Oracle beware: in software, the SAP is rising

Stephen Pritchard reports on the German firm that is laying down the gauntlet to its famed rivals

If you have bought a car, visited a supermarket, called the bank or dealt with a local government department recently, there is a good chance you've entered the world of SAP.

Europe's largest software company might not have the profile of Microsoft or even Oracle, but SAP points out that 900 of the world's biggest 1,000 companies, as ranked by Fortune magazine in the US, run its software.

SAP's relative obscurity is explained by its emphasis on producing software for the back office. The company, based in Walldorf, southern Germany, was founded in 1972 and specialised in enterprise resource planning (ERP) software, which forms the backbone of most larger businesses' IT systems.

Today, SAP also sells software to run firms' finances, human relations, supply chains and marketing, as well as customer relationship management (CRM). Tellingly, SAP has a 57 per cent share in its target market. And, according to the company's own estimates, this is more than the combined share of its four closest competitors - including Oracle, currently the world's second-largest software group after Microsoft.

For Henning Kagermann, who became chief executive earlier this year, SAP's strong position is in part a reflection of the economic climate since some of its progress has come at the expense of the smaller, so-called "best of breed" software companies that came to the fore in the dot-com boom but failed to develop sustainable business models. "In the boom especially, a lot of best-of- breed players oversold [their software]. That's one reason they weren't successful over the longer term. We had a better product portfolio."

Kagermann concedes that if Oracle's proposed hostile takeover of rival Peoplesoft goes though, the short-term effects could be negative for SAP because of downward pressure on software prices. But looking further out, it could gain, especially from customers worried about support for Peoplesoft products.

"In the mid term we see advantages. There will be uncertainty. In order to get a return out of the transaction you have to make cuts, which means you can't be too nice to clients. If you just continue with overlapping products then where are the savings? Consolidation is a tough job. What will clients say if you don't maintain the products? And if you do maintain them, it costs. Some customers will feel the uncertainty is too high and will go with the vendor who will be here in 10 years."

A more immediate threat to SAP could be Microsoft's move into the business automation software market. Kagermann admits that Microsoft's push to sell to the "Mittelstand" - the mid-sized businesses that characterise much of the economy in Germany, and large parts of the rest of Europe - strikes at one of SAP's growth markets.

The trick is to persuade smaller businesses that investing in automation software, be it CRM or ERP, can bring them the sort of returns enjoyed by their larger competitors. Kagermann dismisses the idea that lower economies of scale mean mid-sized businesses will not gain as much from automation and so should opt for cheaper, simpler software. "It depends on what you offer," he says. "Smaller companies may have the same demands for functionality as larger ones. If it is manufacturing, distributing and selling [products], it may be as complex as a large organisation. They can't afford to have inferior software."

Growing SAP's presence in the mid market is important as revenues from larger businesses are still under pressure. SAP's third-quarter results, released earlier this month, showed that total turnover for the company had fallen by 3 per cent, against the third quarter in 2002, to €1.652bn (£1.15bn).

But SAP will not be relying on small and medium businesses to drive growth. Kagermann says it will raise rev- enues by increasing the number of people in a given business who use its software, and by increasing the amount of SAP software that clients use.

The short-term strategy is to persuade businesses that have bought the software to turn on more of its functions. "Not all companies have used SAP up to the limits. They have not implemented all the modules. They may have ERP but they might not have installed supply chain management," suggests Kagermann. "What is happening is that because companies are spending less, they are buying [software] in smaller chunks. But they will spend more because the opportunity to improve efficiency is still huge. Only a few companies are where they want to be. We are ourselves just putting in CRM."

The other arm of the strategy is for clients to use SAP software in parts of their business that are not already covered by main ERP or financial software, with its emphasis on transactions.

"Our traditional space of automating transactions is relatively flat," says Kagermann. "Most companies have done it. So we have to move to reach more people in the enterprise.

"In future there'll be more collaboration between people within the enterprise. If you are planning or budgeting, there may be five people who have to talk to each other to create that budget or plan. This is the bottleneck of the future."

Kagermann also believes collaboration will continue to develop between businesses. New technologies like radio frequency ID tags (RFID) and web services, where business applications share data with each other over the net, will help companies to become more efficient.

Web services, and the XML (extensible mark-up language) standard for data sharing, will make it much easier to connect suppliers' and customers' systems. And RFID, which could replace barcodes within a few years, will make it easier for companies to capture data from across their supply chains.

But while the technology may be new, the business drivers are not. Companies want to stay ahead of their competitors and they will invest money in technology if it helps them to do so. For Kagermann, this goes beyond a simple infrastructure decision; it is about assisting executives in running their businesses better than the competition.

"If IT helps and supports the business, the chief executive will spend a lot on IT," says Kagermann. "What the chief wants has not changed. He wants to execute on strategy. That means he wants to change the organisation and the process to be faster, more agile and more customer responsive. That has not changed in the last 50 years."