What financial analysts think about SAP does (and doesn’t) matter

Some weeks ago, Frank Scavo wrote a piece where he chided Motley Fool analyst Richard Saintvilus for a failure to fully understand Oracle’s cloud play. At the time. I said to Frank that financial analyst opinion is important from the ‘due diligence’ perspective because the tech industry is littered with great ideas that fizzled. When companies bet on technology they are assuming there is a longevity to the solutions into which they are buying and so when financial analysts piss on any company we should take notice.

However….financial analysts have a specific set of agendas: either to pump or short a stock valuation. They usually have little clue about buyer behaviour and, if my observations are correct, blank out observations that challenge their position based models. At their worst, financial analysts presume to know what is happening inside a company based upon thin data which is then extrapolated to represent ‘fact.’ Such is the case with Peter Goldmacher’s ‘analysis’ of SAP’s revenue.

He successfully goaded Arik Hesseldahl on AllThingsD to write the provocative headline: SAP Accused of Inflating HANA Growth Numbers. This was followed by Larry Dignan basically reprinting Hesseldalhl’s story. Goldmacher claims:

“If we take management at its word and believe that HANA’s two-year license growth [rate] through FY13 is about 120 percent, then this means that the other 90 percent of SAP’s license business, Apps and BI, is growing at … roughly 2 percent, materially below category growth rates,” Goldmacher wrote. “Our research and experience lead us to believe that SAP is allocating product revenue subjectively and that this is resulting in an inflated HANA growth rate. This could give the appearance of market momentum that doesn’t yet exist.”

On its face this is a damning assessment but is it as bad as Goldmacher would like us to believe? SAP’s latest results have been in the public domain for some weeks. At the time, I noted:

Then we come to the core. Here, growth is in single digits overall with analytics accounting for “high” single-digit growth. Here Snabe says that going forward, the company expects the recently announced Business Suite on HANA to boost sales.

In an earnings conversation with Jim Snabe, co-CEO SAP, he acknowledged to me that growth in the core business was in ‘low single digits.’ So what’s new here? Nothing.

SAP has known for some time that core apps growth would at best be flat to marginally accretive. That is because the latest iteration of the big money spinners are really upgrades to old products. SAP is instead pinning its future on HANA as much more than a database and anyone who is bucketing in the database camp is utterly missing the point.

HANA is much more than that. While it might have started out as a poorly thought out (Oracle competitive) database play, it is a development environment that is providing ISVs with extraordinary opportunities to rethink business processes as well as providing the real time platform for both analytics and the transactional systems. This is a big topic and given the attention span of most financial analysts, it is hardly surprising that they come to screwy conclusions.

The fact that Goldmacher finds it difficult to find solid examples of HANA momentum doesn’t mean they do not exist. The fact Goldmacher fails to back his conclusions with anything other than speculation should tell you all you need to know.

From my own experience I see plenty of HANA based innovation (Disclosure: SAP is a video client for partner innovations. We have filmed around 50 examples so far. Small potatoes in the SAP context but indicative of future momentum, some of which represent multi million dollar opportunities.)

The real problem is that SAP has yet to find a model where partner innovation can be scaled so that everyone in the ecosystem benefits. SAP is keenly aware of this and is working to fix the problem. When (not if) it does, then I suspect the doubting Thomas’s will be made to eat their words.

In the meantime, the ever positive Morgan Stanley jumps to SAP’s defence, albeit acknowledging the possibility of discounting in other areas to sweeten the HANA pot.

There’s a few things I know about SAP that are worth reiterating:

  • SAP is paranoid about getting revenue recognition wrong – there’s a team of some 70 people working on this topic.
  • SAP marketing is often haphazard. One minute HANA is an Oracle killer, next it is the future of the Business Suite. I have little sympathy for these mis-steps yet understand why they occur.
  • SAP’s obsession with ‘beating out’ Oracle is self defeating, drawing attention away from what it does best.
  • Getting HANA POCs converted to enterprise licences as Snabe has promised is the real metric to which people should be paying attention.
  • Seeing Business Suite on HANA momentum is SAP’s next main target. Watch for SAPPHIRE Now announcements. If they are thin on the ground then SAP is stumbling. If not, and customers are talking value, then Goldmacher’s worries disappear.

Will SAP Business Suite on HANA suffer the same uncertainty as Oracle Fusion?

The back and forth around Oracle’s spanking from Forrester raised many interesting questions in back channels. The latest addition to the conversation from Frank Scavo makes the point that:

…the success of Oracle’s Apps Unlimited policy is the primary inhibitor of Oracle Fusion Applications adoption. Enterprise applications are sticky. It is difficult enough for vendors to get customers make a change, even when vendors announce end of support for an existing product. Imagine how hard it is to get customers to take action when you are promising them continued investment in their existing products.

Frank’s analysis got me thinking about what might happen as SAP rolls out Business Suite on HANA (BS/H.) My initial thinking was that the relative success of BusinessSuite with Enhancement Packs might act as an inhibitor in much the same way that Frank suggests is happening for Oracle.

SAP only announced BS/H availability last month and it has already polarized the analyst community. At this stage it is too early to offer a definitive opinion. We really need to learn about customer acceptance and war stories. Those stories should start trickling through at the next SAPPHIRE.  Even so, the point is worth considering and one that I put to Vijay Vijayasankar, one of SAP’s latest signings.

Side note: for those that don’t know, Vijay is a good friend who, while at IBM, provided tremendous field level insights and was a valuable contributor to the JD-OD wrap shows.

Vijay identifies MRP run on demand as a use case where customers can make immediate savings in capital tied up in the business. That will come as a surprise to some but plays well to the manufacturing companies that have been among SAP’s oldest and most loyal customers. Vijay says the company has identified 23 use cases. I’d like to know more. He also explains that because BS/H comes with some prepackaged analytics capability, controllers (for example) do not need to wait for IT to build operational reports. That will be welcome.

On his personal blog, Vijay talks in broad strokes about how BS/H together with Business Warehouse on HANA (BW/H) and analytics capability provides the foundation for a number of possible use cases where the amount of manual effort to realise value is modest. What he doesn’t explain though is the extent to which customers will need to re-implement and the extent to which customisations are supported in BS/H.

Despite Vijay’s optimism I still wonder just how much traction SAP can get with BS/H in a market that has become fatigued. At the last earnings call, Jim Snabe, SAP’s co-CEO was very bullish about the prospects for HANA. To add an intriguing twist, it was noticeable that user groups were not as vociferous about a recent price hike announcement for SAP Standard Support. Given that enhancements come with SAP support one has to assume that customers are broadly satisfied with what they’re getting.

As always, the proofs will come later in the year. One thing is certain:  SAP will have to be very convincing in its articulation of use cases at a time when customers are more concerned about outcomes and where the hype around HANA has become a tad stale.

In the meantime. enjoy the video with Vishal Sikka, SAP executive board member and my colleague Jon Reed.

Related stories you might like: Fast Is Not A Number – Jim Spath asks pointed questions about the realité of BS/H

Oracle Fusion: good progress or confusing customers?

oracle fusionI’ve been sitting on the sidelines waiting to hear what Oracle would say about a swingeing Forrester report that panned the company’s Fusion progress.

Rather than diving into the he said/she said of the two sides (you can see both sides here and here), I sense that part of the problem arises because Oracle has an image problem.

While financial analysts tend to like the company, industry analysts are often critical. One epithet I hear a lot: ‘Oracle hates everybody and especially its customers.’ In the public domain, the company has a reputation for throwing out headline grabbing content and then clamming up when media tries to get behind the story. Its continued problems with advertising standards bodies don’t make things any easier for the company. The fact it has issued what appears to be a widely circulated rebuttal suggests Forrester has really hurt them. That is something of a surprise because Oracle tends to view the analyst community with disdain. There is some justification for that position but Oracle does itself few favors by attempting to exercise a LOT of control over the Forresters, Gartners. IDCs of the world. What’s the reality?

When the Forrester report content became public knowledge, I approached Oracle on the topic. Something didn’t quite gel for me. Why? I have had ongoing conversations with Oracle partners who are intimately involved in Fusion implementations. Oracle told me that they have had ‘multiple problems with this report.’ Here is what I can discern:

  • Fusion is incredibly difficult to implement as an on-premise application and upgrade from Oracle E-Business Suite. However, it can work well as a cloud offering. As a result, Oracle is (mostly) selling Fusion as a cloud play. Ironically, they benefit from a cloud ‘halo’ effect precisely because Fusion is such a tough ask in the on-premise world.
  • Fusion HR has proven popular – relatively speaking – with Fusion CRM coming down the track. I hear almost nothing about other Fusion modules despite there being ‘more than 100’ on the Oracle price list. .
  • Oracle reports north of 400 deals on Fusion. However it is much shier about talking implementations and go live. My sources say that while the pace of implementation last Fall was slow, things have picked up considerably in the last few months. Oracle will not talk numbers right now because it is in a reporting quiet period. However I am told they will say much more, once they’re in a position to do so. Some will argue that they could still provide indicators but that would be perilously close to breaking SEC rules. That’s one thing Oracle avoids like the plague.
  • From a wider market perspective, everything I hear suggests to me that Fusion is an up/cross sell and not an SAP (or anything else) killer. The ERP market is stagnant and any reported wins between those companies is little more than churn. As regards the wider portfolio, Oracle has started to make enhancements beyond the usual ‘legs and regs’ stuff required to keep applications in compliance. We should not therefore expect Oracle to report thousands of customers transitioning to Fusion any time soon.
  • Oracle’s Applications Unlimited, which offers the basis for a co-existence strategy with Fusion applications has had the effect of stalling the market for Fusion applications. That is not a problem for Oracle customers provided Oracle continues to deliver the innovations they want.

Was Forrester right?

The big statistic Forrester pulled says: “65 percent of Oracle customers in a survey with 79 respondents indicated they had no plans to upgrade to Fusion.” Oracle rebutts saying that:

  • 45% of the respondents are using Oracle Hyperion. Hyperion doesn’t really have anything to do with the context.
  • The survey was limited to the US (60% of respondents) and to Europe (40% of respondents). There is no representation from Asia Pacific, Japan, Latin America, Eastern Europe, Africa or Middle East.
  • The survey was heavily targeted to manufacturing companies (27%); and government, education, and healthcare (17%), so not representative of the entire industry spectrum.

On its face, Oracle’s answers sound reasonable. Personally, I am always skeptical about surveys that use small numbers. While I accept there are circumstances where an otherwise statistically invalid sample can be representative, the combination of objections Oracle raises should at least pose questions about methodology.

As observed above, Forrester’s assertion that support for Applications Unlimited has stalled the market for Fusion is credible. As Larry Dignan observes:

Oracle’s decision to offer Applications Unlimited, a program that allows customers to upgrade software running on their timelines, was a good decision in 2006 because it reassured customers. Today, that program means that few customers are on the Fusion upgrade bandwagon.

Concluding thoughts

  1. The market for Fusion is in early stage.
  2. Partners are investing implementation skills. That would not be the case unless they thought there is a bright future for the solution.
  3. Oracle’s lack of a rich store of publicly accessible success stories reflects the early stage element. However, Oracle needs to surface stories in the coming months if it is not to continue getting hammered on this point.
  4. Customers need to understand the impact of Fusion projects. Starting small with something like talent management – a hot topic of its own – will help build confidence.
  5. Oracle needs to burnish its image. If it can get persuasive spokespeople like Steve Miranda to provide honest assessments of Fusion’s readiness into the public domain then the perception that Fusion is largely pricelist-ware starts to diminish.
  6. Any time there is an upgrade in the wind is an opportunity for competitors to swoop. Competition from Workday in particular is something that Oracle needs to watch carefully. The more customers Workday wins, the more difficult it becomes for Oracle to justify an already difficult upgrade.

Update: Floyd Teter weighs in. Don’t know who Floyd is? He’s been working on Fusion Apps as an implementer for some time. He knows the good, the bad and the ugly. He also knows about adoption cycles. Check out his ‘shoe dropping’ post. It’s an easy and entertaining read.