For SAP, the German software colossus, this could be its Motown moment, the instant when the bosses of Ford and General Motors woke up and realised that American families no longer wanted to drive a tank disguised as a shopping trolley.
In other words, while we were doing our jobs, the world changed and we saw our business model, the thing we did so well for decades, thrown on the scrapheap in favour of something smaller and cheaper.
At SAP and at Oracle, its deadly rival, something similar is happening. The business model that transformed these firms from clever software designers into corporate colossi is selling Enterprise Resource Planning (ERP) systems. The idea is to integrate lots of different bits of business software (payroll, manufacturing, customer service, supply chain) into a seamless whole so that managers can see into the different parts of a business and quickly find out what is going on.
It was a great big idea and the German company possibly has been the most successful seller of large-scale ERP systems. A host of management and software consultancies, including leading competitors, such as IBM, became partners with SAP, creaming off big fees in the gargantuan task of building global data networks for multinational companies and, more importantly, training staff to operate them.
But last week, SAP called time. Even as the software company’s clients were beginning to emerge from their recession bunkers, SAP said that things were getting a bit worse. As manufacturers worldwide begin to rebuild inventories, SAP said that its third-quarter sales were down 9 per cent. Its outlook for 2009 was no longer a software revenue fall of between 4 and 6 per cent, as suggested in July, but a decline of between 6 and 8 per cent.
Advertisement
The prognosis thumped the German stock market, where analysts read SAP’s entrails and make Delphic pronouncements about the world economy. Sales at IBM and Oracle also disappointed. Leo Apotheker, SAP’s chief executive, said that business was stabilising but at a lower level. Customers were no longer making big orders but “buying software in smaller chunks”.
SAP has a problem. The mammoth contract with a multinational worth tens or hundreds of millions of dollars, to roll out an SAP system across the globe, was the firm’s bread and butter. But it is now the old business model. “We believe those contracts will not come back, ” a spokesman for the company said. The core software sales (excluding service and maintenance) are down by a third. Instead, SAP is trying to reinvent itself, selling fashionable applications, such as business intelligence software. SAP has cut 3,300 staff and is asking the rest to be more nimble and opportunistic. A key project is to use “cloud” computing, software delivered over the internet as a service to adapt ERP to small and medium-sized companies. SAP has a product, BusinessbyDesign, but it’s had teething troubles.
Thomas Otter, a software business analyst for Gartner Group, reckons that there is little appetite among businesses to throw money at huge software projects. “If big IT projects were an animal, the WWF would be concerned,” he quipped.
ERP emerged in the 1970s and 1980s, but its heyday was in the 1990s and the run-up to 2000. A millenarian panic developed over the survival of elderly IT systems and whether their digital clocks could handle the transition. Companies took the opportunity to undertake big IT investments. On top of the capital cost of installation, SAP and Oracle built reliable revenue streams for maintenance, training and continuous software improvements. Unfortunately, some customers are now rebelling against the annual fees and SAP is being forced to cut the charges — a recent deal with Siemens is reported to have cuts SAP’s fee in half.
On the surface, SAP faces a simple problem, according to Mr Otter. Most big companies have installed ERP and don’t want to do it again soon. It takes too long and is too expensive to link up every warehouse, every factory and every sales centre. Meanwhile, software firms have run out of a mileage in adding applications to ERP systems. Every business process under the sun has been turned into a software module. That includes human redundancy: if the recession has you rattled, consider workforce planning software that tells chief executives how many staff they will need in three years’ time.
Advertisement
A more deep-seated worry for management is that no one quite knows how to measure the benefit of these automated flows of data. There have been some spectacular ERP failures, often blamed on poor training and implementation, rather than the system itself.
ERP is merely a tool, Mr Otter says, and what matters is what you do with it — “Usain Bolt and I have the same running shoes.”
Software companies like to describe their products as solutions, a word that appeals to managers who spend most of the day trying to catch questions before they fall into their laps as problems. Yet we may have come to the limit of the obvious solutions. Clearly, it is useful for vendors and purchasers to monitor the stock levels in their respective warehouses. It ensures just-in-time delivery between a supplier and a manufacturer and that saves money. But, during the depths of recession this year, Europe’s big manufacturers, linked through every pore with SAP, complained they had no “visibility” to predict the outlook for their businesses.
So much data, so well analysed. But the synthesis of all those numbers, knitted together with the finest software money can buy, was a message of chaos.