I am writing this on request. It’s hectic at Howlett Towers and this will likely be the last #evilplans post here before we launch the real #evilplans on 1st May. Keep your eyes peeled.
SAP announced its Q1 FY2013 results earlier today. Despite missing the consensus revenue forecast by some five percent, I was more concerned with the detail. This is important for a number of reasons that I will discuss over time.
First, it is important to remember that all vendors, regardless of size, should be subject to financial sanity checks. Buyers need to know that the companies they buy from have a long term future. That is especially true for companies that run their back office with a single supplier. Here, I define ‘back office’ as accounting, HR admin and CRM admin functionality. These are the core ‘things’ that all large businesses need in order to develop an efficient organization. They represent the backbone functions upon which all businesses depend and which provide the way in which they pay and get paid for the goods and services provided. SAP is no exception.
Next, and as promised, SAP adopted a method of reporting that gives better visibility into its sources of revenue. This makes it much easier to understand the trends and business drivers, leaving less room for speculative forecasting or interpretation. On to the numbers.
My initial analysis suggests that SAP’s core ERP, BusinessObjects and Sybase businesses are declining. There was a fall of around six percent in revenue for these core items on a year over year basis. This amounted to some €38 million. In an analyst call, the company attributed this entirely to activities in Asia Pacific. I have to take SAP at its word but I have been predicting that without a significant refresh, SAP runs out of steam on core ERP by 2017.
Elsewhere, while attention continues to be focused on SuccessFactors and HANA, I wonder what’s happening with Business ByDesign.
Jim Hageman-Snabe took a call from me on these points. His take (paraphrased):
Provides a way of radically simplifying the landscape. Quoting SAP’s own implementation of HANA, Snabe claimed the company has reduced hardware cost from €3.8 million to €0.5 million. That’s fine but then I don’t know how much HANA was needed to achieve these savings. Neither do I know the amount of retrofitting and testing necessary to achieve those savings. If SAP is to convince and benefit, then it MUST share benefit with its customers. That means ensuring that simplification also translates into reduced implementation cost. Times five software license cost will NOT cut it. As a side note, I hear that Cisco is offering ‘free’ HANA boxes to kick start its entry into the market. IBM is in the process of divesting its server business to Lenovo. That should remove another cost pressure point.
Extending the traditional business. SAP is selling BusinessWarehouse on HANA very hard. Accelerating the warehouse provides incremental value although that can amount to millions of dollars/euros in value. If SAP gets Business Suite on HANA into full production for the summer then the picture changes as SAP is then able to offer real time operational systems. This will put them firmly into competition with the cloud players which already have real time capability while providing a safe haven for those who may feel under pressure to move to the cloud but are nervous about the implications.
Open innovation – new solutions. This is the part that SAP has yet to flesh out and about which Snabe is not fully prepared to discuss. The last year, I, along with my video partner Jon Reed, have been following SAP’s startup support efforts in this business unit. We have found a number of good examples. Only the other day I met Warwick Analytics who have a fledgling solution for discovering root cause quality problems in manufacturing industries. More to come on this but the solution we discussed is genuinely exciting. The other week, I caught up with Basis Technologies. They are working on predicting customer propensity to complain or leave in energy utilities. In both cases, the business value runs many millions of dollars/Euros. And that is just two examples. My personal view is that regardless of the value HANA may bring to Business Suite and BW customers, the biggest potential is in this area of new solutions. It is SAP’s to win…or lose.
SAP is selling SuccessFactors hard and accelerating the onboarding of users for Ariba. The results speak for themselves. Cloud revenue is at an annual run rate of €900 million. Having said that, there is plenty of controversy surrounding SuccessFactors. I routinely hear of tensions between SAP and the implementation channel where the smaller SIs are ignored in favor of the big hitters. Then there is the question about how well SuccessFactors integrates back to core HR and/or whether the newer SuccessFactors products will be sold in as replacements. For now and tensions aside, SAP is leveraging its customer base well. ByDesign is a different story.
On our call, Snabe talked about wins against NetSuite and Salesforce.com on products that are subsets of the main BYD suite, including Sales OnDemand. I can point to wins the other way. Snabe said that the mid range is continuing to buy functions with finance leading the way. I find this depressing. The cloud provides ways to transform business. If SAP is a proxy for what’s happening in the market then that isn’t the case in the mid market. More research is needed here.
Whether BYD shrivels away is an unknown. If that happens then it will be an opportunity wasted that will hurt customers and SAP’s reputation. If SAP is able to get BusinessOne into the cloud in workable form then this discussion becomes moot. BusinessOne is a very good solution and more advanced than BYD. That should not be a surprise given its maturity.
This quarter’s results are the clearest indication of a company in transition. The fact SAP can point to a relatively small market as the reason for a forecast revenue number miss tells me that core ERP sales are fragile. The HANA and cloud replacements are coming along at a brisk pace but then buyers should not be wowed by the double and triple digit growth numbers. SAP is coming from a small base and would be rightly panned if they achieved anything less. HANA is the future at many levels but, as we will discover, SAP has numerous issues to overcome before it can declare that HANA is mainstream. Right now, Snabe is talking up proof of concept conversions. That’s all good. But I can equally point to customers who are holding back, waiting to hear SAP clarify its messaging, simplify pricing and accurately articulate benefits before they make what, for many, will be a multi-million dollar investment. They’ve been bitten before, they won’t fall for it again.