock waves shook the investment community.
Since then, the supplier has been involved in an insider trading probe - although management has now been vindicated - and has issued several profits warnings, indicating that it would be unable to meet analysts? growth expectations this year. Sales increases are falling from about 35 per cent year-on-year to 20-25 per cent.
But, in a market that is becoming increasingly crowded and competitive, rivals such as Peoplesoft and Baan have continued to boast sustained levels of high growth that show no signs of abating.
So, is this a sign that difficult times are ahead for SAP and that the German software giant is in imminent danger of being knocked off its perch?
Henry Morris, research director for applications at analysts IDC, believes that, while SAP needs to address certain technology and market issues, concern over slowing growth has to be put into perspective. Although the market as a whole is growing at 41 per cent a year, and SAP is growing slightly below that figure at 36.4 per cent, the shortfall is relative.
?When you?re a company with sales as large as SAP's, you?re still growing quite well if you can manage to grow at just below the market average. The company?s proportional increase in revenues wasn?t far behind Oracle?s total applications revenues. But, SAP does have challenges - breaking up R/3 into components is taking longer that it expected and it still needs to do more to sell its products down market,? Morris said.
The components issue is an important one, he explained, because many larger customers want to run different parts of their systems on different sites, but this is difficult to do if there are many interdependencies between applications. Limited dependencies make maintenance easier for both users and SAP, because individual sections of the package can be updated at any one time without needing to worry about the repercussions on the rest of the system. Components also make it simpler for customers to mix and match third party packages with the applications suite.
However, Bobby Cameron, analyst at Forrester Research, goes one stage further. He feels that, while SAP is definitely king of the accounting market, it will need to partner efficiently to be number one in other markets.
He also believes the company is having trouble breaking R/3 down into components, which were supposed to be delivered with version 4.0 at the end of the year, but which are now late. He claims the task is difficult, if not impossible, and that SAP may have to start again and forgo backwards compatibility.
?It may have to forego upwards compatibility in the same way it did when moving from R/2 to R/3. I think SAP will have to drop upwards compatability aggressively and go wholeheartedly towards embracing components. Any ambivalence will slow it down and any reticence to partner from the top down will slow it down too,? he said.
But Jyoti Bannerjee, managing director of analysts, Tate Bramald Consultants, feels that to maintain growth, SAP needs to focus more resources on trying to appeal to the midrange market and on building sales up through third party channels.
?The question is how SAP can sustain its growth if R/3 has been sold to all the top companies. It has to maintain growth to please the financial community, but needs to find whole new markets to do so. SAP sees one opportunity as being the midrange, but it faces the problem that R/3 is perceived as expensive, very difficult to implement and requires you to recreate your business processes,? Bannerjee said.
Banarjee suggested that a stripped down version of R/3 could answer these problems, but SAP abandoned work on R/3 Lite, dubbed the Heidelberg project, last year, because it said customers had reacted negatively to having functionality pulled out of the system.
Developing a coherent and focused channel strategy is also key to SAP?s midrange ambitions, Banarjee believes, although the firm still has a long way to go. It had taken the Big Six years to get to grips with R/3, he explained, and it would be the same for the reseller community.
IDC?s Morris agrees that SAP will have to diversify if it wants to keep its market leadership, but he feels the supplier would do well to look at expansion into new geographic markets such as Latin America and Asia.
He also believes that SAP should partner with or acquire a company that will take it into new horizontal markets, in the same way that rival Baan moved into sales and marketing software by acquiring Aurum last month.
He added: ?SAP?s instincts are good so far, but we?ll have to see by its actions whether it can deliver. There is a path forward, but it needs to execute or it will lose market share.?
Tate Bramald?s Bannerjee confessed, however, that he could see no real successor to SAP at the moment. ?Despite its problems, SAP can maintain its extremely strong position because there?s no-one else to replace it. No-one else has got the mind share of the consultants or users. Its current market momentum will hold it in good stead and will buy it time. I expect it will lose ground because if a user is looking for leading edge technology, it may well look at alternatives. But SAP is still the biggest and it will maintain its market leadership. It?s so far ahead, it would take a lot to pass it in revenue terms,? he said.
Dennis Keeling, managing director of consultants, Keeling Associates, was equally upbeat. ?The gap between SAP and its nearest rival is getting bigger. It?s streets ahead in scalability. The biggest R/3 site in Europe supports 6,000 concurrent users, whereas its nearest rival can only support 500,? he said.
He feels that SAP is still just scratching the surface of the corporate market because many customers have so far put in only one module, but plan to follow up with others.
Moreover, the goverment sector, which has hitherto shunned packaged applications, is starting to realise that highly functional offerings are now available and is starting to show some interest, he added. But he is concerned by SAP?s dominance and the fact that the market is starting to polarise around one or two large players.
?Customers don?t trust small, innovative players and are not giving them a chance any more because they?ve experienced too many problems with suppliers not delivering the right solution in the past, or going bust. But, most vendors, including SAP, will be able to maintain growth until the Year 2000. About 70 per cent of UK customers are now replacing and upgrading their software in anticipation of the Millenium problem, but after that, there?ll be an almighty chasm,? Keeling said.
He added that, from 2000 onwards, he is expecting massive redundancies in the industry. The scale of SAP's problems may be one many rivals would envy, but all software developers are already preparing themselves in anticipation of difficult time ahead.
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