The Functionality Dimension
As I said in the intro to this presentation there are 3 and a half dimensions I will cover - today the main one - functionality.
Historically SAP worked a very simple formula – build more functional coverage (in other words cover a new process/transaction set) and you cover more users in the enterprise. The more users you support the more money you make – by virtue of the fact that the software is licensed by the number of users. The only problem with this model is you fairly quickly start going down a long tail curve and the further down that curve you go the lower the margin is for the next set of users you try to cover - less desire with higher cost to build. Let me try to illustrate without the assistance of a football field sized presentation screen behind me…
Every company needs a compliant general ledger (well, Enron suspended disbelief on that for a short period of time…but that didn’t last long) – so that puts ledgers at the top of the process curve, in a sense making it the blockbuster of processes. Similarly, most companies need to manage employees – hence HR is so big, but only half of the world’s companies need manufacturing process support (the services companies don’t manufacture anything…other than money), so you start pretty rapidly to run down that process desirability long tail curve. As you get to vertical processes you find yourself in segments that cover 4% of the market (25 industries – average 4% per industry), and from there you get to process of one, which is what the system integrators are really good at building once for each of their customers.
Some of the greatness of what SAP has done was in leveraging the horizontal presence in ERP to get to industry, and flipping that back around to embed all vertical expertise into a single copy of ERP. The industry “switch framework” that allows a company to turn any number of vertical industries in one implementation allowed for the understanding that market leaders span multiple industries (think about oil companies that are also chiemical manufacturing companies with a huge retail business in gas station outlets). By supporting such a unique framework you reduce the complexity of cobbling together the mid-tail processes which is the exact opposite to what ORCL did in buying a unique application for every vertical problem (try and put together Retek, PeopleSoft and G-Log in one environment and understand the meaning of the famous British underground warning “mind the gap”). Full disclosure: I was not in charge of converging these industries together in ERP – that happened before my time.
What we have done recently is to leverage this same technology and approach to create a model by which the core of ERP is stable and the edge processes can come around that core without disruption to the business – as we called them enhancement packages. That combination gives customers the best of both worlds – stable business processes where things don’t change but rapidly releasing enhancements on edge processes where processes are dynamic and rapidly adopted.
The on-going test though will be how much innovation will SAP continue to delivery through the enhancement packages. I believe that the next frontier will always swing from externally bound processes – in supplier/customer relationship which was the key issue beginning of this decade – back to in-bound processes around talent management and portfolio management which defines the second half of the decade. In a sense every time we look at a different asset class in the business and try to convert it quickly to more value on the P&L. If the 80s were focused on converting manufacturing capacity into orders and cash, the 90s were all about converting customer relationships into orders and cash, and this decade will be about converting skills (both product and people) into winning business. If that theory is correct the next set of process innovation will flip back again into ERP – look for improving the value of your people, the understanding of your manufacturing and goods delivery and enhancing the value you get out of your order to cash as you start dis-intermediating the players around your business and bringing in more margin in the process. The last asset class that is under-utilized and as result under valued, by the way, is risk which is the current and future hot spot for software.
If you look at where we at SAP moved on the axis over the last 2 or so years – you will find a lot to be happy about. The key pillars – ERP and CRM – have had tremendous progress. ERP is getting adopted by thousands of customers, and the rate had only picked up after the delivery of ERP 2005 (again full disclosure, I was only marginally helpful on that). The separation into core plus enhancement packages together with the SOA enablement of ERP made SAP ERP the de-facto ERP platform (see previous blogs) for any innovation around this market by any sane ISV. On CRM we have moved an amazing distance between CRM 5.0 and CRM 5.1 by simplifying implementation, UI and ability to scale. The functionality was always there, but once we made it usable, scalable and most important covering all the industry vertical capabilities, we made the suite a killer product. Putting these two pillars together in coordination with SRM and SCM addressing the full supply chain without the need for ORCL like x-Projects to glue between them (what’s with that? What happened to fusing products by re-writing from scratch???) created a tremendous process platform that by the end of this year has full coverage on all industries from one code base.
As I said, what I described is only the first dimension, but the most important one – historically that is what customers bought from SAP, and delivering on it for the last few years in the suite was critical to delivering on the main covenant of the “SAP-Customer” contract – after all SAP is still an application company. Tomorrow we will push the next axis.
PS. These are not independent axis – they define a three dimensional box…it is hard to explain as one of you asked without the big screen behind me – but work with me…I have less resources at my disposal now.
PS2. Hope you are enjoying Sapphire as you read this post..