Adam Gifford: SAP optimistic in tough market

The 13th slide of Geraldine McBride's keynote presentation had an ominous message - 50 per cent of today's software companies will disappear within two years.

The prediction from research firm Gartner was delivered by SAP's Australia and New Zealand managing director to the company's Sapphire user group conference in Sydney last week.

The warning was followed with a comforting cliche. That while these are challenging times and could get even more challenging, SAP users need not worry - the German software maker will always be there for them.

But to put some rotting flesh on the Gartner skeleton, a market share report by Lehman Brothers estimates the enterprise application market - SAP's stomping ground - will drop 17 per cent this year, the same decline as in 2002.

It said software licence sales - SAP's lifeblood - were down 23 per cent in the first quarter compared with the same quarter the previous year and a whopping 42 per cent down on the fourth quarter of 2002.

SAP did not fare quite so badly. For its first quarter it reported software revenue of 352 million, only 12 per cent below the 2002 figure. More importantly, SAP calculated its market share was up 3 per cent to 54 per cent, compared with the other major enterprise software players it measures itself against - Oracle, Peoplesoft, JD Edwards, Siebel and i2.

According to Lehman Brothers, the big loser was Siebel, the company which did most to turn customer relationship management (CRM) into a separate product category.

It estimated Siebel might have had almost 80 per cent of the enterprise CRM market when SAP launched its own modules at the start of 2001. It now has less than half, with SAP gaining share from all standalone vendors.

The SAP effect is even more pronounced in supply chain management. i2, which pioneered the idea of electronically linking every step of the distribution chain from manufacturing to sale and delivery, had close to 80 per cent share when SAP entered the market two years ago.

Since then its share has dropped below 20 per cent. Last year its staff and revenues halved, and this month it was delisted from Nasdaq when it failed to file its accounts - mainly because of delays in reauditing accounts from previous years which have come under suspicion.

All good news for SAP, but still leaving a big challenge for McBride and her New Zealand manager, Ian Black - to keep generating new licence revenue in a declining market.

SAP's annual report shows 2002 revenue in New Zealand of €13.5 million ($27 million), giving it an €849,000 ($1.7 million) profit, compared with an €858,000 ($1.73 million) loss on revenue of €8 million ($16 million) the previous year. Across the Tasman it made an €8.8 million ($17.8 million) profit on revenue of €115.8 million ($235 million). In 2001 it recorded a €583,000 ($1.17 million) loss on €112 million ($226 million) revenue.

SAP can still win its share of the big bids, as it showed in selling a financial management system to Fonterra this month, on top of the supply chain planning system it sold the dairy giant last year.

McBride believes there are plenty more large customers to be had - eyeing about 250 companies in Australia and New Zealand with revenues over $1 billion which don't yet use SAP.

It is hard to see where such optimism comes from, given the huge trauma involved in switching systems and the fact SAP's competitors wouldn't give up sites without a fight.

There is also growth to be had selling more stuff to existing customers. That strategy has kept SAP's numbers up over the past couple of years, as companies add customer management, supply chain management and other new age modules to their back end transaction processing systems.

McBride and Black are building new consulting teams which will work with customers to identify what additional value they can get out of their systems, and perhaps sell them more applications.

While McBride was quick to assure consulting firms such as Accenture, Bearing Point and Oxygen that this would not cut into their share of the cake, the partners are nervous about how much they will be forced to compete with the vendor.

Despite the assurances, SAP expects to get about a third of its revenue from services - and that will create tensions with partners.

McBride and Black are most upbeat about growth opportunities in the small and medium sized businesses market - territory SAP has only really dipped its toe into in the past.

The firm has developed a template version of its core R/3 system called All-in-One which can be delivered for under $1 million, and has a new small and medium business product, Business One, which will be available here next year through distributors. Integrator RealTech has just finished implementing All-in-One at retail chain Lighting Direct, and SAP is appointing other distributors.

The mid-market is keenly contested. There are firms selling Navision and Great Plains, both owned by Microsoft.

JD Edwards continues to dominate the New Zealand enterprise software market in terms of new sites sold, and Swedish company Intentia is also capable of punching above its weight in this market. SSA GT, rescued from bankruptcy by new owners, is retaining customers and could shine again. And Canadian company Geac, which has a large New Zealand customer base, is also looking healthier than in recent years.

In the battle to win over mid-market customers, SAP has yet to show it understands an environment where IT budgets are smaller, projects must be faster and the return on investment quicker.

* Adam Gifford attended Sapphire in Sydney as a guest of SAP.

* Email Adam Gifford