SAP's Q408 Results & PAC's Estimates on How Bad Things Really Were (Are)...

Thanks to its aggressive cost-cutting measures that began in September of 2008, SAP reported a Q408 (ended Dec. 31) net profit increase to €850 million ($1.12 billion) compared to €752 million in the prior year. Revenue rose by 8% to €3.49 billion, which while fine, is a far cry from its string of double-digit growth of recent years...

The company also announced its first mass job-cuts (I should correct a WSJ report, this is in fact not their first job cuts, there have been plenty of small/focused cuts every few years), reducing its global workforce by 6% or 3,000 workers in order to save €300 million to €350 million a year starting in 2010.

PAC took these results a step further by creating our own pro-forma (including Business Objects revenue) estimates at constant currency. According to our own estimates, SAP's revenue declined by -3% (compared to +8% in their official release) while license revenues declined by -15% (compared to their -6%). Taking this a step further into the US, PAC estimates that license revenues may have declined by as much as -30%!

It is clear that especially in the US from October through now many customers have been in a state of paralysis, waiting for a sign that there is some level of stability (even if we know this stability will come at a much slower market growth rate). In PAC's own estimates for the Worldwide SAP Consulting Services (CS) market, we have forecasted 3.7% growth, which while moderate is approximately two percentages higher than overall IT services growth. At the US level, we expect the SAP CS market to be flat and the overall IT services market to decline for the first time since the dot-com bust...

At the same time, it would be a mistake to completely relay SAP's struggles on the ecosystem. While of course there will be an impact of slower business and license sales of SAP on its partners, the U.S. is also one of the largest markets for "SAP Shelfware" in PAC's opinion... and when stability is reached, there will be a glut of implementations and extensions for IT services companies to slowly work on before SAP sees a major rebound in license sales (I guess a parallel to the real estate market could be drawn here, but I don't think the SAP situation is so dire!). I also believe that this is why SAP has been so aggressive in its cuts, and the fact that the benefits won't come about until 2010, which is commonly seen as the year most business leaders hope things may turn around... perhaps the rebound will come for IT services partners first?

At the same time, while PAC wonders how long a "travel freeze" and other cost-cutting procedures at SAP are feasible before it zaps morale and sales aggressiveness... the company will make a major product launch next week with its new Business Suite 7, which I will be attending. The suite will bundle all of SAP's main products into one offering and is certainly major news... however, it still leaves to question whether customers are so interested in such an offering during such times?

Check back on Wednesday for my Business Suite 7 post...

SAP Partner Kick-Off Highlights, Certification, and News Roundup

As an SAP Mentor, I am sometimes allowed to sneak into places where I don’t categorically belong. In this case, SAP employee and fellow SAP Mentor Darren Hague encouraged us to register for the January SAP PKOM sessions. The PKOM (short for “Partner Kick Off Meeting”) is SAP’s opportunity to set the tone for the partner ecosystem for the year.

The PKOM online event was a cross between a pep rally and an interactive session where partners got the info they needed to better represent themselves and SAP. Turns out my participation in this year’s event helped to spark a hot debate on the merits of SAP certification that sucked in many “thought leaders” in the SAP community. In this blog entry, I’ll tell you how this debate got started and also share a few other trends I observed from this year’s PKOM.

To the best of my knowledge, these were the first PKOM events that SAP held “virtually.” I like the virtual conference format. I don’t think of it as a perfect substitute for a face-to-face event, but used properly, these virtual events can achieve critical mass on key topics and get questions answered. I ended up botching my schedule for the North American version of the conference, so I pulled a vintage all nighter and caught the Singapore version late on Monday, January 19th. I call it the Singapore version because I set my clock via Singapore time. The point is that it served all those who didn’t fit into the North American time slot.

What I like about SAP is that they are careful to gear message to constituency . You hear a different emphasis at a partner event than you would at a customer-focused event. In this case, an excerpt from Zia Yusuf’s keynote caught my eye regarding the importance of SAP certification in the coming year.

So, on Tuesday the 20th, I posted two not-so-innocent “Tweets” on my JonERP Twitter Feed:

Zia Yusuf = strong keynote w/ good specifics. One point: SAP is going to strongly encourage customers to hire CERTIFIED consultants #pkom Yusuf = emphasis on certified SAP consultants is part of overall SAP theme of year: Emphasis on quality resources. #pkom

I say “not so innocent” because I’ve learned that anything I Tweet on SAP certification tends to spark a lot of response. No disappointment here – a burst of Tweets soon followed. This led to a talk on Skype with ZDNet Blogger, “Enterprise Irregular” and fellow SAP Mentor Dennis Howlett from his home in Spain. Dennis might be the most effective “discussion agitator” in the SAP community, and his views on the importance of certification are just the thing to guarantee a worthy debate. Later that same evening, Dennis posted a blog entitled "Should You Be Certified?" on the SAP Community Network (SCN).

Last time I checked, there were more than fifty comments on Dennis’ blog post and counting. I won’t share my own views on SAP certification in detail here, as you can find them on Dennis’ comment thread and also on my own SAP Career Blog.

Here's what I take from this “certification blowup”:

1. Zia's emphasis on SAP certification during the partner event is no accident. SAP is sending a strong message to its partners that they need to think of SAP certification as a competitive differentiator, as well as part of SAP’s own stated commitment to improving the quality of consultants. Whether an emphasis on SAP certification will result in better consultants is open to debate. What is not debatable is that SAP intends to stress this point. I already heard back from one consultant who reported to me that his firm has already announced to its employees that they need to be on top of their certifications.

2. Everyone in the SAP community agrees that there is a need to better calibrate the quality of consultants that are available to SAP customers. The question of how to do that is what has provoked so many comments in Howlett’s blog. There seems to be an optimism, at least amongst SAP community members, that the transparency of such rating systems as LinkedIn, or even eBay, could be applied to assessing SAP consultants (and consulting firms) in a more open manner. It’s good to keep in mind that ASUG, SAP’s North American Users’ Group, has just such an undertaking in place with it’s ASUG Edge consultant ratings site, but the fact that it sits behind a firewall and requires subscription for full participation may present an obstacle for adoption.

So that’s one topic to keep an eye on that came out of PKOM.

There were two other trends I made a note of:

a. SAP sees Business Suite 7.0, set for spring rampup, as a REALLY BIG DEAL. This release is set to be fully service-enabled, also sporting embedded analytics throughout. I find the Business Suite focus more than a little interesting, only because this does not seem like the year when the typical customer is going shell out for a suite of business applications. This seems more like the year of incremental improvements than the “year of the Business Suite.” The themes I personally see for the year are SAP Business Objects and RunSAP/Solution Manager, with the former involving smaller-scale projects with a focus on ERP ROI, and the latter being a way for SAP to shift the maintenance issue away from cost increases and towards the value proposition behind Enterprise Support and post-go-live optimization. But who cares what I think? SAP is going to be talking A LOT about Business Suite 7.0; it will be interesting to see how the market reacts.

b. The EcoHub matters. I guess I should have figured out that EcoHub is a big deal due to its “fourth tab” status on SCN next to SDN, BPX, and the Business Objects Community, but I didn’t quite get it until PKOM. EcoHub is going to present third party SAP software firms with a whole new level of visibility to pitch their wares to the marketplace. During a PKOM chat session, it was also mentioned that EcoHub would soon be opened up to SAP services partners as well as software partners, though I did not see a date posted for when SAP software partners will have the ability to be featured in EcoHub. Visibility within EcoHub seemed to be part of a broader message about how SAP partners can get access to the eyeballs on SCN. To those partners who are interested in more SCN visibility, I would suggest contacting your SAP rep directly.

Finally, I want to point out a useful podcast series that is picking up steam. The “Enterprise Geeks” just issued their third podcast. This is an informal back-and-forth podcast format created by a collection of some of my favorite SAP technical practitioners (though not all of them work for SAP or are SAP-focused all the time). Their third and more recent podcast features a good discussion on SAP certification as well as some other helpful topics.

These days, the best thing about following the SAP market is that we all pretty much have access to the same breaking information. The challenge is what to do with it all. Those who want to make a real impact will figure this out.

IT Bell-weather Microsoft Cuts Back - What Does This Mean for IT Services?

Weighing down the stock market (besides the other various bad news) was Microsoft's announcement of its first ever job cuts, in total 5,000 employees.

On one hand, I've felt for many years that Microsoft has lost its "cool factor" in the IT industry, in that during the 90's and into 2000/2001, when Microsoft said something (e.g. entered a new business or predicted the next frontier of IT) -- the market generally took this quite seriously. I'm not sure where exactly this changed (hmmm... maybe .NET ?), but Microsoft has so many businesses and so many announcements, it is hard to keep up what the company's strategy is from one day to the next. Also, its "new" products increasingly seem borrowed, such as its pretty desperate marketing play to change SaaS (Software as a Services) to its own phrase: Software + Services. Beyond this marketing ploy, if anyone can explain to me clearly what is or will be in Windows Live, and what is the difference between Microsoft Dynamics CRM Live and CRM Online... I'm all ears!

But now back to the economic reality: Microsoft's bread-and-butter business is still Windows, shipped on a PC or a Server, and right now, consumers aren't buying many new computers, and businesses are pushing out refresh cycles for at least a year. These are both rather painless short-term ways to decrease IT budgets.

So what does this mean for IT services? Well, all of the sudden, I think a business segment like hardware maintenance is looking a hell of lot sexier (a lifeline for Unisys??? ...ok, maybe not), and as it was shown even in Microsoft's results (its consulting business grew by 16%), consulting services affixed to short-term and scope ROI projects exist and seem to have upside even in this recession. Applying this to the SAP-related services business, as we expected towards the end of last year, the Business Objects offering from SAP should be a very interesting topic, since already there are a lot of industry solutions that are kind of "light weight" tool sets that can show a positive business return within a period of months rather than years.

Please keep checking back regularly the next few weeks as PAC will be covering SAP's upcoming results, (which I don't expect to be very good but should show some pockets of growth and opportunity especially in a few emerging market SME segments), as well as some rather large SAP announcements in early February!

IT Outlook in the Retail Sector & NRF Wrap-up

Yesterday I attended the 98th annual NRF (National Retail Federation) show, right here in NYC at my least favorite place in the world (the Javits center!)

Going into the event, I was very interested in what the mood would be, as well as how the foot traffic looked, being that retail is probably the most battered industry sector in the U.S. due to the steep drop-off in consumer spending.

Well, to cut to the chase, it was pretty lame... and a tad depressing. I heard a few rumors that attendance was calculated to be around 50% lower than last year (which itself wasn't so stellar), and I think even this estimate was a little rosy.

Notably absent from NRF this year was Lawson Software, who essentially left the core retail apps market when it canceled the next generation of its merchandising solution (Armature); and I also didn't see (or at least couldn't find) many of the Indian offshore players booths besides Cognizant....

As its been reported and rumored about for a week, both SAP and Oracle have made some cuts to their workforce. The best estimate I can find so far has been around 7-8% worldwide for SAP (and perhaps as much as 20% in the US) and anywhere from 500 to 8,000 cuts at Oracle depending on who you believe... Nonetheless, in retail where certainly some of those cuts have touched sales and consulting, both companies stated that investment/R&D levels will remain the same as before for retail-specific product development. My take on this is that if they both want to continue to play in this market, they have no choice. Retailers were reluctant when both companies marched into this market more aggressively 4-5 years ago, and retailers today are watching closely to see the level of committment offered in tough times.

In general, both Oracle and SAP are bringing different messages to the retail market; both are aiming at offering shorter-term ROI, given the economic realities. SAP quite focused on Business Objects tool-sets for helping customers make more informed decisions on their operations in the current climate; while Oracle has been producing extensive process orchestration flows across its acquired retail modules for areas like assortment management and in-store processes.

While these solutions are very interesting, it really doesn't matter. Right now I see retailers in two distinct camps: 1) very sick, and seeing where business KPIs are following this dismal holiday season, and perhaps looking for funding to keep the lights on! And hence, definitely not thinking about a major enterprise apps roll-out...

And 2) retailers that have made it through okay so far, but are in a state of paralysis, in order to see which competitors will be left, where are commercial real estate prices going, whether consumer spending has bottomed, etc., etc. In order for camp #2 to move forward with new projects, the dust from the coming industry shake-up and bankruptcies will need to settle, and there will need to be some glimmer of hope around the consumer, at this point, even under 1% declines or flat growth would suffice.

In the mean time, IT suppliers are going to have to do some work themselves, to assess their own retail customer base's health, and target retailers that might be leaner, but are alive, and may have a few less competitors than before, which could equate into richer margins in the long-term. IT services firms will have to be more involved with the business and more innovative than before to win new business. For those retailers that are still standing, I believe many will take this period to reinvent themselves to a degree, whether it be a shift away from stores to more multi-channel, creating more customer intimacy, or having the ability to diversify their product categories.... in nearly all cases, IT will be a very important factor in success.

What's Going to Happen With Business Objects in 2009?

The biggest story of 2009 in SAP is going to be the economy. We knew that a month ago – heck, we probably knew that six months ago. Early indications are that it’s going to be a challenging year for SAP financially, but no more so than for all enterprise software vendors.

The problem is that obvious stories aren’t usually very interesting to blog about. So what’s going to be interesting for SAP market watchers? The compelling stories will relate to how the economy intersects with other SAP initiatives – for example, with the ongoing Business Objects integration. Intelligent Enterprise Editor-in-Chief Doug Henschen got this topic off to a good start with his recent blog post entitled “SAP ‘Fully Integrates’ Business Objects.”

Henschen’s blog title was a tad misleading; we already know from the combined roadmap that SAP and Business Objects won’t be fully integrated from a product perspective for a number of years. We can look to 2010 for two integrated SAP-BO releases of significance: NetWeaver Crystal Reports and “Pioneer,” the combined BEx Analyzer and BO Voyager product. (for more on the specifics of the SAP-BO product integration, I highly recommend SAP’s own detailed FAQ).

So if Henschen wasn’t referring to product integration, what was he referring to? As it turns out, Henschen’s piece pertains to the fact that the Business Objects sales force is now, in the words of Bill McDermott, President and CEO of Global Field Operations and an Executive Board Member, “fully integrated” with SAP’s. Henschen reveals another indication of the tightening relationship between these business units: as of January 1, 2009, Business Objects is no longer “Business Objects, an SAP Company.” It is now: SAP Business Objects.

The increasing blurring of the lines between SAP and Business Objects is not surprising, given how much the two companies naturally complement each other from a product angle. I have been hearing for almost a year that the sales teams for each team were finding real advantages cross-selling the other, so it makes all kinds of sense for the sales teams to be very closely aligned.

One thing we do know about this current spending environment is that “Business Intelligence,” in many different flavors, is still high on the list of projects that are actually getting green-lighted. If you type the phrase “BI in recession” into Google, you’ll see a host of articles from a variety of perspectives, all emphasizing the relevance of BI projects during economic downturns.

This quote from Louis Columbus of CRMbuyer.com from earlier in 2008 sums up the case for BI nicely: “With the risk of a recession hanging around like a high maintenance relative who doesn't know when to go home after the holidays, BI is going to be the foundation for fighting back bad economic news, and creating entirely new approaches to measuring marketing, manufacturing, services, pricing and operations performance.”

We are even seeing some signs of BI “Software as a Service” options picking up a bit of momentum, so that’s another trend for us to monitor in 2009. Thanks to Business Objects, SAP is right in the mix with its “BI OnDemand” offering from “SAP Business Objects.” In a recent blog post, Courtney Bjorlin, News Editor for SearchSAP.com, did a nice job of documenting the case for “BI SaaS” in recessionary times. The issue for SAP in this sense, however, is that Business Objects SaaS business was built almost entirely along with Salesforce.com, comprising the bulk of its BI SaaS customer base. On this end, without a clear vision and generally available SaaS solution around CRM and ERP, it will be pretty tough for SAP to marry Business Objects On-Demand into its own applications. But perhaps this is another reason why Wookey was brought in?

Back to the subject of criticizing blog titles: we can now assess my own, and I admit that it’s still too early in 2009 to responsibly predict what to expect from BI or any other SAP product. This will be an important topic to return to once spending patterns for 2009 are better revealed. For now, I’m very comfortable saying this: those who have a stake in the SAP Business Objects space are as well-positioned as any in the SAP space to have a successful 2009, regardless of what else unfolds.

A not so Happy New Year for Satyam; A Blackeye for Offshore Players or for all of IT?

Well, at this point, not to lay it on but Satyam is not looking so well in this very young 2009, which is clear. But what is more pressing is to begin to understand what this potential "IT Services Enron" will have on other offshore suppliers, as well as the IT services business in general.

To recap, today it was reported in the NY Times that the chairman of Satyam, Ramalinga Raju, resigned after admitting to a massive accounting fraud at the company, including past quarter revenues that were 20 percent lower than the 27 billion rupees reported, in addition to a massive overstatement of operating margins.

This follows a few scandals that closed out 2008, including in October the World Bank's cancellation of all work with the Indian offshore IT service supplier after it was accused of installing Spyware on some of the World Bank's computers, as well as inproperly charging on some sub-contracting work.

Then in December Satyam attempted to acquire two large Indian construction and real estate businesses (Maytas Properties and Maytas Infra), which in the end was abandoned when it became clear all of Satyam's cash would in essence be transferred to its Chairman B. Ramalinga Raju, who controlled the Maytas companies.

It is quite a shame since Satyam's SAP Consulting Services business itself in the U.S. was among the largest of the Indian offshore's, reaching #12 in 2007 (albeit with a 1% market share) on growth of high 40%! (I assure you, based on PAC estimates, not fuzzy accounting)

While some analysts have commented that many Satyam clients will now look to exit contracts and go to competitors, such as Infosys, TCS and other offshore players. I also believe that while many companies may wish to quickly exit it relationship with Satyam, in reality (contractually as well as physically), it is a much more gradual procedure to switch suppliers; especially when it is tied to a company's backbone processes!

Also, just as companies became smart in their use and the ROI of IT during the last economic downturn, I believe this scandal may make companies much more deliberate in their selection process (if it wasn't long enough already!), and perhaps in some cases rethink whether offshoring to countries with more lax auditing standards is too risky. One could point to the lack of accountability today in the U.S., but at the same time, standards are still far stricter in structure and in practice in the US than in India or other emerging / BRIC regions... to discount this is a joke! And as shocking as Satyam's quick fall has been, to me it would be more difficult to fathom this happening at the same extent to traditional/on-site, large IT services suppliers... not that it could never happen, but as the dot-com saying went, "You don't get fired for hiring IBM!"

Happy New Year Folks...