Making sense of SAP-Microsoft talks
Published: 07 Jul 2004 13:05 BST
After its top-secret merger negotiations with SAP were revealed this month, Microsoft's motivation for the deal was quickly identified: the software giant was looking to gain long-sought enterprise clout through the German company's upscale customer base.
But what was in it for SAP, the leader in the business software market, with over $8bn in sales? The company hasn't fully said. But one answer to that question provides some telling facts about the entire enterprise software industry.
SAP, along with rivals Oracle and PeopleSoft, has long enjoyed fat profits and double-digit growth, as large corporate customers stocked up on financial, human resources and manufacturing software -- functions that fall under the category known as "enterprise resource planning", or ERP.
Last year's talks with Microsoft, coupled with Oracle's bid for PeopleSoft, indicate that new ERP sales are drying up, forcing the leading enterprise software companies to look for new markets or consider mergers and acquisitions in order to grow.
"The thing to realise is that the ERP market is a very small market," said Jim Shepherd, an analyst at AMR Research in Boston. "The reality is that the Fortune 1000 only has 1,000 companies."
Although much of the technology industry faces similar challenges, this change has been particularly harsh for enterprise software manufacturers. For three decades, the prime mover behind business software sales has been the promise of a "killer app" that can give customers new insight into their businesses, wring profits in the most efficient way and help them gain a competitive edge. That's what drove multimillion-dollar sales throughout the 1990s.
In recent years, however, many corporate customers have begun to rethink that notion, especially after the twin blows of the technology bust and the national recession forced them to live with less. Now, rather than buying more products to do more things, companies want the software they already own to more closely model how they do business.
"Every year, something new was going to come out. Now these companies are basically out of ideas," said Rick Beers, director of business process architecture at Corning, a $3bn manufacturing company based in New York that uses PeopleSoft's products. "We no longer need the next killer app. We've all become pretty damn smart as buyers."
It's a change that software makers acknowledge. The average deal size has shrunk, and will continue to diminish, Henning Kagermann, SAP's chief executive, told CNET News.com. "Customers are buying incrementally, related to business cases. [It's] not the big replacement of the IT infrastructure; therefore, deal size goes down," he said.
The state of the enterprise software market is reflected in sluggish sales of business applications.
SAP earlier this year managed to eke out its first quarterly rise in software licence sales in nearly three years, though overall sales remain slow. Last year, its overall sales declined 5 percent, to 7bn euros, or $8.5bn. SAP is attempting to make up the difference through more, smaller sales. "We have less large deals, but we have more deals," Kagermann said. "We will see some increase in deal size. But we will not see a return to the old days."
Previous
Did you find this article useful?
203 out of 401 people found this useful
Digg
Slashdot
Del.ici.ous
Stumble
Reddit
