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Decelerating ByDesign

                          The Caution Behind Business ByDesign

Coming into SAP's Sapphire conference this week, a number of bloggers, tech analysts and Wall Street researchers were looking for answers around recent decisions on SAP's Business ByDesign product line. Business ByDesign is a relatively new offering from SAP and represents a huge investment by SAP in the Software as a Service (SaaS) space. During a recent earnings call, SAP executives indicated a more cautious approach to the continuing rollout of this product line.

After three meetings today with senior SAP executives, there is now more clarity around SAP's recent moves. We spoke with Henning Kagermann (outgoing CEO), Leo Apotheker (incoming CEO) and others. What we learned was:

• The product is not performing to the cost expectations the company had set for it and, as such, was not operating at the level of TCO (total cost of ownership) that the firm needed for it to be a profitable solution. A high TCO is not something investors or Wall Street would appreciate.
• The root cause of the higher than expected TCO was apparently related to two major items. First, the version of NetWeaver (SAP's development and execution software stack) being used by the Business ByDesign solutions is out of date and needs to be updated to version 7.1 once it's completed. When that's accomplished, the solution should run more cost effectively.  Second, the upgrade process (e.g., the upgrade from Version 1.0 to 1.1) turns out to need more automation so that fewer errors are made and human intervention is reduced. Human intervention triggers added costs and introduces potential errors. This creates quality and cost problems.

SAP executives admitted that their new on-demand solution encountered challenges the company had previously never encountered. First, SaaS was an entirely new space. Second, the company couldn't fully 'leverage their 35 year experience' in application software as these customers were not the typical SAP customer and the solution would be used differently than its prior on-premise solutions. One SAP executive said they "thought they knew this market" but that wasn't exactly true. Lastly, their development staff was caught by surprise as the they did not have the same level of control with this product as they have had with other product lines.

Business ByDesign has been an expensive development exercise for SAP. One source indicated some 2000 persons were involved in the creation of the product. While further development efforts are being scaled back, this has more to do with a planned development deceleration and a need to wait for the NetWeaver architecture to be implemented. In creating the product, one executive commented that the company made hundreds or thousands of assumptions (e.g., how quickly customer deals would occur, what response rate is needed for acceptable performance, the targeted TCO, etc.) and some of these assumptions now require a rethink.

Bottom line for Business ByDemand is that:

• sales will continue in six countries: France, US, UK, China, Germany and India but not beyond these for now
• the company will continue to focus its TCO reduction efforts on cutting the cost of hot-patching, hosting, upgrading and on-going operations. Moving their hosting centers to low-cost countries (for a labor arbitrage) is not being considered for now.
• the $149/user cost figure is being held. TCO will be reduced while customer cost will not be increased.
• adjustments by SAP should take 12-18 months to complete

SAP - Earnings, Competition & Business ByDesign

                       SAP - A Rethink Just Before Sapphire

For the last few weeks, I've heard unpleasant rumors about SAP. Because I don't spread rumors, I haven't helped the spread of same. However, the recent earnings report raised a number of concerns just prior to next week's SAPPHIRE conference.

This bombshell was in the investor documents provided to shareholders today:

"Small and Midsize Enterprises and SAP Business ByDesign
SAP’s small and midsize enterprise (SME) business continued to perform well in the first quarter of 2008 as the Company added more than 1,570 new SME customers (excluding customers from Business Objects) in the quarter, representing a 28% increase compared to the first quarter of 2007. A principal component of the SME strategy is SAP’s breakthrough innovative new solution, SAP Business ByDesign. Since last September’s announcement of SAP Business ByDesign, the Company has been working closely with early customers and partners to validate and fine-tune the solution. As a result of this process, SAP has elected to modify the rollout strategy for SAP Business ByDesign to ensure a more focused and controlled ramp-up process. The new rollout strategy includes the following:

• For 2008, go-to-market efforts for SAP Business ByDesign will focus on six countries, where all the current productive early customers are based and which represent a large amount of the worldwide volume market opportunity. Additional country rollouts will be executed in 2009.
• It is expected to take around 12 months to 18 months longer than the original 2010 target to reach the SAP Business ByDesign $1 billion revenue and 10,000 customer potential.
• However, the Company will use SAP Business ByDesign innovations and technologies for the existing solutions and this will contribute significantly to the overall revenues of SAP in 2010.
• Also, the Company will engage with significantly less than 1,000 customers in 2008.

In light of the modified rollout strategy, SAP will reduce its accelerated investments around SAP Business ByDesign in 2008 by approximately €100 million, which is expected to result in additional operating margin expansion in 2008 as noted in the “Business Outlook” section of this release. Furthermore, beginning in 2009 there will be no further accelerated investments. The expected expenses related to SAP Business ByDesign will be funded out of SAP’s normal operational business.

SAP maintains its full confidence in the product, the market opportunity and the associated business model of SAP Business ByDesign, as the Company continues to move toward volume readiness in 2008. " (Source: http://www.sap.com/about/investor/press.epx?pressID=9406)

SAP Business ByDesign has consistently been the most discussed product line within the Enterprise Irregulars whenever SAP products are discussed. Significant issues have been raised previously about:

• the channel program needed to sell this product. Was this channel economically attractive to providers?
• the ability to sell this product line. Do partners or SAP have the materials, collateral, training, etc. to effectively identify prospects and close deals? Can these be done profitably?
• the 50-100 customer per blade limitation
• the long-term strategy for the product. Would Business ByDesign become the future product platform for SAP? Would this eventually replace other product lines?

While Business ByDesign is a robust solution that SAP had consistently maintained would remain a SMB product, their announcement today would imply that parts of the solution may be utilized in other SAP products.

Behind these changes involving Business ByDesign are some hard economic facts:

• the effect of the falling dollar vis-a-vis the Euro has adversely affected SAP's earnings
• a review of their headcount showed that the company added a lot of positions in their North American operations. Specifically, the addition of Business Objects personnel has added materially to their ranks. Whether by design (no pun intended) or not, the company has grown the ranks of its Sales & Marketing, General & Administrative and Infrastructure headcount by 20-30%. (see attached graphic or follow link to full SAP presentation: http://www.sap.com/about/investor/reports/quarterlyreport/2008/pdf/Q1_2008_E_final2.pdf)   

The added effect of more personnel, slower sales of Business ByDesign and other factors caused total revenue to go up 14% while operating expenses increased 22%.

Going into SAPPHIRE, SAP management should expect questions such as:

• Will SAP embark on layoffs, especially in North American non-client facing personnel?
• What progress has SAP made in developing its Business ByDesign channel program?
• Has SAP improved the economics for channel partners for its Business ByDesign product?
• Will SAP share with us details involving the technical difficulties they are examining in the Business ByDesign product line?

On balance, the bulk of the earnings announcement was positive but not surprising. The company posted continued growth and new customer gains. The company continued to gain market share. However, the difficulties with Business ByDesign should cause investors to question whether this company can effectively take the SMB space as confidently as they have pursued large enterprises.

For those who caught Marc Benioff and Hasso Plattner at the Churchill event, Marc teased Dr. Plattner about building SAP on the Force.com platform. Today, that might look like a better on-demand/SaaS strategy afterall.   

Deadweight Tax - A New ERP Term

A Descriptive Way to Describe How Out of Touch ERP Has Become

I liked this post on Sandhill.com http://www.sandhill.com/opinion/daily_blog.php?id=18&post=405 as it describes the concept of a 'deadweight tax' that companies pay as a result of using inflexible, hard to adapt ERP products.

I'm no fan of the lack of business (not technical) innovation behind some of the major ERP vendors. The products are out of touch with the way business works today. This article by Helene Abrams of eprentise (www.eprentise.com) is worth a read. It's provocative and makes you think.

Some Pruning of the SAP Product Line

                            SAP Rationalizes Its BI Products

Users of Business Objects, OutlookSoft, SAP, Crystal and many other products should definitely read InfoWorld's recap of SAP's product retirement announcements.  (see: http://www.infoworld.com/article/08/03/28/SAP-retires-overlapping-BI-products_1.html?source=NLC-TB&cgd=2008-03-28 )

I want to applaud SAP on this move. Instead of taking the approach some its large competitors have taken with their acquisitions, SAP is offering three years of support and is picking the best of the acquired lines that it will continue to enhance. I like this as it shows courage and it offers the best value long-term to the supported products. R&D, in this case, will not get diluted across many redundant products. Instead, it will be focused on a few products and will give those products and the companies that use them, a great deal of enhancements over time.

Other vendors like to promise eternal support for acquired products but end up offering only token upgrades. The SAP approach should yield more material upgrades and a better, stronger product line.

(Users of Pilot, Cartesis, SRC, ALG, Activity Analysis, BEx, Acorn, BPC, SEM, etc. should read the full article)

TomorrowNow Case Going to Arbitrator

           Arbitration - Not Always Speedy or Informative to Outsiders

The Oracle vs. SAP case re: TomorrowNow appears to be leaving the US Federal Courts and headed to arbitration. (See: http://www.infoworld.com/article/08/02/14/Judge-orders-Oracle-SAP-lawsuit-to-mediation_1.html?source=NLC-TB&cgd=2008-02-14 and www.tnlawsuit.com ).

Readers should note that arbitration proceedings often have these two consequences:

First, the proceedings and much of the discovery effort from here out will remain private. Everyday citizens or competitors aren't going to get the opportunity to mine public records to find those nuggets of insight we crave.

Second, the arbitration process could take years to complete. I know this from personal experience as my old employer went through an arbitrated divorce proceeding that ran for almost five years. Be prepared, this case won't get settled tomorrow, tomorrowNow or even after a couple tomorrow years later.

The TomorrowNow story has all the makings for a great television special. It has interesting characters, involves money and technology and pits two massive rivals against each other. With arbitration, we may never get to see the full made-for-television mini-series unfold and the tech world will be poorer for that viewing experience. I know I would have liked a front row seat to this.

Oh, well, maybe the next dustup will have some staying power.....

A Market Reaction to Vista

                               De-Bloat MSFT Vista

If you're a software vendor and another tech firm creates a tool to slim down your product, you're getting a big clue that something's not right with your offering.

vLite is a tool that culls out a lot of Vista functionality (before a user installs the OS on their computer).  If consumers/users need a tool like this, that should cause some folks in Redmond to look at their Vista offering and ask:

- Are we shipping an overly complex, overloaded product?

- Can't we make more of the functionality optional? User-selected?

- Should we make product versions more specific to particular user/platform types?

- Why do third parties feel a slimmed down solution is necessary?

- Are we creating performance problems for our customers?

- Could a slimmer product open up the product to less powerful PCs and laptops?

I looked briefly at the vLite web site (http://www.vlite.net/) . This product appears oriented for a technically savvy user for now. I'm not endorsing or panning it but I do find its presence very interesting. Readers might also check out: http://www.networkworld.com/community/node/24542?docid=3644

GRC - The Saviour of ERP Sales?

                       An Uncomfortable Industry Direction

I was reading a piece in this month's CFO magazine (see "The Emergence of Convergence", CFO, January 2008) about the GRC (governance, regulation and compliance) software marketplace and it left me feeling a bit out of sorts.

The article noted that:

- there are now 114 software vendors pitching GRC solutions

- average price of a GRC solution has tripled since 2003

- 35% of respondents of a survey by Approva Corp. indicated that they don't have a GRC strategy

- sales of GRC solutions should approach $1.2 billion US by 2010 according to Forrester

My concerns are the following:

- Too few GRC solutions are complete enough to handle what many companies want/need. Some want SarbOx support, others need Basel II, others still need an ERM (enterprise risk management) tool, others want a business process mapping and performance tool, and, others need/want something else.

- Vendors are happy to claim they have a complete solution but these solutions are often incomplete or nothing more than a collection of bolt-together acquired products. If you think your firm is buying a finely integrated, well-integrated set of GRC tools, you'll likely be mistaken.

- When new ancillary application spaces emerge, vendors rush in far faster than they can develop solid market responsive apps. The GRC space is new and offerings are still rough.

What's really needed in the GRC space are vendors who can help clients:

- improve their innovative capabilities instead of stifling them via too many redundant GRC tools, controls and initiatives

- streamline their GRC toolset requirements

- drive the cost of GRC activities and technologies to record lows (not highs!)

GRC is getting a lot of buzz from ERP vendors lately because it is the only thing beyond in-fill sales that can buoy a potentially flat market for their base products. GRC is a mandated need and is propelling sales much like Y2K did although on a dramatically lesser scale. Yes, GRC makes ERP vendor shareholders and managements happy but it isn't some long-term panacea for a tech sector bereft of any real innovation of late. Yes, I know everyone's adding SOA architectures but that's only technical innovation not innovation that radically re-defines business and creates value. GRC is costly - it isn't value added and that's the part of it that bothers me most. When ERP vendors are celebrating a non-value added functional solution, something's really wrong.....

Next Step for Talent Mgmt/HR Vendors

Where is Everyone Going? 

(This blog also posted on www.servicesSafari.blogs.com )

 

Wachovia Capital does a great job of capturing attrition data on publicly traded service firms.  Their analysts are especially interested in the turnover rates experienced by Indian outsourcers.  I, too, track this information as attrition rates of 20 - 40% annually cannot be good for the clients who use these outsourcers’ services. 

 

In the November 2007 issue of Global Services magazine (www.globalservicesmedia.com ), there is an interesting article (“Early Warning on Attrition”) that describes the efforts of several outsourcing firms to stem further attrition. Highlighted firms include Convergys and Genpact.   

 

Several weeks prior to this story being published, I discussed predictive analytics around attrition with numerous HR software executives at the HR Technology conference in Chicago. In particular, I questioned the limited thought that is going into many talent management and performance management solutions regarding attrition.  In essence, most of these systems rely on compensation and prior evaluation data to determine someone's flight-risk potential.  Unfortunately, those data attributes, while present in most HR or talent management solutions, represent a limited view into the causes of attrition.

Stanley Bing, of Fortune magazine fame, recently published a book on crazy bosses.  He identified six common pathologies that these mixed up individuals possess.  Bad bosses, as it turns out, are either the first or second reason behind many employee departures depending on whose survey you read.  It would stand to reason that any early warning system around attrition should be significantly focused on the dysfunctional characteristics present in far too many managers, supervisors or bosses. 

 

The bulk of the Global Services article discussed those red, yellow and green dashboards that managers can use to identify potential attrition candidates.  To their credit, the companies utilizing the systems are evaluating more than performance data.  The article indicated that issues such as hygiene, rejections for internal job postings, work quality and other factors also are evaluated. 

 

Convergys stood out in the article by addressing issues related to management that contribute to attrition.  The article states:

“At Convergys, we have introduced a "Team Leader Transformation" program with an emphasis on training the team leaders to improve their people management skills.  Agents with more effective managers have higher job satisfaction, and are thus likely to leave," says (Sharad) Talwar of Convergys.”

 

Right on, Convergys. More human resource software firms should follow the lead of Convergys in this regard.  Bad bosses are more than just harmful to their employer and to themselves. They drive away significant numbers of great people.  Once attrition detection systems understand, track and trap these bad behaviors, corrective actions can be taken. 

 

Going forward, more work must be completed regarding flight-risk.  Systems should be monitoring whether employees are cashing in their stock options, have been bypassed for promotions, have received new supervisors, and other factors beyond compensation and performance evaluation scores. 

 

Talent management and HR vendors should also look at ways of evaluating the attrition impact of ineffective managers and not just bad bosses.  The latter has a toxicity about them that drives all workers away quickly while the former takes more time to run great people away.  When dealing with ineffective managers, companies may devise a number stratagems to either bolster the manager’s skill set, change their team composition to offset managerial weaknesses or other measures.  But, until HR and talent management vendors invest in understanding the root causes of attrition (instead of building new platforms for their technology infrastructure), we will continue to see uninspired, ineffective attrition management solutions.

Oracle OpenWorld - Charles Phillip's Opening Address

                    Innovation via Acquisition and Integration

Charles Phillips, President of Oracle Corp., opened Oracle's OpenWorld conference this morning. The key takeaways from his remarks were:

• customers will get value from the acquisitions they've made.
• these acquisitions have created an infusion of new industry vertical capabilities into the applications and have permitted the underlying infrastructure to become more fleshed out
• a more robust set of applications and infrastructure means customers have only call to make when it comes to support

What Charles didn't discuss was also important. To me, it was notable that:

• innovation is something that Oracle partners (e.g., integrators) will provide if it doesn't come from the outside via acquisition
• the company is more interested in showing how it can stitch together its acquired applications rather than show how a re-worked, single product line actually looks and works

Charles was proud of the gains they’ve made in many fronts. Oracle DB now is 47% of the market (up from last year) (more than next 2 competitors combined) – 53% of market for all others

Middleware – Oracle claims to be the fastest growing vendor in the space. They’re in Gartner’s Leaders Quadrant in 11 Middleware spaces. They are especially proud of their ability to put together a full suite of Middleware products.

In the applications space, they’ve expanded well beyond more than ERP and CRM. Much of the growth is in verticals and many of these successes are due to acquisitions. They highlighted several verticals they’re #1 in (e.g., banking, public sector….)

Customers should expect more business model innovations from Oracle and acquisitions will be a key driver of this.

Charles pitched acquisitions as a good thing for Oracle customers as these are a way to:

-          get applications and middleware in a single support organization

-          get new vertical innovations into the product line

Charles sees the following as key announcements this week:

-          Application Integration Architecture

-          Middleware 11g- Beta 4

-          LogicalApps Active Governance (an acquired product from a compliance vendor with Oracle expertise)

-          Agile PLM

-          Enterprise Manager 11g – Beta

-          MyOracle Support – Software Configuration Manager

-          Oracle VM

o       One complete software stack

o       One source for server virtualization and Linux

o       One call for support

Oracle’s Stated Product Strategy:

-          unified business processes

-          unified Business Intelligence

-          unified infrastructure

-          unified security and governance

-          unified mgmt

-          built with open standards

-          one support call

-          extensive ecosystem

Chuck Rozwat, EVP – Product Development, joined Charles and others on-stage to discuss common business challenges they see in the market and how Oracle's solutions will help. Each is discussed below:

CEO challenge: how to integrate applications after a company acquires another firm

-        AIA-  Applications Integration Architecture  2.0

o       Process integration packs

§         Pre-supplied integration between one ORCL acquired app to another

§         Can model business and process flows here

§         Packets for:

·         Seibel to ebusiness suite

·         Portal to ebusiness suites

·         Retek to ebusiness suite to PSFT

·         Several more

o       Industry reference models

o       Foundation packs

o       SOA suite      

CFO challenge-      managing risk, ensure compliance

o       GRC Manager (Governance Risk Compliance)

§         Data protection/privacy

§         Regulatory

§         Identifies gaps in compliance in workflows

o       LogicalApps – Active Governance Suite

§         Comes with pre-delivered policies re: policy violations and suggested actions

o       Database Vault

§         Restrict access by: app, command rule, factor

o       Audit Vault

§         Powerful auditing

o       Identity Management

o       Content Management

Engineering & Manufacturing Challenge -   managing product lifecycle

o       Agile PLM

§         Shared content system

§       WEB Center

§         AutoVue

§         Prod Info Mgmt

VP Operations -          gaining actionable insight

o       Oracel Enterprise Performance Mgmt and Business Intelligence

§         Order & Fulfillment analytics

CIO/data Center -          delivering end-to-end mgmt

o       managing heterogeneous infrastructure

§         virtual servers

§         os

§         servers

§         dbs

§         apps

§         mw

§         network

§         storage

o       enterprise manager services

§         discovers all services

o       Software Configuration Manager

o       Oracle VM

HR Technology Update

                         HR Technology Show - Chicago

Earlier this month, I attended the HR Technology show in Chicago. I met with approximately 20 vendor executive teams and have developed approximately 11 new research reports on these (The list so far includes Veritude, Workscape, Workstream, Vurv, Emportal and several others). Some of these reports will be available through this blog and/or the new Vital Analysis website once it's launched.

I've also created a longer report titled "State of HR Technology 2007" that should get out of editing this week. More on that in a subsequent post.

Here are some interesting factoids I have regarding the show:

• a whopping 226 vendors were on the show floor
• talent management vendors were especially notable in the number of spectacular new product releases they introduced
• Workday outdrew every other show vendor by a wide margin
• (though not scientific) my view of the attendance looked especially strong

I'll published much more in the days to come.