Yesterday's news that SAP hit its targets for growth etc in 2008 while announcing 3,000 job cuts was largely well received. For my part, I see this as a time for opportunity. SAP has Business ByDesign hanging in the wind and seems to have few plans for its future. I don't understand this.
My estimate is that SAP's topline software revenue sales will have fallen around 12% between 2007-9. That's a fairly hefty drop but is more than compensated by increases in maintenance and services revenues. Most of my colleagues are of the view the high end ERP market is saturated but there is always room for innovation along vertical market lines. Looking solely at maintenance as a profit saver isn't a road I'd want to tread. It assumes a level of lock-in that history has shown does not exist. Sure, very large organizations have huge investments but the ERP software element is often a relatively small fraction. Assuming the market will turn at some point and re-ignite top line sales sounds like a reasonable strategy. But I believe it is flawed. If the market IS saturated then there is not much one can do in any market conditions, is there?
As it turns out, there's plenty that can be done - just not at the place SAP has traditionally occupied. According to HotViews, SAP's co-CEO Leo Apotheker is concerned with margins:
SAP's operating margins are now around 25%; they are aiming for over 30%. BBD is losing money, even ignoring the gazillion euros SAP has so far spent on R&D. Apotheker noted that typical SaaS vendor margins are around 10%. Actually, the most notable, and arguably the most successful player, Salesforce.com, is more like 6%. He says he wants to control BBD roll out so as not to dilute group margins. How? This is not a trick question - I just can't see how!
If you look at Salesforce.com, it is still a company in hyper growth mode. That means huge spend on marketing. It *could* dial back that element and massively improve the bottom line. SAP doesn't have that option IF it is trying to maintain margin. But then there is a sense where maintaining margins becomes an obsession that diverts attention away from long term stability. Given SAP's history, I find that hard to believe.
So let's turn this in another direction. SAP identified markets where ByDesign could readily fit. Having dived into the bowels of the service I'm sure they have something sufficiently different to attract a large number of customers in markets it sees as under served. OK - so that might be at lower margins. But then think about the business applications market as a whole. It is only about 40 years old. It is exhibiting similar characteristics to other markets that mature over time. Here I am thinking about the motor industry.
In the early days, Ford and General Motors became fabulously wealthy but over time lost their way by clinging to past practices. Enter the Toyota's of this world and blam! Years on and the industry is looking for US ogvernment hand outs.
If you believe as I do that the large applications software industry is heading in the same direction then surely the thing to do is take what could be an attractive asset and put it to work. If SAP doesn't then someone else will.
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