Last week, SAP announced preliminary results of its 2011 fourth quarter financial performance and the results were impressive, exceeding analyst expectations for revenues and profits.  In Q4, software license revenues increased by 16 percent and total revenues grew by 11 percent.  Operating profit from a year ago is expected to increase by over 200 percent . Similarly, full fiscal 2011 financial performance was equally impressive prompting SAP senior management to declare that SAP delivered “the best year in its 40 year history.”

Upon review of the preliminary earnings release we noted statements indicating that growth in core applications business, increased momentum for analytics and mobile product lines, and accelerated growth of SAP HANA were each cited as growth engines.  SAP had established a 2011 revenue goal of €100 million for HANA, and has indicated that it exceeded that goal by €60 million. The company also exceeded its €100 million goal established for its mobile based applications, reflecting even more interest by customers in engagement type systems, empowering the user wherever he/she may be located.

Enterprise software companies have a tendency to perform creative allocation among internal revenue segments, thus we have to context SAP’s with some caution.  Also, many of the SAP HANA applications have experienced a delayed market entry and are just reaching customer release visibility and confined to certain non-mission critical application segments.  All that as an aside, the SAP performance is still impressive, especially when placed in context to the ongoing market battle with rival Oracle.  In December, Oracle surprised analysts with a disappointing fiscal Q2 2012 financial performance, indicating only a 2 percent adjusted growth rate in software license revenues.

For readers unfamiliar with HANA, it will become SAP’s answer to leveraging today’s advanced in-memory computing for areas such as advanced planning and predictive analytics.  In our Supply Chain Matters attendance at SAP’s 2011 Sapphire customer conference, we shared our belief that if successful, conversion of SAP applications and software infrastructure to take maximum advantage of in-memory technology would be market game changing.  Last year’s Sapphire customer conference provided a more detailed understanding of how extensive and far-reaching this objective really is, as well as the difficult technical challenges that SAP needed to overcome.  Subsequent SAP influencer focused events have lacked some details related to the future release schedules of HANA powered applications. At face value, the fact that customers are now beginning to buy into the potential of HANA is noteworthy.

From a supply chain and supplier relationship management lens, the real test for HANA focused applications is yet to come.  The initial test will be the long awaited Sales and Operations Planning (S&OP) powered by HANA application that is scheduled for initial customer release this quarter.  Supply Chain Matters has been attempting to secure a detailed briefing on this specific application. During his keynote address at the 2011 Sapphire conference, SAP father and Supervisory Board member Hasso Plattner declared that if he had his way, all of SAP’s business planning applications and specifically the SAP APO application should be the initial targets of further HANA enablement.  We were quick on the keys to “tweet” that statement in belief that SAP’s SCM and SRM customers take note of the implications of that statement.

We continue to believe that in-memory computing will have profound impacts in supporting future supply chain sourcing, planning, fulfillment, collaboration and decision support needs but customers will need vendors like SAP to actively integrate this technology within the existing applications, and not leave that burden on the shoulders of existing customers.

The preliminary uptake of HANA is indeed impressive but the real test will come in SAP operations and mission critical applications such as supply chain and supplier relationship management focused applications.

Bob Ferrari

Something interesting occurred this weekend, an announcement of an acquisition by SAP.  We note the term interesting because the announcement was made on a Saturday, a relatively non-news day for enterprise software companies in the U.S. as most people are busy with leisure and pre-holiday activity.  We were not even alerted by SAP Global Communications to the announcement.

In any case, the headline reflects SAP’s intent to acquire cloud-based human capital applications provider SuccessFactors for an estimated $3.4 billion. The deal includes an all-cash transaction and was priced at over 60 percent above SuccessFactors trailing 60 day trailing stock price and roughly 9.7 times current earnings.  The San Mateo California based company touts to have a Business Execution System that helps companies manage recruitment, assess human performance and accommodate other human resource process needs.   SuccessFactors boasts over 3500 customers and 15 million subscribers, a software licensing nirvana.  It also includes a rather top-heavy management structure for a mid-sized software services firm in the area of $400 million in revenues.

The deal comes on the heels of SAP’s October announced acquisition of Crossgate, a B2B cloud platform that helps companies to exchange data with their partners. Both announcements are sure raise more debates regarding SAP’s prior statements to follow an organic growth strategy.

It would appear that SAP has caught the HP tendency to significantly overpay in acquisitions, or is acknowledging that it needs to augment its current cloud services offerings.  A New York Times DealBook posting (metered view may be required) quotes a Forester analyst observing that the premium is an indicator of SAP’s struggle with its current cloud platform strategy along with its need to garner more future revenue from the cloud model for computing.   We tend to concur.

In its announcement, SAP indicates that SuccessFactors will remain an independent company, to be renamed SuccessFactors, an SAP Company. Of more interesting note, Lars Dalgard, the current CEO will be appointed to the SAP supervisory board and take on the broader role for providing leadership for SAP’s cloud business offerings.  Readers may recall a similar type of appointment when SAP acquired Business Objects in 2008 and its CEO, John Swartz was tapped to lead SAP’s business intelligence offerings. Swartz later departed SAP over presumed differences in strategy.

Supply Chain Matters wonders aloud whether SAP will be inclined to exercise further cloud related acquisitions in the specific area of supply chain, PLM and manufacturing management applications.

Bob Ferrari

Supply Chain Matters had the opportunity to attend SAP’s Supply Chain Management Summit meeting at SAP North America headquarters. The purpose of this day and a half  summit was to bring SAP’s current supply chain management applications customers together to share information and gain further knowledge on SAP’s various software applications supporting supply chain business processes.  In our initial part one posting, Supply Chain Matters provided commentary on the leadership change within SAP SCM.

We had the opportunity to attend a number of educational sessions during the Summit.  Here are some summary impressions.

A deep-dive session entitled Best Practices in Improving Supply Chain Response Management was rather interesting.  The session facilitators billed their presentation as an educational overview on the role and purpose of response management and stated up-front that the session would not be technical.  The audience however had other needs, and wanted more detailed knowledge on how the newly released SAP Supply Chain Response Management by ICON-SCM would specifically integrate with SAP’s APO and SNC and ERP ECC applications. What became evident is that integration to other existing  SCM applications is still a work-in-progress  What was mentioned is that the initial integration target involves Global Available-To-Promise (gATP).  Also mentioned was that in the interim, customers desiring integration of Response Management to existing SCM or other applications can do so on a custom project management basis.

A session summarizing all the changes incorporated in SAP APO Version 5.0 and 7.0 reinforced that APO customers need to keep abreast of changes, since a lot of enhancements continue to be added.  The key takeaway for APO users is SAP’s message that Release 7.0 provides the staple ECC core release, and that once customers move to 7.0, they will be able to henceforth take advantage of SAP’s less disrupting Enhancement Release Paks which promise to make future upgrades less disruptive.  Eric Simonson of SCM Solution Management demonstrated superb and detailed knowledge of various APO enhancements, and APO customers should keep Eric’s contact data on their smartphones.  One of the other most significant takeaways for SAP customers in life sciences and process industries is that APO has finally addressed comprehensive and detailed support for shelf-life planning, an issue that dates back six years. Supply Chain Matters would be highly interested in speaking with any SAP APO customer who has had experience with this newest shelf-life optimization technology.

There were a series of roundtable luncheons involving customers representing specific industries.  Supply chain Matters sat in on the Life Sciences roundtable that included representation of a broad cross-section of life sciences companies spanning generic drugs, proprietary drugs and pharmaceuticals, medical devices and other ancillary products.  The listing of hot topics and process challenges was quite comprehensive and by our count, the ones most emphasized included lean enablement, extended warehouse management, master data management and reporting, inventory optimization and response management.   To our pleasant surprise, we also discovered that SAP currently sponsors four different forums dedicated to the topic of supply chain tracking and serialization, which is another life sciences challenge given upcoming state and governmental mandates for supply chain drug tracking capabilities. Many life sciences companies are also moving toward extended contract manufacturing, which has added more challenges for visibility and process controls.

By our observation, the most widely attended customer sessions involved Newell Rubbermaid’s use of SAP APO to enhance its S&OP process, and Medtronic’s deployment of SAP Enterprise Inventory Optimization by SmartOps, one of SAP SCM’s other solution extensions.  A lot of learning and watch outs came from both of these presentations. Supply Chain Matters will provide additional comment in subsequent postings.

Overall the Summit was very educational, providing ample time for attendee networking, which is rather important in these times of social media.  Some attendees indicated that they preferred these smaller sized venues, as well as a location that was easy to travel to by automobile, train, or quick plane ride.

In the category of disappointment, was the lack of any definitive knowledge-sharing of how SAP’s ongoing in-memory HANA technology would play a role in SAP’s evolving SCM suite, especially SAP APO. At this year’s Sapphire, SAP Supervisory Board Member Hasso Plattner indicated that APO would be a top priority for HANA. The lack of any education or update was an opportunity lost.

Bob Ferrari

This week, Supply Chain Matters had the opportunity to attend SAP’s Supply Chain Management Summit meeting at SAP North America headquarters. The purpose of this day and a half  summit was to bring SAP’s current supply chain management applications customers together to share information and gain further knowledge on SAP’s various software applications supporting supply chain business processes.  It is part of an outreach program that involves various SAP Business Suite areas, where customers with similar interests can come together. The agenda featured a three hour deep-dive session in select SAP SCM applications including the newly announced Solution Extension, SAP Supply Chain Response Management by ICON-SCM as well as the newly upgraded SAP Transportation Management 8.0.  The most widely attended deep dive was that covering SAP Supply Network Collaboration (SNC).

Day two included quite a number of SAP customer presentations that shared their experiences and implementation learning on specific applications, and included roundtable discussions among specific industry players.  We will highlight our observations from attending certain sessions in a subsequent posting in this series.

In this specific post, we comment on a leadership change within SAP Supply Chain Solutions Management.  Hans Thalbauer is the new Head of Line of Business Solutions for Supply Chain Management, PLM and R&D. Hans replaces Lori Mitchell-Keller, who has now assumed a LOB solution management role for SAP Retail.  In our view, Lori did an extraordinary job of providing added focus and renewal to SAP’s efforts in SCM.  Her leadership in adding the response management solution extension to the product portfolio and for a renewed emphasis on SAP’s supply chain execution offerings is commendable and we wish her well in her new role.

Hans Thalbauer is no stranger to SAP SCM, having previously served in an SCM management role.  This author has had personal experience in working directly with Hans in my previous tenure at SAP, and I can assure the SAP SCM customer community that SCM is in good hands.  Hans was previously managing PLM solutions management, and his knowledge of that domain along with detailed SCM and manufacturing applications knowledge will serve him well. Hans can navigate the halls of Walldorf solutions development teams having resided for multiple years at that facility. He possesses an engaging style and sincerely cares about customer needs.

In subsequent postings, we will highlight some further impressions from the Summit.

Bob Ferrari

In our Part One commentary, Supply Chain Matters reflected on a rather contrasting year of highs and perceived lows for SAP. Certainly, many executives at SAP may take issue with the notion of lows, but feedback should also be taken with an open mind.

At the SAP Influencer Summit, SAP executives stressed that the company will not pursue a growth by acquisition strategy, but rather an innovation based strategy. CTO Vishal Sikka made a bold and revealing statement: He noted that customers don’t really care or seek a technology stack.  They are instead seeking solutions to their business problems. While that was an obvious barb toward Oracle, bravo for telling it like it should be told.  SAP executives are also fully aware that not all customers elect to follow SAP’s technology direction, and many remain on older platforms.  This year alone has brought even more choices and another upgrade to the SAP Netweaver integration platform.

Customers do seek support for their business process challenges, and that especially includes procurement, contract management and supply chain process needs. We continue our view that SAP has been somewhat remiss in stepping-up innovation across the entire SCM area. An increased global supply chain presence introducing higher levels of complexity coupled with business process needs for more timely synchronization of planning and execution process activities certainly qualifies as needs for streamlined business solutions.  It took nearly five years to bring transportation management capabilities up to customer expectations for required functionality. Similarly, SAP Supply Network Collaboration has experienced a promising, but elongated period of planned enhancements, with much remaining to bring this application to current ‘best-of-breed status’.

As we approach 2011, SAP should perhaps reflect more on Vishal’s statement and adopt some company-wide New Year’s resolutions.   Here is a potential list for consideration:

• A continued focus in innovation combined with consistent execution and quality in product release programs.  Enough of the re-branding and spiffy videos. Customers know SAP and new prospects can find out more about SAP in social media than in expensive videos and branding campaigns. We believe that SAP customers seek clear communication of product direction, firm delivery timetables and logical customer upgrade paths.
• Serious efforts directed at simplification in organizational structure coupled with more accountability for senior management performance. We trust that accountability for the oversight and direction of the ill-fated TommorowNow venture would be included and serve as a milestone for accountability.
• Continue to compete on what brought SAP its success. That would include deep roots in understanding and responding to business and unique industry business process needs, the scale and scope of SAP footprints, and a renewed desire to work in partnership with customer needs. SAP could garner more widespread customer goodwill if it focused more on customer timetables vs. those of SAP
• A renewed emphasis on enabling win-win ecosystem partnerships with smaller as well as larger partners, with genuine opportunities for joint goal accomplishments.
• Achieving its five year old vision of enabling more adaptive and more globally oriented supply chain planning and execution processes for its customers.  That would include a serious step-up in the synchronization functionality of SAP Supply Network Collaboration and a faster, more streamlined SAP Advanced Planning and Optimization (APO) application that could perform more rapid planning cycles.  APO is a natural for enhanced in-memory computing technology enhancement. Deeper supply chain planning, collaborative execution and coordination within SAP Business By Design should be a resolution as well.

Installed base customers know that they have a stakeholder interest in SAP’s continued success and market performance. Customers also need a more responsive and predictable SAP.   The highs and lows of 2010 should be tucked away as a learning. Customers really care that a vendor such as SAP can not only support scale of implementation, but have the flexibility to serve individual customer needs, large or small.

Bob Ferrari

Enterprise software providers can have periods of highs and lows but in the case of SAP, 2010 should be logged as the year of both. I had the opportunity to view live webcasts in conjunction with the SAP Key Influencer Summit held this week, and I could not help but reflect on a rather interesting year for a company that is trying hard to increase momentum, and better respond to more dynamic market with a even keel.

For SAP, 2010 was no doubt, a year of highs and otherwise.  There are many large and small SAP installed base customers that continue to have a stakeholder interest in SAP’s success in innovation and business support, but at the same time, have their own challenges in keeping up with constantly changing business needs while reducing unnecessary costs.  Customers need to have choices among various dynamic enterprise software providers since that helps keep the market vibrant and constantly innovating vs. the taxing of customers with the burden of maintaining older and less responsive technology. This has special significance for supply chain management process needs.

SAP entered 2010 with a two year burden of intense activity directed at the re-architecting of its core ERP system, which in our view, hindered the pace of product innovation.  A near revolt from global customers relative to increased annual software maintenance fees led to a decision of change at the CEO level.  In early 2010, the Co-CEO structure of Jim Snabe and Bill McDermott assumed the reigns.  We have previously voiced our observation that co-CEO models have marginal track records, especially in times where strong leadership models are required. To their credit, their first agenda item was to speak directly with hundreds of customers to gain direct feedback on customer impressions of SAP as a partner.  We only wish we could have been able to listen in on some of these sessions.

May 2010 provided highs and perhaps other reactions. In mid-May, SAP announced its intent to acquire database provider Sybase for a reported $5.8 billion. Many of us in the blogosphere questioned why such a high price, as well as the long term value of the acquisition.  In August, Sybase management responded by articulating the framework of a combined vision for on-device applications, but many will have to wait until next year to see some specifics in terms of applications support.

A high point in 2010 was the annual Sapphire conference held in May. Masterfully orchestrated and globally simulcast, the event provided vision and an uplifted SAP.  In a previous Supply Chain Matters commentary, we noted our observation that SAP had returned to its roots for articulating its former role as a broad based business solutions provider, avoiding the previous one trick, sales oriented marketing shows of the past.  The vision and organizational alignment in product direction looked sound, and the in-memory concept of future product direction had the potential to be game changing. In late September, SAP announced its Q3 earnings which reflect 12% revenue and 31% profit growth year-to-date. That is an obvious positive. Disappointing remains the lack of any appreciable progress in SAP Business By Design’s depth of supply chain functionality. SAP management indicates that there has been lots of large customer interest in the business subsidiary model of BBD. If so, the suite needs to have deeper supply chain planning, execution and fulfillment collaboration functionality to tie back to corporate systems.

The obvious low point was the announcement of the November verdict in Oracle vs. SAP TommorrowNow where a federal jury awarded Oracle $1.3 billion in damages for copyright infringement by this SAP subsidiary.  Beyond the implications, if upheld in the appeals process, of the largest amount of copyright infringement ever awarded, was the outright admission by SAP of liability.  The obvious question in hindsight lies in the degree of management and oversight that SAP had in managing the activities of this subsidiary, not to mention the wisdom of the this acquisition. If the verdict is upheld, these funds that would have been invested in innovation or people will instead go to an arch competitor.

Other disappointments were the delay in Release 5 of SAP Business Suite scheduled in late summer, which was re-scheduled to December.  This followed last years delay and entire revisit of the SAP Business By Design product architecture. An argument can be made that SAP is serious enough about meeting customer expectations that it is willing to make the toughest management call.  That is a good news, since some software companies would forgo initial quality for revenue goals.  Conversely, a track record of product milestone delays does not help customers in planning their own technology timeline deployments, and nor does it help instill confidence to make the leap into a new technology platform.

In the combination categories, in our view, were statements made regarding the breakthrough release of SAP Business Objects 4.0, SAP NetWeaver 7.3 and of course, SAP Business By Design 2.6. I note these in the combined category because they acknowledge it has taken multi-year efforts to bring these platforms to what is termed breakthrough status, while communicating to customers months ago on the compelling benefits for each.

In the category of encouraging is this month’s announcement of the initial release of the HANA application (high performance analytical appliance) which was conceived and developed in a matter of months, and can have significant implications for future supply chain analytical enhancement capabilities.

In our part two commentary, we will reflect on our 2011 resolutions for SAP.

Bob Ferrari