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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version of NetWeaver (SAP's development and execution software stack) being used by the Business ByDesign solutions is out of date and needs to be updated to version 7.1 once it's completed.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.

ORCL - Apps Results for Q3

                       Preview of a Tougher Tech Sales Environment?

BusinessWeek last week alerted its readers that Wall Street would be looking at the numbers Oracle (ORCL) would report Wednesday March 26, 2008. Tech analysts have also called wondering whether ERP vendors would be experiencing market softness, too. (see snapshot graphic embedded in this blog - figures from ORCL investor resources at http://www.oracle.com/corporate/investor_relations/earnings/3q08-pressrelease-march.pdf )

After listening to the earnings call, one would conclude:

• ORCL overall did okay. Sales in database and middleware clearly outshone those in applications.
• Compared to last year's Q3, new application software revenues only grew 7% - a figure Wall Street will use to punish ORCL and other ERP vendors
• Application software updates and product support revenues grew 3X those of new application sales but all of these numbers failed to match the growth percentages of the last two quarters
• ORCL is clearly benefitting from a declining dollar as a significant percentage of their revenue gains reflect the effect of currency exchange forces

Wall Street has already discounted a number of ERP stocks and will likely do more of the same. ORCL will not be the only firm to feel downward stock price pressure. Investors should note that:

• large tech purchases often track the general economy
• vendors that continue to develop all-new functionality (as opposed to re-platforming existing apps) may continue to grow during economic declines
• the very smallest, newest tech firms are the most vulnerable during a decline as buyers perceive them to be too risky or extend sales cycles to unacceptable levels
• well-established vendors, like ORCL and SAP, usually come through fine albeit with somewhat diminished growth rates
• mid-market buyers do not track with the general economy

 

More on the Softscape - SuccessFactors Litigation

                      Softscape Lines Up Top Flight Counsel

SoftScape has lined up Taylor & Co. to defend them in the case recently filed by SuccessFactors. The two attorneys from Taylor & Co. on this case will be Steve Taylor and Jessica Grant. Mr. Taylor achieved some measure of fame in HR circles with his successful defense of PeopleSoft in a theft of trade secrets trial in the early 90s.

In that trial, two competing HR software firms alleged that newcomer, PeopleSoft, had infringed on proprietary intellectual property. In the spirit of full disclosure, I was personally subpoenaed for that case although I did not get deposed or offer testimony. That case was quickly dismissed as the Federal judge on that case did not find that the infringements were at all material or unique. In that case, plaintiffs alleged that a screen requesting 14 data elements like name, address, zip code and social security number were a unique, defensible HR intellectual property creation. I agreed with the judge that those 'unique' features were obvious and common to just about any payroll or HR system. PeopleSoft prevailed and their sales exploded immediately after the case was ended.

Softscape needs a solid litigator and it appears that they've made a good choice (see: http://www.tcolaw.com/aboutus.html) . If they get the case heard in Federal court with a sharp judge, that could help them, too.

No one can handicap the case right now as the discovery process is far from complete. Like in sports and war, a good defense is as important as a good offense. Lining up solid defense attorneys is a good move on Softscape's part. If this case is all about the bad acts of a rogue employee, both parties could save a lot of money and reach a quick settlement fast. The attorney fees will be steep. If it's a bigger matter, it will become the HR software story of the year.   

Temporary Restraining Order - Softscape / SuccessFactors

Latest News -

U.S. Judge Claudia Wilken granted SuccessFactors its motion for a temporary restraining order (TRO)against Softscape. Specifically, the court ordered Softscape to:

• not distribute the PowerPoint deck in question
• not access SuccessFactors' websites or other intellectual property
• not make statements that purportedly come from another

The court further ordered Softscape to post a $10,000 bond. The court also granted permission to issue subpeonas to Verizon and Comcast. Those subpeonas will help identify who either sent the PowerPoint deck to SuccessFactor prospects or who logged into SuccessFactor webinars.

My assessment:

The judge issued an appropriate TRO. The impact on Softscape, so far, is minimal but when the participants are identified, it could get problematic for those involved. SuccessFactors gets what it most needs: the end of the distribution of this document and a pile of sympathetic publicity.

At this juncture, the case will now go through a protracted discovery process followed by additional court room time for the civil case. When the discovery process is completed, it will be interesting to see if criminal charges are possible. Those could arise if SuccessFactors' web site or other intellectual property was illegally viewed with stolen passwords or other acts.

For now, the talent management/human resources software space will go back to being a relatively calm space. It will get more interesting again once the discovery facts come to light. Who wins in this deal? No one really except the lawyers. Who'll pay is clear: Softscape and certain Softscape employees. Softscape will need to distance itself from rogue employee behavior, if that's indeed what happened. It will need to double down on its PR activities and become a more humble, chastened and repentant firm. That's okay and software buyers are actually a forgiving lot. They've forgiven a lot worse:

• CEOs who blew most of their investors' capital on elaborate Vegas parties instead of product development;
• CEOs convicted of crimes;
• Products with over 10,000 bugs
• Products that were late, by years, to market
• Loss of key company founders

Both companies need to move past this quickly and get prospects focused on the real matters at hand: talent management and HR problems in today's business economy. This dust-up should not become more important than solving their customers real business problems.

To read the judge's opinion see: http://www.softscape.com/pdf/doc/TRO_Decision080313.pdf     

10 Mgmt Rules for SaaS Firms

Metrics That Analysts and Stock Buyers Should Use in Evaluating SaaS Firms

I found Byron Deeter's "Top 10 Laws for Being SaaS-Y" to be one of the best blog posts of the month. http://www.sandhill.com/opinion/editorial.php?id=176&page=1 Byron is with Bessemer Venture Partners and his posting reflects the knowledge Bessemer acquired in reviewing scores of SaaS companies.

An Excellent post!

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.....

India and SAP

                                  The SAP Presence

IDG reported today (via its InfoWorld online publication) a number of interesting facts regarding SAP in India (see: http://www.infoworld.com/article/08/02/06/India-emerges-as-fastest-growing-market-for-SAP_1.html?source=NLC-TB&cgd=2008-02-06).

One of the more interesting quotes in the article was:

"SAP more than doubled its number of customers from 1,350 a year earlier to 3,024 in December, said Ranjan Das, SAP's president and chief executive officer for the Indian subcontinent."

Sales figures or revenues by product line were not provided. Interestingly, two different analyst firms have pegged the size of the software market in India between $9-20 billion. You can be sure SAP is doing what it can to acquire as much of this as it can.

Unless SAP is experiencing atypical market penetration in India, we should expect that its Business One and All in One products sell well there. The SAP Business ByDesign products may be moving too although I've not heard about there being a strong reseller community for that line in India yet. Nonetheless, even Business ByDesign could be ramping up there as well. The Indian economy is one with a lot of concentrated wealth held by a few very large firms with a staggering number of smaller firms at the small side of the market. That said, we should expect to hear about solid increases in customer counts from SAP and other vendors that cater to the small to mid-market space. We should hear fewer stories of huge enterprise deals there as the numbers of potential new clients in that market segment is constrained.

So, was this a big story? Maybe. Maybe not. When we see the numbers that other firms are booking in India and when we get more detail from SAP on their sales, it could be more interesting. It's certainly something to watch.  

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.....