The news that SAP is delaying the roll-out of Business ByDesign – and that its last quarter, while decent, failed to meet analyst estimates – is the perfect preamble to this post: With Leo Apotheker slated to assume to mantle of SAP by the end of the year, his mandate – and challenges – couldn’t be made more clear than the juxtaposition of this news.
Here’s what has to happen in order for Leo to go down in the history of SAP as a great CEO, and it entails responding to three major problems that SAP will be facing in the next decade.
Problem number one: what to do about the problem of on-demand vs. on-premise computing. While many, myself included, see on-demand and on-premise as the joint foundation of computing reality in the next 10 years – on-demand and on-premise will be offered as joint, or should I say conjoined, offerings – they are in violent opposition to each other when it comes to the business model of SAP. How SAP can continue to simultaneously drive value to its customers and to its shareholders in this hybridized world will be one of Leo’s biggest challenges, and the delays in BBD announced today are evidence of that problem.
At issue is an on-demand pricing model – utility-based, pay-as-you-go, subscription-revenue-based – that conflicts with SAP’s classic sales model, not to mention the sales models of every big enterprise software player that sells direct. And on-demand pricing alleges that total cost of ownership can be cheaper (more on that allegation in problem number two.)
On-demand changes the implementation revenue picture for SAP’s SI partners as well. While this is a direct revenue problem for the SIs – where are they going to get the 5:1 service to license revenues from an on-demand, model-driven implementation product? – it’s a serious indirect problem for SAP as well. If you can’t promise the big bucks in implementation services – as well as upgrades – you can’t support the kind of channel that made SAP a boardroom name in the ‘90s. This I believe is one of the back stories to the delay in BBD: how can SAP build a high-value, C-level sales channel that has to be content with high-volume, low margin sales? It’s a little too paradigm breaking for most SIs, big and small.
On-demand makes it harder to hunt the big deals, and book the big revenues, and lock in the customers, and make a ton off maintenance revenues. On-demand is game-changing in every respect, and while Salesforce.com has proven that you can build a decent sized company with an outrageous market cap, it still hasn’t proven how to build a highly profitable company, so even Salesforce.com has no idea how the game actually ends: It will be up to Leo to make sure that, whatever the outcome, SAP emerges a winner.
Problem number two: The TCO problem. Another of SAP’s big challenges from both the on-demand market and the market in general is the question of total cost of ownership. TCO is a slippery issue, not as slippery as ROI, which requires vast quantities of “before” data in order to really measure the “after” value, but TCO is going to be one of the main issues confronting SAP in the Leo era. This is in part because on-demand’s five year TCO looks on paper to be seriously competitive with on-premise’s five year TCO, and also because the macro-economics of the next ten years will by nature drive companies to lower IT costs at all costs.
There’s a lot Leo can do about TCO in the on-premise world, including work hard to expose the truth about on-premise TCO (hint: it’s more nuanced, and better, than most think) as well as limit the one big cost factor that lends credence to the notion that on-demand is cheaper: the cost of upgrades. If you take upgrade costs out of the equation – a big if, admittedly – the five or six year costs of on-premise comes very close to on-demand. SAP is actually well on its way to dealing with this problem through the use of what it calls Enhancement Packs, and it’s not inconceivable that upgrade-free on-premise, and the economics that come with it, could be part of the Leo legacy.
Finally, there’s problem number three: The customer-centricity problem. One of the appeals of on-demand is a more customer-centric pricing model, and that appeal is one of the mirrors that reflect a major weakness in the entire enterprise software industry: The lack of true customer-centricity in pricing and contracting. Too many contract negotiations are adversarial, too many customers get caught by the gotchas vendor lawyers insert in their contracts, and too many vendors are tainted by what their sales execs and channel partners are doing to the customer on “behalf” of the vendor. Ending this zero-sum game and making customer relations the kind of partnership that most vendors largely pay lip service too will be the final component to the Leo legacy, that, if he pulls this one off too, will make for a truly impressive reign.
The news of today may not look great, but it’s only a blip in a timeline that starts with next week’s Sapphire. When we look back at the Leo Apotheker era some years from now (and I’ll be there, the cost of educating my children will keep me following Leo and SAP around for some time), what happened on April 30, 2008, when SAP reported its Q1 earnings, won’t be particularly interesting. But what happens from that day forward will determine the fate of SAP, and with it the Leo legacy.