Prelim SAP Services Topics for 2009

A big thank you to everyone who submitted thoughts, suggestions and topic ideas over the past week and a half. Based on your feedback, along with what PAC analyst have noted on the market, we have put together our preliminary research schedule for 2009, including the following topics below.

With overall decreasing IT demand and PAC's latest IT services forecasts moving into negative territory in 2009, PAC has recently expanded and enhanced its SAP Services Research, since it looks to be one of the few "safe havens" during this economic downturn

As such, PAC is offering a Half-Day Workshop & Presentation, "Preparing your SAP Business for 2009," including at minimum 2 PAC consultants for $4,500. We have blocked off time from the second half of January through early February to help support clients on the opportunities that we see on this market in 2009. If you are interested please contact myself or my colleague, JC Jung; and if possible no later than the first week of January, due to scheduling constraints.


"The SAP Skills Ecosystem" (to be published in early January)

A follow-up to PAC's topic leading report in 2007, the report analyzes the current state of the general IT skills crunch, how SAP skill-sets are changing and whether or not the economic environment will ease or continue this labor structure issue for SAP, its customers and its partners.

"SAP Trends in a Lean Economy - First Half '09 Assessment" (to be published: Q109)

How is the buying behavior changing for SAP customers?
What SAP technical and business trends can we expect to see in 2009?
Which projects are positioned to be launched, prolonged, placed on hold or canceled?
How can IT Services suppliers adapt their SAP Services offering to succeed?

"SAP Application Management Services" (to be published: Q209)

Analysis of SAP AM Services Best Practices between suppliers and users
Areas of the greatest demand for AM Services
Sourcing models, including the use of emerging region resources
What does SAP's own exit from the hosting business mean for IT services suppliers?

"SAP Services in Emerging Markets" (to be published Q309)
Analysis of both local SAP Services market demand, as well as the establishment of sourcing models in emerging regions, with a focus on Eastern Europe, Brazil, China and India.

"SAP/Business Objects: Product Roadmap & Opportunities in '09" (to be published: Q409)

PAC's view of SAP's Business Objects roadmap and SAP suite integration
Which Business Objects offerings are most attractive to end-users in the current economy?
Analysis of skills needs around Business Objects, and how PAC sees these skill sets evolving as part of SAP Best practices in leveraging information management skills

HCL Targeting European SAP Services with Axon

A recent interview with the CEO of HCL came out following the company's completion of its acquisition of Axon.

CEO, Vineet Nayar, clearly states that HCL will use Axon to target the Western European market, which outside of the UK has been a pretty tough region for Indian offshore players to do business in.

In particular, he states: "The UK is a stepping stone and markets such as France, Sweden, Germany and the Netherlands are growing at a colossal rate.” In my opinion, he might be making the common mistake (which I used to hear all the time from US executives!), that Europe can be treated as a single market... He goes on saying: “the first thing is identification of unhappy customers elsewhere and make them happy customers."

“In effect, Axon has reversed merged with HCL” he said. “It is being kept separate from the rest of the business, with a separate identity and culture.” That final point might cause some problems for HCL, in my opinion, since on one hand it is certainly smart to keep the Axon business as a separate brand, however, the margin pressures coming from HCL will certainly create some heavy-fisted situations on cost structures. In this case, the whole culture clash issue comes into play, since Axon developed a very unique and rather loose organizational culture that at first glance doesn't seem to mesh well with that of HCL.

Nayar also went on to say that Deloitte, Logica, Capgemini... even IBM and Accenture will be competitive targets. Well, it seems very ambitious: Axon itself wasn't yet at the same level with these competitors, and certainly not outside of the UK! For example, in the U.S., the company had a significant presence, however it was often relegated to the lower margin and lower strategic importance of SAP sub-contracting.

Like other Indian offshore suppliers, HCL certainly is looking to move up the value chain, and to dismiss this strategy would be very dangerous for traditional / regional IT services suppliers. However, HCL has a great deal to prove in its ability to effectively integrate such a large business successfully (in IT Services it is the largest by an Indian offshore thus far!), provide more than RICE and testing services around SAP, as well as to enter new geographic markets outside of the US and the UK.

Again, with the approach stated by Nayar to use the UK as a stepping stone to France (ahem... I'll let my respective French and British colleagues create their own jokes on this one!) and to find "unhappy customers" and just make them "happy," HCL might find the European market not so simple after all. Additionally, even with the economic downturn, the SAP labor market continues to be very tight with everyone and their grandmother looking for high-end resources. It is quite possible that Axon will now become a major poaching target for talent, which will require HCL to demonstrate very quickly to Axon employees that working for HCL will make them "happy" too ;-)

PAC's SAP Research Focus in 2009 -- What's Your Take?

The whole SAP Research team at PAC is now in the process of deciding which topics we will cover in 2009, and as leading SAP customers and SAP-related IT Services suppliers, we would very much like your thoughts on what you see as most important moving into the new year!

Please email any ideas directly to me at p.russo@pac-online.com ; and look out for our preliminary research schedule later this month!

Thanks for your input! ~ Peter

Nearshore SAP Application Management Still Developing in Eastern Europe

Compared to other segments, SAP application management remains very limited in Eastern Europe. Although the labor cost difference and the language skills sets would favor SAP application management from Eastern Europe to Western European, the model is quite limited thus far.

By contrast, non-packaged application development and technical application development have been fairing very well, accounting for the great bulk of the nearshore application management/application development in Eastern Europe. One key reason for this situation is the still nascent SAP market (and packaged software in general) in Eastern Europe. SAP skills remain fairly scarce and these are easily absorbed by the local demand at high rates.

Compared to India which has developed strong SAP application management delivery capabilities, Eastern Europe is not likely to see in the medium term a strong uptake in this market. Nevertheless, as the economic crisis becomes increasingly clear in Eastern Europe too, and local demand may shrink step-by-step, application management may arise as a leverage option for well positioned IT services providers.

PAC has just released new SAP Application Manegement figures, go to www.pac-online.com/sap to check it out!

What's the Latest on SAP Support and the Departure of ASUG CEO Steve Strout?

News Update: SAP support is a fast-moving story these days. I published the following piece Monday morning; much has happened in the meantime. Due to some aspects of contract law in Austria and Germany, SAP has agreed to honor the existing support contracts of customers in those two countries through 2009. There is currently a great deal of speculation as to whether this change is a move towards repeal of support increases across-the-board, or whether it is more of an isolated instance. It's going to take a while for this to play out. If you want more details on the latest developments, I issued a piece on JonERP.com that gives a play-by-play on how this latest SAP support twist unfolded. In the meantime, the fundamentals of this blog entry still hold up, so read on.

Since SAP raised its maintenance fees from 17 to 22 percent on July 16, 2008, SAP support has been a topic that has remained front and center. Some speculate that the aftermath of this announcement even cost ASUG CEO Steve Strout his position on Wednesday, November 26. In this blog entry, I will look at the departure of Steve Strout and then provide some updates on SAP support and why this issue is such a crucial one for SAP and its customers to reach a better understanding on.

When word arrived that the ASUG board had dismissed Steve Strout on November 26, I received a number of calls from reporters and analysts. All were thinking the same thing: that Steve’s departure was somehow connected to ASUG’s rather puzzling initial response to SAP’s announcement of its support increase. It was well known that the response from SAP’s own users to this price increase was anything but enthusiastic. However, unlike some of the SAP user groups in Europe, who went on the record with some very forceful remarks, ASUG initially seemed to be unnecessarily sympathetic to SAP’s position.

However, further investigation shows that ASUG, and Steve Strout himself, were not exactly rolling over when it came to the support issue. See, for example, this piece from September 25, 2008 which shows that ASUG had indeed joined a new 12 user group task force, the SAP User Group Executive Network (SUGEN), which was formed specifically to address the issue of SAP support increases and to effectively relay the position of SAP users to SAP executives. Since Steve Strout has been the recipient of quite a bit of “he was soft on support” blog commentary in recent days, it’s only fair to point out that in the quotes in this September 25, 2008, Steve comes off as someone determined to represent his users. “We're trying to be prudent and trying to be collaborative,” Strout said. “We're not going to roll over either.” No, it’s not the talk of a confrontational firebrand, but it’s also not the talk of an SAP apologist.

To me, one of the lessons of Strout’s departure is that if you don’t provide the blogosphere with some useful information, they are going to riff on whatever speculation is out there. To this point, the truth of why exactly Strout was dismissed has not been revealed. ASUG has not yet explained where they wanted to go that Strout wasn’t taking them. Thus unwarranted speculation rules the day, and let’s be clear: saying that Strout was dismissed due to user dissatisfaction with his handling of the SAP support issue is just that: pure speculation. ASUG issued a press release on November 26 by email that was eventually sent to me by some third parties. The release did not offer any reason for Strout’s departure. If you go to ASUG.com, a copy of that initial release is not easily found, if it is there at all. No follow up stories are linked to.

Board members I contacted personally had nothing more to say on the topic, though there were a couple of follow up quotes from ASUG Board Chairman Mike O’Dell that made clear the decision to dismiss Strout was not about Enterprise Support, though no clarification on what ASUG plans to do differently was offered. Surprisingly, even high-level user group volunteers I talked to inside of ASUG had no light to shed on this, on or off the record. So we can set the Steve Strout part of the issue aside for now. Whether it’s related or not, it shouldn’t be the focal point. More than likely, it is a blog fodder sideshow fueled by a lack of useful information.

Meanwhile, where do we stand on the SAP support issue in general, and why does it matter? Cynical types have suggested that the support issue is a non-issue because in today’s consolidated ERP market, vendors can charge what they want to charge (a tribute to the “company store” approach to capitalism). However, this is not the case. SAP needs the enthusiastic support of its users to succeed in the long term. On October 31, 2008, Forrester issued a report comparing SAP and Oracle’s market position. One of the themes of the report that did not receive enough attention, in my view, was the notion that if Oracle can be ready with Fusion in 2010 (which Forrester believes they can), then Oracle is in an position to potentially win over SAP customers running on 4.6 who have remained on that release due to their frustration with the SAP maintenance issue.

Whether this is a credible hypothesis or merely a worst case scenario, if it happened, it would be an ERP game changer, and SAP should be taking it seriously. It has also been noted that SAP might be motivated to hike support fees to bolster its profit margins and thus the attractiveness of its stock price for investors in comparison to Oracle, which currently boasts better profit margins. If that’s the case, there is some evidence that it has backfired. Recently, Societe Generale analyst Richard Nguyen issued a “sell rating” for SAP’s stock largely on the basis of SAP customer discontent.

From what I can see, SAP is now making a major effort to get on the same page with its customers on the support issue. While SAP has not backed down from its plans to increase support prices, they have shown a willingness to assess the value of “Enterprise Support” from a KPI perspective. SAP has maintained from the beginning that the value of Enterprise Support, driven by new tools like Solution Manager and the post-go live RunSAP methodology, will more than justify the price increase.

For the most part, customers have been less receptive to the idea that Solution Manager will change their lives as they know it. But as this Computer Weekly article reports, SAP is working with the SAP User Group Executive Network (SUGEN) to agree upon a set of KPIs for Enterprise Support. As the article states, “After January, further cost increases will depend on meeting those KPIs.” This development comes on the heels of SAP offering to extend the lifespan of Enterprise Support over additional years, thus sweetening the pot for cost-conscious CIOs.

These developments indicate that SAP is engaging in more than lip service on the support issue, though it must be said that some prominent analysts, in particular ZDNet blogger Dennis Howlett, continue to make a persuasive case for SAP repealing its support hike altogether as a way of getting on the same page with its customers in a difficult economy. Whether or not that happens, it’s clear that the Enterprise Support issue is moving more into “dialogue mode.”

One thing we should keep in mind is that support is not just a function of price; it’s also a function of value. Those SAP customers I have talked to about SAP’s current support are not always enthusiastic about the kind of support they are receiving currently. Additionally, while the SAP Community Network (SCN) has become a valuable part of the puzzle for those SAP customers seeking support, there are questions that need to be resolved about the limits of community-based support, as well as the ethics of charging SAP customers a premium for support if their most useful support channel turns out to be online communities that they themselves help to populate.

Finally, there is continued skepticism about Solution Manager as a huge support difference-maker. SAP should get its chance to prove Solution Manager can deliver the goods through these as-yet-agreed-upon KPIs, but it warrants mention that the best support has a human element behind it, ready to be called upon for personalized service when needed. If SAP can provide integrated “tools/community/human intervention” support, my bet is that the price will become less of an issue than it appears to be today. As for ASUG’s part, if ASUG can play a role, along with the rest of the SUGEN, in influencing the support issue from a customer advocacy standpoint, then past quibbling about ASUG’s initial response to the support increase will become irrelevant.

IBM Continues to Blur the Lines of its "No Business Applications" Strategy

In the past, IBM has repeatably claimed that they were not a player in the business application market, with the likes of SAP, Oracle, Lawson, etc., but rather was focused on delivering solutions, leveraging where possible their middleware stack and database software servers through the largest IT services business in the world. The business application stack, it was said, was a different business, requiring a different business structure and focus...

The acquisition of MRO (enterprise asset management (EAM) application software vendor) two years ago raised a few eyebrows... then came the acquisition of Cognos earlier this year, which made IBM a stronger player in BI and some associated business applications.

Now IBM has announced a comprehensive Talent Management software suite, based on Cognos, as well as Saba and SuccessFactors, in order to provide an integrated solution offering:

• Workforce analytics
• e-recruitment
• Performance management
• Learning
• Succession planning
• Compensation and rewards
• Workforce deployment and scheduling
• Employee portal, collaboration and social networking

Beyond this move into Talent Management, IBM has also renewed its efforts in the office application space with Symphony and its office desktop virtualization approach, clearly targeted at Microsoft.

While IBM is now clearly feeling the competition from SAP's movement into middleware and even database software in the small business space, combined with the always aggressive competition coming from traditional rivals Oracle and Microsoft... Will there be implications for IBM's IT Services business? Will they perhaps become more aggressive in pushing beyond the traditional blue stack into IBM business applications? While it's true IBM is not offering core ERP and business applications to the same extent of their competitors, perhaps IBM is looking to build more of a surround strategy, offering applications that are underserved on the market, but reliant on other IBM software and services.

Application Management Sees Uptake in the UK

While the SAP consulting services market is facing significant challenges with projects being delayed and sales cycle getting longer, the outsourcing segment in the UK is seeing some more positive developments. In 2008, several deals were signed with those most notably taking place in the public, manufacturing and services sectors. Deals secured in 2008 include:

- Wiltshire County Council awarded Logica a 7-year contract to implement and host a new SAP ERP solution to better manage and improve the delivery of the Council’s applications and processes for finance, procurement, HR, payroll services and performance management.

- EDS' contract win to host and manage Meggitt Plc’s new SAP system, with the aim to help Meggitt transform its ERP system. Services include hosting Meggitt’s SAP system in the UK and in the United States.

- Atos Origin was awarded a 3-year contract with Britvic Soft Drinks to manage the SAP, Siebel and associated systems for all back office functions. Atos Origin takes over management of the systems applications and will provide support from both the UK and its Indian delivery centres in India.

Application management (AM) in particular is seeing rising activity as it is increasingly perceived as a quick and simple way to achieve cost benefits. The ability to use offshore resources as part of the deals have further helped attract customers to handing over the less critical applications to third-party suppliers.

In the UK, Steria is a strong AM player on the whole, as well as specifically in the SAP area. The acquisition of UK-based Xansa has further strengthened its local presence in the market, as well as significantly building Steria's offshore resources in India. Other leading AM players include Accenture, IBM and Axon and other IT services providers such as Fujitsu are strategically positioning themselves to take advantage of the growing opportunities in this space, as well as applications outsourcing.

The market downturn has made offshoring ever more attractive, and Indian providers are more determined to expand in the outsourcing business. Satyam and Infosys are key players that have made some good progress in the SAP AM space.

As part of PAC's SAP Services Research practice, we have launched additional services that include SAP AM market figures for the U.S., Western Europe, Germany, UK and France; in addition to top 10 rankings in all countries.

Black Friday Results...

Black Friday turned out not to be a bust after all with the NRF estimating that consumers spent $372.57/person on average, an increase of 7.2% from last year. For the full holiday season, they are predicting growth to slow over the next 2 weeks as the major deals subside and consumers continue to be cautious, forecasting 2.2% growth to $470.4 billion.

I've already heard a few economists state that the 2.2% growth forecast may be too rosy, but nonetheless, if it does come in close to this rate (compared to 2.4% in 2007); it would point to a U.S. consumer that is now acting in moderation (versus a continuation of credit-backed growth -or- a steep consumer spending downturn last seen in the early 80s), which would seem the most healthy choice for the economy.

Perhaps if this path of consumer moderation is reached, business spending will follow suit?