SAP realigns to market as businesses shy away from major IT overhauls
In the past, SAP has pulled a lot of its revenue from the large enterprise customer base, but businesses are becoming more hesitant to switch ERP systems.
Enterprise resource planning (ERP) has been around for decades, but digital forces are changing the market — even among the longtime leaders and innovators.
SAP announced a companywide restructuring last week, its second in the last four years, geared to double down on strategic growth areas. The company is looking at a hefty $915 million to $1.1 billion restructuring charge.
As businesses grow and become more complex, ERP systems are more necessary to manage sprawling systems and networks.
But customers are buying ERP differently, opting for niche applications instead of full suite overhauls. SAP, like other vendors in the space, has to target markets it has traditionally been weak in and move perception of its offerings away from one core product to a suite of enterprise tools.
The postmodern ERP
Founded in the early 1970s by former IBM employees, European technology giant SAP found its success in the ERP market.
ERP is expected to generate $47 billion between 2017 and 2022 and is in the midst of a renaissance. The technology is decades old, but changes in buying cycles and the shift to cloud computing have changed the way businesses use the management systems and software.
Panorama Consulting Solutions categorizes ERP vendors into three categories. Companies that go for vendors in the Tier I space generally have dedicated teams to develop the software. Tier II customers tend to do more outsourcing and have fewer dedicated IT resources. Tier III companies have limited budgets and are tackling more basic needs with their ERP selection.
Panorama Consulting Solutions 3 ERP vendor tiers
|Tier I||Tier II||Tier III|
SAP is strong competitor in the Tier 1 space, boasting a sizable footprint in Fortune 500 companies, Chris DeVault, manager of software selection at Panorama Consulting Solutions
, said in an interview with CIO Dive. But its weakness lies in the small and midmarket space among companies in the $50 million to $200 million range.
In the past, SAP has pulled a lot of its revenue from the large enterprise customer base, but businesses are becoming more hesitant to switch ERP systems and taking longer to assess their needs and options.
Businesses are being more careful, which means vendors like SAP need to adjust to customers pushing off large IT projects, such as a full ERP suite change, and focusing on independent applications for niche functions, DeVault said.
But some customers aren't even looking to ERP vendors anymore.
CIOs are dealing with more technology pieces and ambiguity, and many have been "frustrated and confused" by vendors without clear roadmaps whose offerings are not adapting, according to Gartner. This translates to leading digital organizations looking elsewhere for innovative capabilities, leaving ERP vendors behind.
Market changes are not an indication that SAP's technology is outdated or useless. It is still very innovating and industry-leading at the T1 level, they're just more laggards in the midmarket space, DeVault said.
It just shows that enterprise customers are looking for more point solutions and overhauling entire systems less often.
The company is battling resistance from industry leaders that look toward niche offering for their siloed responsibilities. The next step for vendors like SAP is "best of breed" — creating industry niche leading functionalities.
DeVault sees potential for SAP to become a fully capable cloud leader. Digital transformation strategies have been lagging in Europe, and he sees opportunities for SAP to restructure, fill that gap and "get things going in Europe," which will then seep over to the North American market.
Not the first or the last
The changing digital economy, with emphasis on cloud-first and artificial intelligence capabilities, is forcing traditional technology companies old and new to reassess their strategy, offerings and structure. Companywide reorganizations create friction in the short-term, but in the long run they better position vendors to tackle the new ways of doing business.
Microsoft, another big competitor in the Tier I space, underwent a large reorganization last year, moving the company at the business level past its Windows history and towards its future by restructuring around key areas such as cloud and artificial intelligence.
In the past, SAP has been primarily an on-premise ERP company with some additional cloud products, acting "like a dozen different companies to customers," Paul Saunders, senior director analyst at Gartner, wrote in a statement to CIO Dive. The restructuring is an "inevitable position" as SAP moves to a "more focused company that can be more relevant to businesses in 2019 and beyond.”
But the company still has to ace the execution and find its place in the larger digital ecosystem.
SAP is putting greater focus on selling the entire technology stack instead of independent applications, DeVault said. It's more about the suite, brand and name than it is one core product.
In his research on postmodern ERP's evolution, Saunders and other Gartner researchers found vendors who become trusted and strategic partners will prove successful in the long run over "high-pressure tactics and bullying." With organizations no longer relying on traditional capabilities, at least one major ERP vendor will exit the market by 2022, the researchers said.
Leading organizations are focused on "differentiation and innovation — not on vendor offerings," and software vendors aware of this shift are trying to avoid "shackling their business to legacy software," Gartner said. But "ERP" is often closely associated with ideas of "legacy," and vendors with portfolios that extend far beyond ERP can be limited by an ERP perception.
At least one ERP vendor will stop producing ERP software to get away from this, Gartner said.
For SAP, in three to five years changes to growth rates should become evident, though the space vendors are operating in, especially relative to the cloud, will also be very different, DeVault said. There is still a lot of resistance to cloud offerings, and many companies negotiating contracts with T1 and T2 vendors are still looking for on-premise versions of software.
The majority of workloads are still in noncloud environments, creating tension for vendors trying to move forward in the cloud era yet accommodate the bulk of clients' infrastructure. Many vendors have created on-premise versions of cloud offerings to meet these needs.
In its earnings call, SAP hit all the buzzy areas of innovation it wants to sit in: AI, blockchain, quantum computing, and more. But flashy technology is different than delivering value.
Customers don't sign up for Spotify or Netflix because of flashy technology, they sign up for the experience enabled by technology, Saunders said. "SAP is right to focus on the experience economy, the challenge for them is whether digital native organizations will consider SAP as the trusted innovative partner to help them succeed."
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