The Ponderings of Woodrow

SAP: TomorrowNow execs call it a day

To say that SAP has played an important role in this blog, and by proxy my reputation as a blogger, would be an understatement. You need only do a quick search for SAP among my tag cloud to see that, without question, I've written about the company more than any other. There are practical reasons for that:

1. SAP is the dominant provider of enterprise software in the world; and that's one of my main areas of focus both professionally and personally
2. When I started writing this blog, one of the most interesting themes in enterprise software revolved around SAP versus Oracle/Peoplesoft/Siebel
3. My early postings led me to meet, and befriend people like Jeff, Niel, Dennis and Vinnie; which in turn led to the formation of the Enterprise Irregulars
4. Mike Prosceno, Stacey Fish and Steve Mann have continued to foster the industry's most tangible and comprehensive blogger relations program

Among the various and sundry SAP-related posts over the last two years, few memes have been as widely read as my analysis of TomorrowNow:

• TomorrowNow: Will the Ends Justify the Means?
• Where's Judge Wapner When We Need Him: Oracle Sues SAP

For those playing at home, you know that TomorrowNow is a 3rd party maintenance provider that supports Oracle, Peoplesoft, J.D. Edwards and Siebel products at 50% of the 1st party cost. SAP acquired TomorrowNow with the intention of helping capitalize on the F.U.D. factor created by Oracle's M&A binge.

Although TomorrowNow was (and is) a tiny part of SAP's business; it was a stronger performer. Profitable, satisfied customers, and helpful in the battle against Oracle. While many (myself included) wondered how SAP could justify premium (22%) annual maintenance for its own software while simultaneously espousing the virtues of TomorrowNow; it seemed to work well enough for awhile.

And then came the lawsuit. I'm not a lawyer and, having been an investor in both SAP and Oracle in the past (and likely at points in the future) I also haven't conjectured on whether or not SAP has any culpability relative to the allegations against them. But regardless of how the formal legal proceedings finish out; I have thought for some time that TomorrowNow's executive team was likely to undergo some changeover. When a company of SAP's presence suffers a PR blight as they did with this lawsuit; the forces of nature demand a pound of flesh.

Today, it became official that Andrew Nelson and several of his executives have resigned from the company:

SAP (NYSE: SAP) today announced that several senior managers of TomorrowNow, including the company’s CEO, have chosen to resign. In addition, SAP said it is considering several options for the future of the TomorrowNow business, including possible sale.

The most interesting question to come of today's announcement is; should SAP sell TomorrowNow? Again, I've questioned from day one whether the ends justified the means. Make no mistake, 3rd party maintenance, if handled properly, has tremendous potential value to customers. I'm sure Vinnie could speak to this far more eloquently. And now with TomorrowNow's driving force (Nelson) extricated from the process; it's hard to see the value of keeping TN as part of SAP proper.

I'm curious to hear what the rest of you think? What does SAP have to gain from 3rd party maintenance? Do you know of any TomorrowNow customers that have transitioned to SAP ERP after the fact? Will the legal proceedings with Oracle erase any profits generated from the division over the last few years? Who would be a logical buyer for the company?

Note: This is not a recommendation to buy or sell SAP, ORCL or any other security, but is merely a personal analysis to foster discussion for informational purposes only. At the time of this writing, I and/or funds I maintain discretionary control over, did not maintain a position (long or short) in SAP or ORCL. We also may, at times, carry derivative options on underlying positions as a hedge.

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SAP Business ByDesign: Peter Zencke discusses the product evolution

Peter Zencke walks us through the evolution of SAP Business ByDesign; equating early work on the mid-market SAP solution to a "concept car." It's been 4+ years of development and more than 1,000 software engineers.

He highlighted the four key points of differentiation between ByDesign and other midmarket ERP solutions:

• Completeness
• Adaptability
• Ease of Use
• TCO Reduction

Zencke then showed a video of several of SAP's initial beta customers. Although the video showed four or five, it's my understanding that SAP has 20 live customers with 40+ more in pilots.

The product is designed to provide COMPLETE business process functionality from "order to cash."  The functional footprint covers eight segments:

• Compliance Management
• Executive Management Support
• Financial Management
• Customer Relationship Management
• Supplier Relationship Management
• Project Management
• Supply Chain Management
• HR Management

...now on to the DEMO

Note: This is not a recommendation to buy or sell SAP or any other security, but is merely a personal analysis to foster discussion for informational purposes only. At the time of this writing, I and/or funds I maintain discretionary control over, did not maintain a position (long or short) in SAP. We also may, at times, carry derivative options on underlying positions as a hedge.

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SAP unveils mid-market solution…ByDesign

The much ballyhooed and oft-discussed evolution of SAP's midmarket software strategy is finally upon us. As I type this, SAP's Henning Kagermann has just announced the availability of SAP Business ByDesign; formerly referred to as A1S.

Business ByDesign is, "the most important announcement of my career" according to Kagermann; heady words for someone who was rather dismissive of the impact of on-demand software architecture just 18 months ago.

Segmenting the Market

One of the biggest challenges SAP will have is segmenting the new offering. Take a look at the opening paragraph of the Fact Sheet we were provided in today's press kit:

The SAP Business ByDesign solution is a new addition to the SAP portfolio of solutions for small businesses and midsize companies. The on-demand business software solution complements and does not replace any of the other solutions in the SAP portfolio. [note: emphasis mine] SAP Business ByDesign specifically addresses a new market of prospective customers: growing midsize companies that typically have not invested in the types of integrated business solutions SAP provides.

To my mind, there is tremendous need and opportunity for a hosted, subscription-based, easy-to-use ERP solution for small and mid-market companies. That said, I don't see how the demand doesn't, at least in part, cannibalize the traditional SMB on-premise ERP solutions; of which SAP has several already in the market.

Henning put up a chart describing SAP Business ByDesign as a solution that addresses an entirely new segment of the market.

Large	SAP BUsiness Suite	>2500 employees	~$30B market
Midsize	SAP Business All-In-One	<2500 employees	~$15B market
Midsize	SAP Business ByDesign	100-500 employees	~$15B market
Small	SAP Business One	<100 employees	~$15B market

Note: This is not a recommendation to buy or sell SAP or any other security, but is merely a personal analysis to foster discussion for informational purposes only. At the time of this writing, I and/or funds I maintain discretionary control over, did not maintain a position (long or short) in SAP. We also may, at times, carry derivative options on underlying positions as a hedge.

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Dennis Howlett on software's Phoenix(s)...

Dennis Howlett is a rare breed.  He's a straight shooter with the tenacity of a beat reporter but the perspective of a seasoned industry executive.  One of the most enjoyable outcroppings of the development of the Enterprise Irregulars has been getting to know him and becoming familiar with his perspective.

In a three part missive, he gives his views on Microsoft and SAP, and the challenges they face as the software industry paradigms change around them. I don't always agree with Dennis, but I always feel smarter for having hashed out a topic with him. Hopefully you will, too.

1. Microsoft/SAP need to become phoenixes (Part 1)
   
2. Microsoft/SAP need to become phoenixes (Part 2)
3. Microsoft/SAP need to become phoenixes (Part 3)

Note: This is not a recommendation to buy or sell MSFT, SAP or any other security, but is merely a personal analysis to foster discussion for informational purposes only. At the time of this writing, I and/or funds I maintain discretionary control over maintained a long equity position in MSFT but did not maintain a position (long or short) in SAP . We also may, at times, carry derivative options on underlying positions as a hedge.

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64,000 Steps: Or SAP’s Daunting Customer Challenge

As of December 2006, SAP had 36,200 customers worldwide. That number is a testament to the company's position of dominance in the enterprise software industry. Yet, it's also emblematic of the company's biggest challenge going forward.  CEO Henning Kagermann is on record with a stated goal of "100,000 customers by the end of the decade."

• 100,000 customers by the end of 2010
• 63,800 additional customers
• 15,950 new customers per year
• 1,329 new customers per month
• 44 new customers per day
• 1.8 new customers per hour
• 1 new customer every 33 minutes

Jokes aside, I think this little math exercise helps illustrate the significance of what's ahead for SAP.  SAP was founded in 1972. It's taken the company 35 years to gain 36,000 customers and that's with industry-best growth and execution. Now it wants to add another 64,000 in four years.

For as talented as its sales organization may be [and it's talented through and through], SAP's stated goal of trebling its customer base won't come by either a) hiring 3x the current field sales force or b) raising quotas threefold.  This is an efficient sales organization with a high win rate as it stands. SAP is only going to come close to matching its lofty goal through FUNDAMENTALLY CHANGING THE WAY IT DOES BUSINESS.

At the heart of its plan is an aggressive pursuit of the mid-market; which is going to come from its yet-to-be-released A1S product and its existing low end products (BusinessOne, for example).  When I'm at Sapphire in two weeks as part of Blogger's Corner, I plan to really hone in on A1S and the opportunities and challenges it presents. Simply having a new product suite won't be good enough, and SAP knows that. It also must find a way to sell, implement and service customers in a much more efficient way. Can an organization with 38,000 employees shift on a dime like that? And assuming SAP does fall short of the 100,000 customer mark, how close does it need to get to satisfy its stakeholders? Remember, SAP's 300mm Euro bonus pool is tied to doubling the company's market cap by 2010.  Absent significant organic customer additions, this would require – GASP – an aggressive M&A policy which belies SAP's history and stated plan of action. 

Stay tuned; I know I am.

Note: This is not a recommendation to buy or sell SAP or any other security, but is merely a personal analysis to foster discussion for informational purposes only. At the time of this writing, I and/or funds I maintain discretionary control over, did not maintain a position (long or short) in SAP. We also may, at times, carry derivative options on underlying positions as a hedge.

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Where's Judge Wapner when we need him?: Oracle sues SAP

Oracle filed suit against SAP today in the Northern District of California alleging:

Oracle brings this lawsuit after discovering that SAP is engaged in systematic, illegal access to – and taking from – Oracle’s computerized customer support systems. Through this scheme, SAP has stolen thousands of proprietary, copyrighted software products and other confidential materials that Oracle developed to service its own support customers. SAP gained repeated and unauthorized access, in many cases by use of pretextual customer log-in credentials, to Oracle’s proprietary, password-protected customer support website. From that website, SAP has copied and swept thousands of Oracle software products and other proprietary and confidential materials onto its own servers. As a result, SAP has compiled an illegal library of Oracle’s copyrighted software code and other materials. This storehouse of stolen Oracle intellectual property enables SAP to offer cut rate support services to customers who use Oracle software, and to attempt to lure them to SAP’s applications software platform and away from Oracle’s. Through this Complaint, Oracle seeks to stop SAP’s illegal intrusions and theft, to prevent SAP from using the materials it has illegally acquired to compete with Oracle, and to recover damages and attorneys’ fees.

The complaint is surprisingly easy to read and a short [at least for legal filings] 41 pages and offers some very explicit allegations that largely revolve around alleged use of passwords to access and subsequently download large amounts of Oracle customer support and technical documentation. Although the lawsuit extends to SAP proper, most of the complaints appear to revolve around actions allegedly taken by SAP's 3rd-party maintenance subsidiary, TomorrowNow.

I can't and won't begin to comment on how this ultimately plays out; we haven't heard SAP's official response [and we might not as their stated corporate policy is to not comment on pending litigation] and we also have no sense of the magnitude of the requested damages. Not to mention legal affairs are clearly outside my bailiwick.

In any event, you can be sure this will make for some interesting press bites. We know that Ellison has never shied away from public barbs with his competitors, so surely he'll play up the "wounded Oracle" angle for as long as this litigation persists.

The much broader and more interesting question is what impact, if any, this will have on the 3rd party maintenance movement. While TomorrowNow isn't the only game in town (netCustomer, Rimini, SYSTIME to name a few); at the heart of Oracle's complaint is that TomorrowNow wouldn't have been able to successfully woo PeopleSoft and J.D. Edward's customers away for 50% discounts without this ill-gotten information.

When I profiled TomorrowNow after Sapphire last year, I asked...will the ends justify the means? But I never suspected that would be a prescient question that would ultimately be settled in court.

Several Irregulars have chimed in on this story, too.

• Between the Lines [Dan Farber & Larry Dignan]: Oracle Sues SAP
• Dennis Howlett: Oracle accuses SAP of "theft on a grand scale"
• Vinnie Mirchandani: A Sad Day for Enterprise Software

I would urge you to read Vinnie's brief but articulate take on this matter. Among all my friends and colleagues, he understands the customers' perspective; as he is on the front lines of customer maintenance negotiations every day.

Note: This is not a recommendation to buy or sell Oracle, SAP or any other security, but is merely a personal analysis to foster discussion for informational purposes only. At the time of this writing, I and/or funds I maintain discretionary control over, maintained a long equity position in SAP but did not maintain a position (long or short) in ORCL.

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I've really seen it all now...

I thought I had really and truly heard everything when this story made it's way into my Inbox:

• German shares higher at midday led by SAP amid rumours of takeover bid by Oracle [Forbes.com]

But then I realized that, in fact, I hadn't really seen everything:

• Henry Blodget on why investors shouldn't pay attention to Jim Cramer [Slate.com]

What's next?

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SAP: Hasso expects Henning to remain CEO through 2008...

Hasso Plattner, SAP's founder and chairman, said he expects Henning Kagermann will stay on as CEO beyond the end of his current contract which runs through the end of 2007. The Journal has the story, which originally appeared in a German newspaper interview and was subsequently confirmed by SAP officials.

• SAP Chairman Sees CEO Staying Extra Year for Revamp (WSJ-Sub Required)

..."In any case, we aim to have Kagermann available to us as CEO for at least one more year," Mr. Plattner said, adding that he expects Mr. Kagermann, 59 years old, to accept

Mr. Plattner made his comments in an interview with German newspaper Süddeutsche Zeitung. A spokesman for SAP confirmed Mr. Plattner's comments. Company watchers had anticipated Mr. Kagermann to extend his contract, as the company is still in the midst of a transformation he orchestrated...

This is welcome news for SAP investors, customers and employees. SAP is not without potential successors, but continuity from one of the company's driving forces is a good thing as 2007 & 2008 are key transition years for the software giant.

Assuming Kagermann does indeed extend his employment contract, we can leave the discussion and analysis of who will (and should) succeed him as CEO for another day.

Note: At the time of this writing I, and/or funds I maintain discretionary control over, maintained a long equity position in SAP. We also may, at times, carry derivative options on underlying positions as a hedge.

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Liveblogging SAP Investor Symposium (Part III)...

Compliance, risk and governance might not be the sexiest topics at your next cocktail party, but they're at the epicenter of much of today's business process management. SAP has been building up their focus on compliance and governance. Unlike today's other presentations, Doug Merritt's overview of the Governance, Risk and Compliance (GRC) business had the weight of metrics behind it. Nothing gets an analyst's ears perked up more than cold hard numbers; something we were all craving after the first four presentations.

• Governance, Risk and Compliance Update [pdf]

Takeaways from Merritt

• GRC ASPs increased 63% year-on-year
• GRC is experiencing 15% quarter-over-quarter customer growth (2,000 GRC customers)
• Installed based has doubled in the last six months
• Additional modules added since Sapphire (May)
  • Product Compliance
  • Environmental, Health and Safety
  • FDA Prototype
  • Emissions Management
  • Risk Management [pilot]
  • Global Trade Services
  • Process Control
  • GRC Repository
• Cisco and SAP working on delivery of network-aware applications

Shai Agassi's Discussion

Shai didn't have many slides, but rather spoke for awhile about the importance of crossing the chasm and driving SOA adoption into the enterprise. Agassi articulated the goal of having 10,000 SAP customers live on BPP by the end of 2007, which is a massively aggressive goal [Jeff agrees its aggressive but also cautions against counting out his former employer]. Dan Farber does an excellent job of summarizing Shai's keynote, so rather than regurgitate the same things, I'll just point you to Dan's writeup.

• SAP Crossing the Chasm in 2007 [Dan Farber, ZDNet]

Note: At the time of this writing I, and/or funds I maintain discretionary control over, maintained long equity positions in CSCO, MSFT and SAP. We did not maintain a position, long or short, in ORCL. We also may, at times, carry derivative options on underlying positions as a hedge.

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Liveblogging SAP Investor Symposium (Part II)...

I had high hopes for the next two presentations, but was left wanting on both fronts. Up first, was Udo Waibel with an update on Duet. I've followed Duet with great interest but hoped to hear more today about the progress made since I last did a deep dive on the SAP/Microsoft collaboration.

• Duet: Product Demo and Update [pdf]

Waibel did a workmanlike job of articulating the opportunity for SAP (i.e., extending the reach of SAP to the tens of millions of productivity workers who have little reason to leave their Microsoft apps for most work processes) but lacked presence on-stage and had too few answers in the Q&A to indicate he's a driving force on the app. Personally I would've rather heard from Dennis Moore, who I know from firsthand experience is passionate and articulate about Duet.

Takeaways from Waibel

• The Good
  • Duet is launching two value packs in the coming months
    • Three new scenarios
      • Travel Management
      • Sales Management
      • Demand Planning
    • Multi-language support
    • Basic customization and configuration tools
  • Duet 1.5 planned for summer 2007
    • Two new scenarios
      • Purchasing management
      • Recruitment management
    • Advanced customization and configuration
  • To date...100 customers and 200,000 licenses
• The Bad
  • Fuzzy math 1.0
    
    • Why does a product launched seven months ago with a reported 200,000 licenses only have a handful of named accounts live? During the presentation Waibel made the point of how quickly Duet can be implemented, which belies the lack of live, reference accounts
  • Fuzzy math 2.0
    • Waibel was evasive on pricing, refusing to comment on Duet pricing. He was not alone in his evasiveness as several colleagues told me they were similarly stonewalled by other executives during the day. Again, if Duet is already in the market with several hundred thousand licenses, how is pricing a big secret? Particularly when Microsoft has been quoting a $125/seat price point since the day Duet was launched?
  • Versioning
    • A customer must be both an SAP and Microsoft customer to utilize Duet; but what versions must they be running?
      • Several times in the presentation Office 2007 support was listed as "coming soon"
      • What versions of SAP does a customer need to run? I've been told by several sources that you must be on R/3 4.6.3 or later
      • I've also been told that SAP is not using Duet internally. If this is true, why aren't they?

Next, came an update on SAP's Analytics strategy by Sanjay Poonen. Sanjay gave an energetic and polished presentation.

• Analytics and Performance Management Update [pdf]

Sanjay broke SAP's BI strategy into three components:

• Simplicity
• Relevance
• Agility

Simplicity = embedding BI functionality into existing UI environments; tailoring BI functionality to meet the sophistication of each user; creating central monitoring and minimal administration requirements by the IT organization

Relevance = providing a set of analytics applications (xApps) including a pre-built library in addition to tools for the creation of custom apps and reports.

Innovation = Leveraging the SAP BI Accelerator program to improve "go live" times and lower TCO.

Other takeaways from Poonen

• Poonen articulated a view of the bifurcation of BI...with traditional tools (ETL, basic querying) as becoming commoditized while analytical applications will provide the value. Obviously this is a self-serving view, but probably doesn't make SAP's BI partners feel very warm and fuzzy
• While SAP has primarily focused on organic growth, Poonen acknowledged that SAP will need to "own" many aspects of the BI roadmap; some of which will be easier to acquire than to build out internally

Up next...Doug Merritt on Governance and Compliance, Shai Agassi on the Technology Roadmap...

Note: At the time of this writing I, and/or funds I maintain discretionary control over, maintained long equity positions in MSFT and SAP. We also may, at times, carry derivative options on underlying positions as a hedge.

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