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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Comments

[Jason Wood]

@Nitin -- Your point vis-a-vis firms internalizing operations is an interesting one. Typically I think of the inverse of that same value proposition: which is to say firms look to externalize operations that they CAN get executed in a more efficient manner. Two sides of the same coin. Thanks for the comment.

@Mukund -- You are absolutely correct; SAP bought TomorrowNow as part of a multi-pronged attempt to lure away PeopleSoft customers during the ORCL/PSFT/JDEC merger soap opera. They had some success actually; but I suspected SAP had two stages in mind. Phase 1: Lure away PSFT customers for cheap maintenance. Phase 2: When it came time to expand or standardize on one ERP platform, convert those customers fully to an SAP solution. It's that second phase which would've made the TomorrowNow acquisition an astute one; but I know of very few examples of this happening. Thanks for your comment.

[Mukund Mohan]

Jason
I thought the main reason SAP bought TomorrowNow was to get access to PSFT customers and convert them to SAP vs. continue as PSFT or move to Oracle. The point this recent move seems to drive home is that Oracle has done a good job of convincing those customers (or maybe those customers have concluded on their own) that they are better served by Oracle. Given the investments in these large ERP products as you point out, there's little propensity to switch.

Wonder if CA or Quest software would buy out the business or a PSFT partner to get access to those customers and position themselves as a Oracle Fusion upgrade expert.

[Nitin]

The value that TomorrowNow brings to SAP is that it can hurts (bleed) Oracle margins for support and maintenance. Whether it makes sense to have it under SAP's umbrella or hive it off as an independent is a strategic decision which I am sure is based on multiple factors.

From purely a theoritical standpoint:
Firms generally tend to internalize operations which they cannot get executed from the marketplace in a cheaper and reliable way. TomorrowNow also has high "asset specificity" for SAP.

You raise many interesting questions - I hope the comments provide deeper insights.

Thanks,
Nitin