Recently, ERP technology providers have rushed to take advantage of today’s buyer preferences for adoption of more cloud-based applications that can surgically be inserted to support specific business processes. They effect of that strategy has come home to roost for the major players.
This week, SAP AG reported a 23 percent increase in third-quarter profits but the winds of currency and buyer preferences impacted the growth of software license revenues. Total revenues climbed a mere 2 percent to slightly over €4 billion, compared with a 14 percent growth rate a year earlier. According to business media reports, revenues for the company’s core software licensing businesses actually decreased by 5 percent overall, including 13 percent in the Americas and 9 percent in the Asia regions. License sales in the EMEA region increased by 8 percent. Cloud subscription revenues more than doubled in the quarter to €191 million and claims to have 33 million cloud subscribers. Looking toward its final quarter, SAP executives forecasted an overall 10 percent excluding currency fluctuations. That would imply an aggressive sales effort in the very important upcoming final fiscal quarter.
In mid-September, rival Oracle also reported a mere 2 percent increase its fiscal first quarter revenues, continuing its trend of two challenging quarters of revenue growth. Oracle does not breakout its revenues for cloud based application and indicated that revenue from the combination of new application software licenses and cloud subscriptions grew 5 percent in the quarter. First quarter profits rose to approximately $2.2 billion, compared with just over $2 billion a year earlier. Looking forward to the remainder of the fiscal year, Oracle indicated that combined software application and cloud subscription revenues growth would range from a negative 4 percent to a gain of 6 percent in constant currency, a rather wide range.
ERP vendors have a special challenge, they have to convince customers that their current cloud computing offerings have a more compelling value proposition that those of existing best-of-breed cloud-based vendors. Recent cloud-focused acquisitions have had a slower record of integration with existing applications with elongated timetables, and that probably accounts for why buyers are shopping the field.
The other more subtle challenges is that ERP vendors have built a legacy of staffing and overhead directed at supporting traditional direct sales of applications while cloud-based sales are more developed by longer-term relationship selling.
According to announcements from both the German and Americas SAP Users Groups, SAP has begun to modify some of its software maintenance policies to allow customers some flexibility in retiring older software licenses related to on-premise installations. This is good news, even though the terms are complex and dependent on individual circumstances.
A posting on ASUG News (Americas SAP User Group) indicates that SAP will now allow customers to terminate on-premise licenses in order to buy new cloud-based software. According to the ASUG posting: “In effect, customers can eliminate maintenance payments on the software they are no longer using and use that money to pay for cloud software.” Specific customer needs will be apparently taken on a case-by -case basis, implying that SAP Sales and Services teams will maintain control of the negotiations, in essence, assuring that any changes ensure a net positive outcome for SAP. The posting reinforces that the one caveat is that new cloud-based subscriptions which include either SAP’s newly developed HANA applications, or offerings from Ariba or SuccessFactors, have to add-up to more than the customer is currently paying in legacy maintenance and support for the eliminated on-premise software.
A later ASUG News posting informs of another option, the ability to terminate an on-premise software maintenance plan to buy a new on-premise plan, or to terminate some licenses without a new purchase of software. Again, these policies are highly dependent on existing contract terms and customer related discount structures and include lots of fine print.
On the newly formed start-up digitnomica web site, veteran SAP observer and sage Dennis Howlett opines that these new maintenance licensing policies are indeed complicated to understand and interpret. Howlett notes SAP’s history of giving customer benefit with one one-hand, only to take-away with the other. Howlett opines: “The message is clear: while customers always welcome initiatives that provide more bang for the buck, they also want a much simpler pricing landscape. It is worrying to see customers becoming annoyed to the point where I am receiving inquiries about 3PM from what I also see as SAP only shops. SAP won’t want to see that become a trend, especially in light of the fact that SAP’s on premise business is looking over a fiscal cliff of its own.”
Supply Chain Matters highlights these changing SAP software maintenance policies because by our observation, SAP supply chain management applications often feature many unused seats or applications that were placed on-the-shelf for later implementation, and remain in that state. The takeaway message for supply chain functional teams is that your IT or technology procurement teams now have some flexibility in the ability to modify the ongoing cost burden of the unused or not widely deployed supply chain applications. Again, as noted above, there are lots of caveats and SAP obviously is attempting to provide its installed-base customers the economic justification to upgrade to the newer cloud-based software offerings. For SAP Supply Chain Management Suite customers, that applies directly to consideration for the adoption of Ariba’s broad B2B supplier connectivity applications or SAP Business Suite Powered by HANA applications that directly support supply chain business process needs. There are also SAP customers that might have acquired licenses to the entire SAP Supply Chain Management suite, including SAP APO that really did not widely deploy these applications because of other business needs or disruption concerns. Your IT team may now have some flexibility to consider a non-SAP cloud based application without the excuse of the SAP maintenance costs already budgeted, forcing you to make do with previously acquired but unused software.
As many software industry watchers have pointed out these past months, enterprise software customers are no longer willing to tolerate high legacy software maintenance costs which are perceived as a burden with marginal upside business benefits. Customers are pushing back with their collective voices, and vendors such as SAP are responding, albeit in a conservative, highly controlled manner. The good news is that other enterprise vendors are bound to follow, and supply chain functional teams will gain added flexibility in their needs to plug-in process automation capabilities such as more predictive supply-chain decision-making support. In essence, SAP is dealing with customer realities and supporting the financial ability to adopt cloud-based options more readily than before.
This Supply Chain Matters commentary is a follow-up to our previous breaking news commentary regarding E2open and its acquisition of supply chain planning, collaboration and response management technology provider icon-scm.
Our initial commentary noted the previous favored Solution Extension partnership that icon-scm had in the area of SAP capabilities in response management or what is sometimes referred to as fast planning. I
In the interests of fairness, we noted that Supply Chain Matters had reached-out to SAP for comment in formulating our commentary, but had not heard back at the time of publishing.
This afternoon, SAP proactively responded and provided additional perspectives which Supply Chain Matters would like to share
We were informed by SAP representatives that the Solution Extension partnership with icon-scm and the application SAP Supply Chain Supply Chain Response Management by ICON-SCM has not officially be dissolved as yet. There is a prescribed process for winding-down such a relationship in terms of communication with existing customers, attending to existing sales cycles and other matters, but we were informed that the partnership is in all practicality is likely to be closed.
SAP confirmed that existing customers that have secured SAP support will be assured that they will continue to receive that support until maintenance contract renewal, or for the life of the application SAP customers utilizing icon-scm will likely have the option to renew maintenance with SAP or opt for another alternative including that of E2open. Existing customers should rest easy that both SAP and E2open have affirmed a transition support plan.
Regarding some background to the partnership, SAP indicated rather positive customer interest and uptake in the initial year of the icon-scm partnership, not so in the second and third year. Mark David, who has supply chain planning solution management responsibilities for SAP affirmed the importance of customer interest in supply chain response management capabilities.
While a lot of icon-scm interest came from customers from the high tech sector, SAP was challenged to generate customer interest from other industries. This was not from a lack of effort from the SAP Supply Chain Management Solutions Management team. a muted admission that SAP sales teams did not have either the domain knowledge or patience to ride out elongated sales cycles. SAP customers were apparently demanding a more harmonized approach in integration to the broader array of the SAP Supply Chain Management applications suite and thus willing to continue use of existing SAP planning applications such as APO, awaiting such harmonization.
While SAP viewed icon-scm as strategic down the road, there was apparently not enough momentum to justify a corporate acquisition decision at this time. SAP however affirmed to Supply Chain Matters that the company has been working on a full harmonized supply chain response management collection of capabilities that would address today’s challenges manifested by multi-channel fulfillment and more outsourced activities. That approach could likely include leveraging of the B2B networking patform provided by Ariba, SAP’s most recent acquisition concerning supply chain and procurement support.
Obviously, the timetable of that effort has a renewed emphasis and urgency.
Since our initial commentary, Supply Chain Matters has received additional background and other information from E2open which will be shared in a later commentary.
Disclosure: E2open is one of other named sponsors of the Supply Chain Matters blog.
The announcement declares that its Supervisory Board, the German equivalent to a Board of Directors, has agreed to propose co-CEO Jim Hagemann Snabe to be elected to that body in May 2014. The proposal is subject to at least 25 percent of existing shareholder approval but more than likely comes with some endorsement of SAP Co-founder and Supervisory Board Chairmen, Hasso Plattner. None the less, Snabe will have to replace one the current 16 Supervisory Board members.
This announcement anoints current Co-CEO Bill McDermott to the role of sole CEO by May of 2014, an announcement that will draw mixed reaction both internally and externally.
The obvious question is why now?
On the executive briefing for Press and Analysts, an agitated Hasso Plattner explained that the Supervisory Board held an extraordinary meeting over the weekend after hearing of Mr. Snabe’s personal decision. Snabe’s existing employment contract extended to 2017, thus Plattner explained that regulatory factors deemed that SAP had to make a public announcement regarding this leadership development concerning the company’s top leadership and its Supervisory Board leadership. Otherwise, it would have been an internal matter. In the Q&A session, representatives of the press provided many questions related to why this timing, especially since Mr. Snabe just three weeks ago was extolling the praises of the co-CEO structure.
There will no doubt be lots of open questions and possible implications from this significant announcement. It was no secret that the SAP co-CEO model was working for SAP because of the respect that each co-CEO garnered internally and their working relationship with one another. Mr. Snabe had a loyal following from the business unit and product development teams while Mr. McDermott’s following came from the sales and field aspects of SAP.
Obvious open questions relate to how leadership will evolve over the next eight months of what could be termed as a “lame-duck” transition. From the call it seemed apparent that Vishal Sikka’s technical leadership will expand along with Bernd Leukert, with product go-to-market leadership influence expanded to Robert Easlin. Perhaps that was already in the works.
SAP has a rather challenging next 12-18 months as it continues to make yet another major transition, the latest being HANA and cloud computing capability. Whether today’s announcement detracts from that challenge remains a matter of much speculation in the weeks to come.
This author came to know of Jim Snabe during my tenures both at SAP and as an industry analyst. I found him to be a highly competent and personable senior manager, one that drew the trust and respect of many teams and individuals. His leadership of both SAP business units and product teams was admirable. I found Jim to be a very down-to-earth and approachable executive, not swept-up in power tendencies of certain CEO’s or senior executive leaders.
From the wording of the announcement and this morning’s executive briefing, it would appear that this was a personal decision on the part of Jim to spend more time with his family. Our Supply Chain Matters gut feel is that there were probably more signs occurring behind the scenes to prompt such a sudden decision such as this.
By our lens, this is a big leadership loss for SAP.
If readers of this posting have had the opportunity to read our Q2-2013 Supply Chain Matters Quarterly Newsletter that published yesterday, you hopefully read our report: Global Supply Chain Activity in Q2 Reflects Downward Trends. In the report, we cited the current drag of manufacturing and supply chain activity across developing market regions including China as reflected in PMI and recent GDP performance.
Many manufacturers and retailers have grown dependent on China and other emerging market based revenues and profits to shore-up less than adequate results from Europe and U.S. geographic regions.
This week brings even more revelation. Major software and information technology related providers were also pinned toward emerging markets for boosting revenues and profits, and the bubble apparently burst in Q2.
High-tech firms Ericsson, Google, IBM, Intel, Microsoft and SAP all disappointed equity markets in their earnings reports or warnings this week.
Ericsson indicated that its telecom investments in China have declined to 4 percent from a previous 6 percent. Google disappointed on earnings citing a six percent erosion in average revenue-per-click. This follows a 4 percent decline in click revenue in Q1. Of more concern, Google’s operating expenses have increased by close to a billion dollars from a year earlier.
IBM posted its fifth consecutive quarterly revenue decline, again citing a slowing of growth in emerging markets, among other factors. A Wall Street Journal article reporting on IBM’s latest results cites a Goldman Sachs analyst as indicating that between 2010-2012, 61 percent of IBM’s gross profit and 80 percent of its revenue growth came from termed “growth markets.” While IBM’s services and software businesses report robust pipelines, hardware and technology outsourcing experienced revenue declines. The best performing business was IBM’s software group which grew 4 percent in revenues to $6.4 billion. Obviously, the strategy of multiple acquisitions of other software providers is bearing fruit. Rival IT and outsourcing services provider Accenture lowered in 2013 revenue expectations in June.
Intel, which not so very long ago was on a Wall Street roll in revenue and profit growth is dealing with the challenges of a declining PC market that fuels two-thirds of its revenue growth. Some of that decline in PC market growth stems from China and other emerging markets, where Lenovo has been the dominant provider. The company’s overall revenues declined 5 percent in the recent quarter. In a CNBC interview, the managing director of Intel Europe indicated that “China is a worry.” “Certainly emerging markets are not performing at the level we are expecting them to perform.” The company was previously hesitant to become a chip supplier for mobile devices because of lower margins and higher competition. Of late, it has been aggressively maneuvering to get more of its chips embedded in mobile devices. Supply Chain Matters has previously noted constant information leaks that indicate that Intel has been trying to position itself as a chip supplier to Apple. As a result of its latest financial results, Intel cut its capital equipment budget for manufacturing equipment by $1 billion.
Microsoft missed on revenue expectations by $800 million citing the same general downturn in the PC market. The company took a whopping $900 million charge for unsold inventory of its Surface tablets which is not a good sign for that product. There was an additional deferred $782 million charge related to Microsoft Office. Its Online Services Division continues to lose money albeit at a lower rate. Prior to the earnings announcement, Microsoft announced a sweeping corporate re-organization directed at “One strategy, One Microsoft” which appears to delude the former power of individual product groups.
SAP this week cut its 2013 revenue outlook by two percentage points, citing slowing growth in China. Rival Oracle reported its second decline in total revenues in June causing its shares to tumble amid fears of weakness in the company’s cloud-based offerings. The company also cited weakness in emerging markets in addition to other areas.
Thus, in just a one week period, we observe multiple data points indicating a declining bubble among high tech, IT and software providers. A period of robust growth fueled by opportunities in emerging markets is changing rather quickly, and competitive juices to land new deals are bound to become more aggressive. Microsoft may not be the only high profile teach player to initiate re-alignment and/or re-focus in the weeks to come.
Readers who have heard me speak at industry events or continuously read Supply Chain Matters, know of my prediction that the B2B supply chain and its relationships to cloud computing options is by far the hottest segment of supply chain related customer interest. Market dynamics are moving at warp speed and enterprise vendors are investing big bucks either in internal development or market acquisitions to insure that they have solutions to offer customers, or to outflank the competition.
If readers wanted more evidence of the strategic stakes, consider what is occurring from Redwood Shores California, the home of Oracle. The need to dominant this market now transcends certain previous bitter competitive rivalries.
Last week, the enterprise software vendor announced its fiscal Q1-2014 earnings which did not impress Wall Street equity analysts. Other software competitors such as SAP were quick to comment on these results since Oracle was not shy about voicing its views on SAP’s claims for HANA based applications growth. Similar to performance in the March ending quarter, software license and cloud computing results were disappointing to say the least. In that quarter, blame was cast on sales force execution. But alas, another quarter has passed with almost similar results. Oracle executives actually provided some encouraging words about the engineered hardware business about to turn the corner, but that was not the headline byline that permeated business media.
In the world of Oracle founder and CEO Larry Ellison, these events trigger a need for deferring the business media news cycle on to bigger developments concerning the hottest segment of the market. He did not disappoint.
On the fiscal earnings call last week, Ellison stated: “Next week, we will be announcing technology partnerships with the most important –the largest and most important SaaS companies and infrastructure companies in the cloud. And they will be using our technology, committing to our technology for years to come.” Sure enough, that is now unfolding in a series of announcements that has social media, business and industry observers like Ray Wang exclaiming that the did not see this coming. We add our Supply Chain Matters voice that we did not see this coming as well.
Yesterday, arch competitor Microsoft, and Oracle jointly announced a partnership that will allow Microsoft’s Azure cloud based customers to deploy Oracle software, including Oracle Java, Oracle Database and Oracle WebLogic Server will full support from Oracle. To distill the IT speak, this allows Microsoft Azure and Windows Hyper-V IT development teams to fully utilize the outlined Oracle technology. Since Microsoft caters to small and medium sized manufacturers and businesses, this has the potential to expose Oracle technology to a far larger universe of cloud-computing customers. Microsoft technology also tends to dominant factory control applications and the potential to leverage the mentioned Oracle technology elements opens the possibility for more responsive shop-floor to supply chain business process integration. The announcement itself was significant enough to draw direct comments from Microsoft CEO Steve Ballmer.
Today featured the second announcement, a brief but stunning announcement indicating that Salesforce.com and Oracle have embarked on a partnership to integrate each vendor’s cloud infrastructure platforms. Salesforce plans to standardize on the Oracle Linux operating system, Exadata engineered systems, Oracle Database and Oracle Java. This announcement was also significant enough to draw the comments of Salesforce Chairmen and CEO and long-time Ellison nemesis Marc Benioff.
The third strategic announcement is rumored to be with NetSuite.
What do these latest announcements have to do with functional product development, purchasing, supply chain and online fulfillment teams?
First and foremost, it will provide broader options for your internal IT and software partner development teams to support advanced analytical and information computing needs. While the bulk of today’s cloud-based applications offerings cater to non-mission critical business process support, the potential for broader mission critical supply chain business process support is clearly on the horizon.
Specifically for cloud, the real battle stems from advances in multi-tenant database architecture allowing your business along with many other businesses to run on the same infrastructure with access to specific advanced reporting and predictive analytics needs. Multi-tenant architecture implemented at the database layer addresses the overriding need for increased security of the information that is stored in a public or private hosted cloud. As we have noted in our commentaries related to SAP HANA, these advances are game-changing in the ability to integrate much larger volumes and scale of data and information and facilitate the ability to integrate planning and execution processes together as one continuous decision-support process.
Adoption of standardized infrastructure allows cloud vendors to integrate multi-application and multi-vendor data more seamlessly without the need for expensive and often time-consuming middleware. Faster integration opens the door for faster adoption and systems implementation cycles.
By our view, these Oracle announcements are noteworthy will surely motivate further announcements from competing enterprise cloud vendors the likes of Amazon, IBM, SAP and others.
For Oracle these announcements are noteworthy, but the fact remains that the market perception lingers that its technology stack is too expensive and costly in the long-run. More attention beyond big announcements is required in this area.