SAP's Sweet Spot

In the $3S billion enterprise software market, no one comes close to SAP.
By Maria Lstrella Manuel and Heinz Bulos
November 2003
he news came as a bit o a shock.
Last June 2003, business sotware
giant Oracle Corp. announced a
>6.3 billion hostile takeoer bid o
PeopleSot Inc., which only ie days
earlier announced its >1. billion
acquisition o yet another business
sotware company J.D. Ldwards & Co.
It certainly bothered customers o both
PeopleSot and J.D. Ldwards who hae
already inested millions o dollars in
enterprise resource planning ,LRP, and
customer relation management ,CRM,
applications and are now acing this
merger and integration nightmare.
An analyst rom the International Data
Corporation ,IDC, called it Oracle`s
great white shark attack`, designed to
destabilize the competition and gaining
market share. By swallowing PeopleSot,
Oracle maintains second lead in the >35
billion enterprise sotware market.
Otherwise, it will be bumped o to third
place behind the bigger PeopleSot.
\hicheer way it went-and by the time
this article goes to press, PeopleSot has
already merged with J.D. Ldwards with
Oracle`s oer still lingering-one player
ultimately beneits. 1hat`s SAP AG, the
global business applications Goliath.
SAP was ounded by ormer IBM
eterans-lasso Plattner and Dieter
lopp-in 192 in \alldor, Germany.
SAP is synonymous with LRP, being the
industry pioneer in proiding companies
with business applications or accounting,
manuacturing, and human resources. It`s
currently the world's largest enterprise
sotware company, and the world's third-
largest independent sotware supplier
oerall.
Dominant player
t`s a behemoth in eery sense o the
word. SAP employs oer 28,900
people in more than 50 countries,
with 12 million users and 64,000
installations in oer 120 countries. In
2002, its reenues were t.4 billion,
roughly US>.8 billion with net income o
t508 million ,>533 million,.
In the application space today, who is the
irst player, who is the second player`
asks Krish Datta, managing director o
SAP Philippines and concurrently o SAP
Indonesia. Commenting on the still
ongoing takeoer battle, 1his is not
exactly clear because JDL |J.D. Ldwards|
is now with PeopleSot, and Oracle is
ighting. I deinitely know that there will
be room or one or two players more.
Now, those one or two players hae not
really emerged. It could be Oracle on its
own, it could be JDL-PeopleSot
combination, or a JDL-PeopleSot-Oracle
combination, I don`t know.`
And rankly, SAP doesn`t care. SAP`s
market share is more than that o its ie
largest competitors covbivea. 1he igures
ary depending on the source. SAP`s 2002
annual report estimates it has 51, Oracle
14, PeopleSot 12, J.D. Ldwards 5,
and i2 1echnologies 3. Interestingly,
eeryone except SAP lost market share in
2002. AMR Research gies SAP 35
market share, ollowed by Oracle with
13, PeopleSot with 10, and J.D.
1
I
Ldwards with 5. So, een i Oracle
gobbles up PeopleSot which gobbled up
J.D. Ldwards, SAP will continue to lead.
And, more likely, it will widen the gap as it
woos disgruntled customers to its old.
\ith the current turmoil, SAP looks like a
sae haen. Datta points out, I think it is
just a huge risk or any customer to
choose anything other than SAP. \es,
there could still be one or two more
players. \ho those one or two and when
we don`t know. So rom the saety point
o iew, what works, what is proen, what
is well supported, is SAP.`
1hat has been accentuated een earlier on
with the troubles o the so-called "best-o-
breed" ,that is, niche players that do one
thing well, \eb-based products that
stormed the dot-com gold rush, such as
those o i2 1echnologies Inc., Ariba Inc.,
Siebel Systems Inc., and Commerce One,
which oered applications or CRM, e-
marketplaces, e-commerce, sales orce
automation, and supply chain
management. At that time, SAP, which
was associated with just LRP, was
dismissed as a has-been that`s too late to
the Internet, a slow-moing dinosaur that
didn`t get it.

Datta says, Some people said we were
too slow and that we will miss the boat.
My boss told me that the dot-com boat
will sink ery close to shore, and it did.
1hat`s why we did not change our
business model, een when eerybody
else`s share rocketed. \e thought long-
term. \e elt that yes, the Internet was
important, and we will integrate that into
our solutions, but essentially, we were still
ocused on applications.`

But in act, SAP ra. slow to the Internet
and it aia eentually jumped into the dot-
com bandwagon, in uriously ast ashion,
launching mySAP.com, which integrated
the Internet in its applications.
Now that business customers hae
become wary o anything associated with
dot-coms and returning to stable
companies, SAP dropped the .com suix
and renamed it as mySAP Business Suite.
And it quickly deeloped competitie and
een better sotware in areas once ruled
by high-lying niche players. SAP rules in
all segments, except CRM, where it plays
second iddle to Siebel, but is ast catching
up. And with uncertainty still hanging
oer its ull-suite competitors Oracle and
PeopleSot, the company is positioning
itsel as a sae, stable, and trusted business
adiser.
And oerwhelmingly dominant at that.
Len in the Philippines, SAP rules the
roost. 1he company has been doing brisk
business in the Philippines, een though it
set up shop only in 1995.
Mariic Gamo, Marketing and Alliance
Manager o SAP Philippines, quotes
IDC`s igures which estimated SAP
Philippines` market share in terms o
license reenues at around 40, but that
includes accounting packages such as
ACCPAC that are not LRP applications.
Gamo notes, \hat we did was we made
our own computations and we remoed
what we called niche players and we
changed the base. And based on our
computations based on IDC`s numbers, it
would put us as haing a market share o
something like 60.`
But een at the original IDC numbers,
Gamo points out, our next competitor is
at 8. At 60, our next competitor is
something like 16.` Consider that SAP
is installed in 80 o the country`s top
100 companies. \orldwide, 65 o all
lortune Global 500 corporations use
SAP.
Differentiation
t`s not just market dominance that
makes SAP an easy sell to CIOs. SAP
positions itsel against the
competition in other ways.
lor instance, it`s a ull-suite player, with
applications rom business intelligence
,BI,, CRM, enterprise portal, LRP,
inancials, human resources ,lR,,
marketplace, mobile business, product
liecycle management ,PLM,, supplier
relationship management ,SRM,, and
supply chain management ,SCM,. And it`s
doing well in all. At the end o 2002, it
generated t92 million in reenues rom
inancials and lR ,or 41 o total
reenues,, t43 million rom CRM ,21,,
t464 million rom SCM ,20,, t259
million rom BI, enterprise portals, and
SRM ,11,, and t168 million rom PLM
,,. In the sotware business, as
Microsot has proen in oice
productiity applications, suites rule.
It also prides itsel or oering 23
industry-speciic solutions, rom
aerospace to utilities. Datta explains, So,
i somebody is oering a generic product
to these dierent industries, |say a|
pharmaceutical manuacturer ersus a guy
who manuactures components or
automoties, deinitely they are ery
dierent - the way they account, the way
they distribute, the way they manage their
inentory, and the way they set their
maintenance plans. So what we are doing
in SAP is that we are looking at it by
industry by industry, and SAP has huge
experience in implementing solutions in
these industries and in large corporations
in those industries.`
\hat clearly dierentiates SAP is that it
brings in decades o business process
experience rom dierent industries, best
practices that not just any sotware maker
can inent. Len in the mid-market
segment, Datta says it deliers not just
sotware or the hardware that comes with
it, but also its wealth o knowledge. It`s
this combination that it packages as
mySAP All-in-One. Can somebody copy
this It will take years because we didn`t
come up with this oernight. Oerlapping
a ew unctionalities is aster, is easier,
than trying to get knowledge.`
Also, unlike upstart business sotware
players, including Microsot, SAP`s
reenues are not largely dependent on
sotware licenses. In act, only a third o
its reenues comes rom sotware. A third
comes rom maintenance, a recurring
reenue source, and another third rom
consulting and training.
Datta expects that as more SMLs start
using business sotware more, there will
be increasing pressure to lower upront
costs, so licensing reenue would be
under a squeeze, but serice reenue will
go up. Serice will be more important.`
le adds, I think there will be more
serice partners ocusing on hosting, not
ASP |application serice proiders|,
though. People will merge their I1
systems together. 1oday, i there are orty
companies, there are orty systems, later
on they will merge and they will ask
someone to maintain the system. \ou will
ind specialized serice proiders which
will not just oer package
implementation, but which will oer to
merge your I1 system and host the
product. 1hat, I think, is what the
preailing trend would be.`
SAP also positions itsel as a neutral
player, much like IBM. Ironically, Oracle,
I
a major player in the database business, is
somehow hampered by its ery lagship
business when it comes to selling its
enterprise sotware suite. Microsot aces
a similar dilemma. SAP sells itsel similarly
when it comes to choosing between the
rial Jaa and .Net camps.
Recently, it launched its middleware
application called Net\eaer. But unlike
the middleware being peddled by Sun,
IBM, and Microsot, which they sell as tbe
platorm or the entire computing
enironment, SAP positions Net\eaer
as simply an integration tool that connects
SAP`s with those o other sotware
companies.
Growth areas
espite its size, there`s still a lot o
room or growth. Asia Paciic is
still a small market or SAP,
about 12 o total reenues. Obiously,
there`s an enormous opportunity there.
In the Philippines, een as it dominates
the top-tier market, Gamo stresses, that
does not mean that there is no room or
growth, because some o them are not
using the whole package and one o the
key things about being successul also is
to keep on deeloping and improing with
time.` Most hae installed LRP, but there
are the other modules.
\hile SAP has a ew CRM installations in
the country, just like worldwide, it didn`t
really ly. 1here was just too much hype in
CRM, and some companies poured
millions into it, without irst addressing
their core business processes. \hat`s
doing well in the Philippines are BI, SCM,
and, surprisingly, enterprise portals.
Datta says business intelligence is a logical
extension to LRP. Ater LRP churns out
the inancial inormation, how do I get it
out o there` LRP systems, due to the
relational nature o the database, are not
ery strong at analytical reports. So you
put it out to an external database and you
extract all o it,` leaing the data or BI
sotware to analyze.
le adds, A natural market here is supply
chain |management|, because in a large
country, |there are| distribution
challenges, multiple suppliers, and
marketing distributors are in remote
places.`
Lnterprise portals look like a potential
winner as well. Datta explains that while
there is a host o cheaper and een ree
alternaties, SAP`s portal application
proides real business alue, including
single sign-on across applications,
integration o both SAP and non-SAP
applications, and lexible customization
across an organization. 1he CLO`s portal,
or instance, is dierent rom the lR
manager`s. And the portal o the sales
team is dierent rom that o the
accounting department.
But i there`s one thing that SAP sees as
its major growth drier, it`s the small-and-
medium enterprises ,SMLs, market,
particularly the mid-market.
Now, in this space, it`s a dierent
ballgame. In the >100 million and below
market, Datta points at Oracle and J.D.
Ldwards as the major players. In the >20
million and below market, Microsot is a
serious competitor.
le admits, In that market, SAP is
relatiely late and you know BusinessOne
is getting geared up in that small market.
It`s going to be a competitie market and
again it`s going to be a market o two or
three |players|. I think it is a market where
D
SAP will play, where Microsot will play,
and maybe one more guy will play and the
others will slowly either merge or anish.`
In the mid-range market,` he adds, I
think Oracle has moed rom the top-
ranked mode to the middle market. Oracle
today is still a player based on what they
hae and based on the ery strong
marketing ocus that they hae.`
Datta is conident SAP will be an easy
choice. SAP, or the top tier, or the
middle tier, should be an automatic
choice. I not, then we are not doing a
good job. And or the lower market, that
is still a ery olatile market but I
personally eel that a year down, SAP will
be a strong player.`
SAP Philippines recently launched its
M3Lite solution, a simpliied orm o its
LRP packages. Datta explains, \hat we
hae done is we hae ocused it on this
|SML| segment, and bundled it with
support serices and ongoing consulting
and hardware.`

1he company has already signed up its
irst M3Lite customer, and expects a ew
more by year end. Datta says, I will be
happy i between now up to the end o
the year, there will be ten companies that
will sign up.` Gamo says they`e been
receiing a lot o inquiries or M3Lite. But
she admits that SMLs are a tough market
to crack. lor these small companies, the
inestment in I1 in proportion to their
reenue is a lot higher than or the bigger
companies, so or them, it`s really a leap
o aith. It`s a hard sell because we
compete with so many small players. \hat
we ask them is to go home and think
about what their business will be like three
years rom now.
It`s really the SML market that will
determine SAP`s uture growth. Right
now, 90 o its reenues comes rom
large corporations. But researcher ARC
Adisory Group Inc. predicts that
purchases rom such enterprises will
decline between now and 2006.
Microsot knows the SML market quite
well. And it has proen quite adept at
attacking the low-end and moing
upwards. But it will take some time beore
Microsot ixes up its Business Solutions
diision, which emerged rom its
acquisition o Great Plains and Naision a
ew years ago.
SAP positions its SML oerings based on
alue, not price. Datta explains, I your
business is >100 million and below and
you compare it to a business which is >1
billion, |that| doesn`t make the >100
million business 90 less complex, that`s
wrong. 1he |amount| o complexity can
be rom 20 to 30 more complex, but
by and large the complexities, the industry
traits, the peculiarities o that industry is
the same. 1hat is where we clearly
dierentiate ourseles rom the other
generic players because what is happening
is other companies are entering this
middle market with one key ambition,
which is how cheap can I |sell it to| you
So they are saying this is the package price
which we can implement in three months
or our months, and you can pay us
P150,000 in hardware, sotware, and
implementation. \es, that is an important
dimension that we do not orget, but is
that the real alue to the customer`
le adds, Our dierence is that we are
coming out with a solution that is ar
richer than eerybody else in terms o its
completeness and integration. But on top
o that, we are giing industry best
practices, we are giing business processes
which are eectiely working or that
particular industry applied across the
world, in dierent companies which are
market leaders in that particular industry.
\e are also certiying partners based on
their |industry| knowledge.`
2004 will be a better year or determining
which company will lead in the SML
market. loweer, better year` might be
a misnomer. Datta estimates that SAP
Philippines will grow at a slower pace.
It`s really ery diicult to say. In the
countries that I`m handling, Indonesia and
the Philippines, I`m looking at anything
between 10-15 growth. 1he next couple
o years, it`s not really the time where a lot
o companies will inest. But the 10-15,
I`m talking about reenue growth. In
terms o the number o installations, it
will probably be higher, maybe something
like 20,` due largely to the expected
SML takeup.

1he last three years hae been tough on
the global economy, and quite
pronounced in the technology sector.
SAP`s reenues in 2002 barely moed, and
or the irst hal o 2003, total reenues
declined by 8 to t3.2 billion. In the
Philippines, Datta says, Last year, we met
our numbers, our proit margins. 1his
year, we are on track. In terms o
proitability, we met our margins, but it`s
nowhere near what we would hae liked
to make, and it`s deinitely nowhere near
what Microsot makes globally, or een
what SAP makes globally. \e are not 25
plus, but we`re not so ar below. I think I
would call it healthy. But I think oer
time, in the next two or three years, I
would like to moe the margins a little bit
up. \e would like to stay close to 20-
25.`

Being not so ar below` 25 is deinitely
not so bad. Datta explains, \e had a lot
o licensing deals last year. A lot o clients
upgraded to mySAP solutions suite
because they were ery happy with the
serices we oered. At the end o the day,
a lot o our customers come back because
they are satisied.`

Gamo says, \e hae the highest
customer satisaction index in the whole
Asia Paciic region. I don`t know, maybe
it`s the culture, but or the last three years,
we hae had the highest rating.` Datta
adds, 1hat`s why we grow een in tough
times.`

Globally, customer satisaction sureys
rank SAP quite high, with one
independent irm placing the company at
.4 on a scale o 1 to 10. In the recent
Businessweek,Interbrand Global 100
Brands, SAP was ranked 35 across att
industries worldwide, jumping 14 rom
the preious year, making it the third
highest leap or 2003. Obiously, the SAP
brand is highly alued.

It`s hard to imagine anything that could go
wrong or SAP. It has a superior suite o
applications, a dominant market position,
an expanding market, innoatie new
products, high customer satisaction, and
a strong brand. lor a company which only
a ew years ago was derided as stodgy and
irreleant, SAP indeed is in a sweet spot.