SAP’s Presence and Growth Opportunities in Eastern Europe Remain Very Heterogeneous

Eastern Europe is for SAP a territory with uneven market penetration. Part of this is the result of different maturity levels of Eastern European (EE) economies, size and type of addressable customers, cultural and economic affiliation or reasons relating to time of arrival in the marketplace. Looking to several key economies in the region, one can spot visible differences in SAP’s establishment and strength:

- The Czech Republic is an SAP stronghold, with a very deep penetration of SAP and a strong inclination towards SAP in general.

- In contrast, Poland remains a difficult territory for SAP, mostly because of the strong influence of domestic IT services companies, which have been pushing custom development and/or their own proprietary solutions, but also due to a stronger presence of Oracle than in other EE markets.

- Slovakia, although small and lagging behind economically the Czech Republic, is walking the path of the Czech.

- Hungary, as Poland, remains challenging for SAP, partly due to a good presence of Oracle, partly due to a general difficult situation of the IT market.

- Russia is the rising as one of the most promising territories for SAP at global level, supported by hyper-growth in combination with volume potential. For instance, utilities in Russia are a hot topic for application vendors, with SAP having a strong edge on the segment.

- Romania remains a strongly disputed area, with no clear supplier dominating in the EAS space. While SAP did have some large and impacting projects, it has not the recognition and lacks the entrenchment it has in other EE market, which may be partly attributable to its later entry in the market compared to Oracle.

Where is the Opportunity for Local/Regional SAP Services providers in SAP’s “Co-Innovation Lab”?

In general, the “Co-Innovation Lab” is an interesting idea from SAP, in order to create a healthier and more collaborative ecosystem around its products by integrating partners in the development of SAP’s software solutions. Nevertheless – I may be wrong – but I still do not see how the small and medium-sized companies in the ecosystem should be able to join and profit from it?

And here, I am clearly speaking about the German ecosystem. In Germany, we have a strong market concentration with a few large SAP services providers and hundreds of small SAP services suppliers (who nevertheless account for ~1 billion Euros in business). SAP is for sure a global company, and Palo Alto is a great place for global business development, but there seems to me a need for a less complex “innovation lab” that puts more focus on the needs of small services partners; which in their specific space are definitely innovative for their customers and may help SAP to “come back down to earth” and leverage its business and market success in this area.

Once again, it is a good idea to involve the ecosystem in this way. However, SAP must not forget that SMBs – SAP users as well as suppliers – work under different market rules. SAP must make sure that not only the likes of IBM, HP, Deloitte, or Cisco will be able to benefit from institutions like this, but also the SMBs.

SAP Enters into the Manufacturing Execution System Market: an Opportunity for System Integrators?

MES (Manufacturing Execution System) solutions have existed for more than 20 years in order to answer specific needs of manufacturers, such as:
⇒ Performance / Productivity (Automotive…)
⇒ Traceability / Quality for completing regulations (CPG, Life Sciences…)

But business issues of this sector are daunting:
• Mass production has led to mass customization: production units must be flexible and must adapt quickly to evolving demand
• Globalization: reorganization of the flux and reactivity

In order to be successful in this market, there must be better integration/communication between the different components of the value chain : MES to MRP to SCM; all providing real-time data.

This has led to the trend of company’s moving away from in-house or legacy MRP to ERP (especially SAP!), as well as the trend from in-house or legacy MES to a new generation of more flexible MES solutions that offer higher level of integration and coordination with the ERP system.

SAP, in order to benefit from the development of the MES trend, first bought Lighthammer (in 2005) and set up the Composite Application Manufacturing Integration and Intelligence (xMII) component, offering communication between SAP and the MES tools. This week, SAP has decided to cross the line and to buy its closest partner in this field: Visiprise.

Is this an opportunity for system integrators?

In fact, the system integrators have invested more in this market since the last 3 years, and they will benefit from the development of SAP’s MES ecosystem : Visiprise, Apriso… Will they benefit more?

For SAP, entering the MES market opens up new dimensions. MES involves the integration of real-time plant operation processes, with requirements and contacts on the customer side being different from those for ERP systems, which traditionally are more transaction-oriented. SAP will face the competition from players as Siemens or ABB. This will be a challenge for SAP, but PAC believes this takeover is a smart move. Thanks to its large MRP/ERP market share and its technology capabilities, SAP can be expected to successfully meet this challenge.

For those IT integrator’s that are closer to the manufacturing side of the business, such as T-Systems and Capgemini (which have Technical IT competencies with Sogeti)… I believe they will benefit more from the development of the MES market, given their long time experience in this market and understanding of complex manufacturing processes.

While manufacturing makes up more than 50% of SAP’s revenue, this movement into MES represents a new growth avenue, even in the company’s most traditional sector!

The Ongoing SAP Upgrade Cycle, Showing Big Regional Differences!

While producing PAC's new "Worldwide SAP Upgrades Market" report, which is scheduled for release next week, I found it amazing how the various country markets are moving at quite different paces (having had a lot of input from my colleagues around the world).

And here's generally what I gathered:

While SAP Upgrade Services are a healthy and fast growing offering, the timing that PAC has estimated as the upgrade cycle reaching its "peak" is very different from country. Germany will be the first market to reach an “Upgrade Cycle Peak” in mid-2009, followed by the U.S. in mid-2010, remaining G-7 countries in the second half of 2010, and finally large enterprises within emerging regions into 2011.

The other thing to consider, is that while "SAP Upgrade Services" are not necessarily a true "market segment," and perhaps more of a "market cycle" that will come and go, the movement of the SAP user base (albeit slower than expected) to the new technology platform should offer a boost to the SAP-related IT Services business for years to come.

Business ByDesign: with a Little Help from my Friends?

Since the news of SAP slowing down its "accelerated development" around Business ByDesign (BBD), there has been little color added on the subject by the company and much in the way of speculation.

To add my view on the subject, it is important to keep in mind that with the addition of Business ByDesign (BBD), SAP is now trying to successfully manage both its traditional low sales volume (in the number of deals, obviously not total revenue!) / large enterprise / on-premise business, along with a high sales volume / SMB / SaaS business. If we consider the reverse for a moment: the high volume software sales king, Microsoft, has not been able to make a significant dent in SAP's traditional lower volume ERP business with Microsoft Dynamics, and has struggled to move up the value chain towards larger engagements (while I think they do themselves a disservice to mention SAP as their chief competitor, Steve Ballmer down to Kirill Tatarinov mention them almost every time these days!)

With this in mind, and countless other examples, it is no surprise then that the typically conservative SAP would like to take a more gradual approach to reaching a profitable business for BBD, having delayed its initial target of 10,000 customers by 2010, by an additional 12-18 months. While several executives at Sapphire mentioned that part of the issue was product performance, which should be addressed in future updates, it is also my belief that the services model of delivering a SaaS solution may also be partly to blame. While it is understandable that SAP would like to serve the initial set of BBD customers directly, why haven't they opened up this hosting business to partners yet? As of now, in the SAP SaaS model, the focus is to remove unnecessary services and have partners bring process knowledge, domain expertise, training, etc. Having a good understanding of typical Salesforce.com services partners, this amounts to services deals in the tens of thousands, not the hundreds of thousands or millions that traditional SAP partners are used...

I see an opportunity here for SAP to expand the service delivery around BBD, by allowing partners to take more of a lead for hosting services, which should allow SAP to focus on software development. SAP Americas, in fact, has already done this for the mid-market for SAP ERP 6.0. By opening up the hosting business, this will allow customers who may want more secure and separate data-centers (Federal Government, for example) to run the BBD SaaS solution. Or for that matter, many customers already have large services engagement in place, and may want run BBD through these trusted suppliers in the future. One shouldn't forget, while SAP has placed BBD into a very neat "100 to 500 customers" segment, it is worth noting that R/3 was also intended for the mid-market when first released to the market!

Three Days in Berlin – Sapphire 2008

Compared with Sapphire Orlando, the European SAP customer event 2008 in Berlin started off with even less fanfare, especially given that the US event had Harley Davidson coming on the stage with its beautiful bikes! Of course, SAP has been successful on the market for years, and yes, we cannot expect groundbreaking solutions from each conference, nonetheless I can’t remember seeing fewer press releases floating around a SAP conference in so many years!

The overall message was the business world is becoming ever faster and more complex, whose boundaries change permanently and SAP is the solution. However, for me, just a little more vision and inspiration in the keynotes would have rounded out the whole event better.

Both co-CEOs, Henning Kagermann and Leo Apotheker, told us about business reality in their respective keynotes. Kagermann opened the event under the motto “Business Beyond Boundaries” and surprised us with his speech announcing that SAP wanted to dispose of the 3-letter acronym. Or was it perhaps no surprise in the end? To me, the business world, above all the specialist departments, was never so excited about these terms, and without a doubt, this is also evidence of the fact that IT departments are the primary customer contacts for SAP, with a smaller presence of C-level executives, something that must change as SAP continues to focus on industry specific business processes. So the question arises whether the omission of the respective 3 letters would help SAP here?

Besides Henning Kagermann and John Schwartz; Leo Apotheker, Co-CEO and designated successor of Henning Kagermann, also addressed the audience. In contrast to the keynotes of Kagermann and Schwartz, Apotheker gave a presentation full of demonstrations and light on vision and strategy. So my question is, do we now have to wait until 2009, when Apotheker is sole CEO and then presents us his outlook into the future of SAP in a corresponding keynote?

I’m quite curious and am looking forward to the event in 2009!