SAP had a great quarter – and deserves kudos for that. Not a surprise either that maintenance revenue is the big contributor. Despite what analysts say about disruption and other such stuff – when you have a stable and committed install base, they are not going anywhere in a hurry. So SAP can take reasonable time to get new revenue streams. However it is not a permanent hall pass, and investors will become annoyed quickly if EPS drops.
So they have these three opportunities to make new money – HANA, Mobility and On-demand.
HANA is the biggest name from a pure marketing POV – SAP is shouting from the roof tops that HANA is awesome. But what is the reality? Dennis Howlett’s post http://www.zdnet.com/blog/howlett/jim-snabe-co-ceo-sap-explains-current-business-drivers/3313?tag=mantle_skin;content says Snabe could not name a live customer for HANA. We know there are several POC customers from the SAPPHIRE videos. We also heard the 10 Million a week pipeline . We also heard it is fast and easy to stand up a high value HANA scenario. So why is not Snabe listing out several customer names using HANA and deriving value in production ? Assuming 20% of the pipeline will close sales – it should bring in 72M in 2011. May be for a 1.0 product that is pretty good.
So then what happens when HANA moves under BW as its database? There are about 15000 installations or so of BW as I heard somewhere. How many of these will move from ORCL, DB2 etc to HANA? I am not convinced there will be a mass exodus from existing DB to HANA DB. For one – SAP needs to prove HANA can be fail safe in HA environments. And of course legacy DB vendors are not dumb – they will use licensing terms, instability of a new product and other FUD to delay a transition. It is an even bigger problem when HANA goes under business suites. So how much money will SAP make out of HANA eventually?Remains to be seen.
Moving on to On Demand – they have two things at play. ByD and LOB on demand. In my opinion, it is hard for SAP to make it big on ByD any time soon. They started late, had delays, and still are aiming for low numbers. There is also the worry of cannibalizing ERP on premises. Maybe some day this will change – but not soon enough.
However, LOB on demand solutions I think is a money shot. Compared to HANA – the upfront development cost is low. A small team of product managers need to figure out a good solution. Technology is already there from ByD, and since both report into same SAP executive in Peter L, I am pretty sure ByD can be extended as needed for a good reason, if an on-demand application needs it. Development skills are existing – not new, like HANA. And even if SAP takes time to sell this – one big customer is all they would need to break even. And since it is on internet, it can reach more people quickly. And they can/should be used on mobile. And once you institutionalize the development process – each successive application can be made faster and cheaper.
However, on flip side there are two big issues. One – it is never easy for a small developer to be an SAP partner to build applications on top. And two – SAP needs scalable data centers to host this. Neither is particularly easy to pull off soon.
And then there is mobility – which should be the easiest place for SAP to make money., given the growing market. Every client I know of has a mobility initiative. And very few know what SAP has to offer. Which is a pity to say the least.
Bottom line – SAP seems to portray the next big things as HANA, On Demand and Mobility. And I think it should be exactly the other way around. What say you?
And Vijay Says... 
Thanks for chiming in, Jarret. Since I am not active yet in G+, I did not see this. Glad to note that we think similar on OD.
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Here were the comments I left on G+ that I thought I would share here.
“Very good article and I also believe that LOB OnDemand products are going to surprise some people. The offering has a great UI, built from ground up, integrates with on-premise, using excellent co-innovation program and is targeted towards areas where SAP doesnt have a large footprint with their on-premise as customers have previously chosen best of breed SaaS. It has a lot less risk of cannablizing sales that is a worry if ByD moves out of SME space (long ways to go before any risks there)”
Would also like to add that the LOB OD has the potential to help SAP supplement gaps in on-premise and keep those customers from looking at other products that have their sights set on large enterprise as well it can do well in the SME space. SAP has a long ways to go but I think it has a better potential for incremental profits than ByD does.
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I am not at all convinced that SAP can compete well in the small business market– mid-market, yes, small — I doubt it. I’m not convinced that it’s a good idea to make the attempt, nor am I seeing the reasons debated well anywhere in public to date. Admittedly I’m not looking terribly hard as it’s not a priority for me, but the fundamental issues– real and perceived conflicts are significant.
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I agree, Mark. And I seriously doubt they will go after the small shops any time soon
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is HANA going after DB2? even if it does, it offers new paradigm or promises to go beyond the traditional OLTP/OLAP duality. IBM should differentiate itself from HP in its hardware bundling of HANA and not worry about DB2 too much.
i like Jon’s (and SAP’s) collaborative approach to further development in areas like Gateway, Streamwork, or Workflow.
OT, i would lump OD together with ERP as both terms that are quickly losing their cutting edge, but i’m unsure if ambiguous LOB is any better. time for Gartner to concoct some new juicy acronym to raise the eye brows.
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Hmm, well I agree and disagree. I actually think that SAP is going to have an uphill battle in the short term deriving significant revenue from any of the three (HANA, mobility, and in-memory). I’m currently trying to get some clarification from SAP on revenue goals for 2011 for mobility and HANA, but the point stands, I am still bullish on most of these products in the long term but not sure they can bring in the impact dollars in the short term.
Having said that it depends on how you define the revenues. Roll HANA into analytics and revenues start looking pretty good. 🙂 Same to a large extent with mobility and Sybase as a whole.
Where I”m going to disagree with you is that I think SAP is doing these in the right order in terms of revenue expectations. Snabe said during the earnings call (and talk with Dennis Howlett) that he didn’t expect on-demand to generate noticeable (as in quarterly results impact noticeable) revenues as quickly as mobility and HANA, and I suspect he’s right.
He’s right for two reasons: 1. Even though ByD is getting good customer traction (on track to meet their 1,000 customer goal for the year), on-demand is a volume sales scenario which means revenue impact will require many thousands of customers, a more robust partner channel still being built to extend to that many customers, etc. For Line of Business on-demand, I’m not sure that the development for these apps is all that easy. It’s certainly taking SAP a while to get them out, in 12 more months time only Career OnDemand and Travel OnDemand are on schedule to be added, and Sales OnDemand, while in GA now, is still a product with a lot of growing room before we will hear from productive customers.
The reason for the revenue delays here in LOB on-demand are two fold: one, it’s a volume sales game like ByD, if SAP expects the pricing to be competitive. Second: SAP is building these solutions from the ground up with a design thinking approach, using role-based and socialized work scenarios, in heavy collaboration with end customers during the design and development. I think this process is the right one and will result in winning products in the long run, but I don’t see it contributing to the financial bottom line any time soon. Again I like the long term outlook for these on-demand products, especially as part of a multi-tenant (and, not too far off, in-memory) on-demand ByD platform, but as for big money? One major HANA deal may be worth hundreds of smaller on-demand sales…for now.
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Hey Jon – I guess I am going to be agreeing and disagreeing too with your comment 🙂
SAP expects HANA to bring in more revenue than ByD. I don’t doubt that for a minute.
But what numbers are we talking about in absolute terms? And 1000 customers for ByD is not anything to be proud of, compared to competitors.
At that pace – they can always say OD will bring less revenue than ByD 🙂
But I am not comparing HANA to ByD – I am comparing it to LOB OD products.
LOB OD might have happened faster too if SAP put as much focus on it as they are doing with HANA.
SAP could get HANA designed and developed out of thin air in few months, but LOB takes 2 years on existing technology in ByD.
So I am deducing that it was a conscious decision to put more focus on HANA compared to OD.
OD is a volume game – I agree. But since ByD platform is already done, it should not take a lot of extra cost per new application.
This I think would mean – if SAP gets just one or two big customers to buy for an organization (Sales OD is only needed for sales force in a company, so they need more companies to buy for SAP to make money. But career on demand, or travel on demand – most companies should buy for large seats by default). And these applications do not need to cannibalize existing SAP apps – so the sales force will be only happy to sell it.
apples to apples on a gross profit basis – I think OD has a better chance of making SAP successful.
Sure one big HANA deal is better than many LOB seats. But with all the apprehensions I have on HANA – I doubt how many “big” HANA deals will happen.
Of course I am counting out selling HANA as a part of a basket just to move it somehow. Long term – once HANA stabilizes, and SAP and ecosystem comes up with many HANA based apps – it is all good stuff. But I think it will be a rockier road for HANA compared to LOB and Mobile.
Mobile is money they can make TODAY. Market is totally readyfor massive expansion, Sybase is a consistent leader in the space and so on.
And HANA, LOB and everything else needs “mobile first” thinking to succeed – since that is where most of the consumption will happen now.
I could be very wrong on all of this – wouldn’t be the first or last time. But for sure – I will be watching this very closely to see how it unfolds.
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Good elaborations Vijay, I think I can sign off on your view of the convergence being around mobility. I’m going to stand by my view that the way SAP is going about LOB on-demand, painstakingly “design thinking” each app through development, it’s going to take a while for any major revenue impact to appear. Perhaps you are arguing that SAP should step up its LOB on-demand investment dramatically. If so, I can’t argue with that but I don’t see it happening. I think they might, however, step up that investment if they can see the business model solidifying with the first few apps. Even with the long road HANA has to go down, I think it might start booking more revenue sooner than LOB on-demand. Certainly SAP feels that way. 🙂
As for mobility, let’s see a massive SAP apps store and then we may see the revenues you are talking about. SAP is forecasting $100 million from HANA and mobility this year, I am currently seeking clarification on exactly what that means (separate or together, revenue or sales booked, etc), so take that with a grain of salt for now.
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Thanks Mark. It is not an easy decision for SAP which ever way we look at it
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Well a couple of thoughts Vijay —
1) It looks from afar that many large companies were given the opportunity to take a test drive free of charge. Understandable and common, but if not disclosed it leaves everyone to speculation, which isn’t terribly good. The lack of transparency and communications shows that while intellectual renewal has come a long way, cultural renewal has a long way to go yet.
2) While it’s understandable for the promotions and communications to be focused on the future with products like HANA — I wouldn’t be trying to partner with them if I didn’t see the potential, although would like to test drive myself…. ; the obvious truth is that the overwhelming majority of revenue at SAP is still from the old line of computing. I am aware of several very large multi-year installs, most of which is with the old bread and butter, and the average overall cost is several hundred million. Take the standard deduction for SAP share vs partners and it’s still a very large percentage of new sales and of course future maintenance fees. BTW, we have interest in two of the largest installs in Kyield so far, not to mention many of the old SAP customers:-)
3) I agree with you on cannibalization of ByD — this is an age old challenge I attempted to clarify with my latest post on my blog — Clarifying Disruption: Operations vs. Innovation
http://kyield.wordpress.com/
“Within the context of logistics, supply chain, manufacturing, IT, and other business operations, disruption is obviously an experience managers work diligently to avoid.”….
“In the context of innovation, however, and long-term economic survival, disruption can be paradoxical when “the act of interrupting continuity” of tightly controlled markets, stale products, and outdated business models is not an evil, but rather can be a savior to businesses, ecosystems, and economies, preventing eventual operational disruption, or as we’ve seen in many cases—complete failure.”
So while a balance between current cash flow and future with current innovation is always a challenge, and I am confident SAP has their arm’s around the issue, I’m not sure that forecasts on external disruption are accurate, simply due to historical experience with same — they rarely are. That is to say that becoming friendlier with cannibalization sooner than later more often than not means less starvation.
Regards, Mark
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Nice post Vijay. Lots to think about here. Was at an ASUG get together yesterday, and when the speaker asked the crowd about their mobility plans/strategies, I can say that not a lot of confident hands went up.
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Thanks Tom. Mobility message seems to be getting lost in the abundance of HANA messaging 🙂
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