In 1968, in an article discussing collaborative innovation, software engineer Dr Melvin Conway coined an adage now known as Conway’s Law. “Organisations which design systems,” he wrote, “are constrained to produce designs which are copies of the communication structures of these organisations.”
According to Thomas Otter, a former SAP employee and now a Gartner analyst tracking the company, Conway’s Law is a useful aid to understanding the enterprise software giant.
Fifteen years ago, the German company was a top-heavy organisation dominated by the engineers who founded it, he explains. Since then, however, the constitution of its executive leadership has changed.
“Ten years ago, 90% of the board members could point to code that they had written,” says Otter. “Today, 80% of them can point to deals that they have closed.”
This means SAP is now more focused on sales than it has been in the past, Otter says. “Or to put it another way, it is more ‘customer focused’,” he adds.
That comment hints at the predicament SAP is in today: caught between the need to increase the value its customers derive from their SAP investments, while simultaneously growing its own revenues.
Extending customer focus
The company certainly needs to grow sales. Its software revenues have plummeted in recent times, falling 31% to €525 million during the most recent financial quarter, and by 40% and 33% in the previous two.
“Most of the on-premise enterprise software vendors have seen declines in sales of around 30% to 40%,” explains R ‘Ray’ Wang, enterprise software analyst for the Altimeter Group, “and SAP is the poster child of those vendors.”
SAP did manage to grow net income by 12% to €435 million in the recent quarter, thanks to the completion of a redundancy programme that shed around 3,000 jobs and the fact that it doesn’t have to pay as much commission when its salespeople don’t make as many sales.
But new software licence sales are a leading indicator for support and maintenance revenue in the future, and unless it accelerates sales soon, SAP is on course for some lean years.
According to Tim Noble, managing director of SAP UK, the company’s plan to increase sales involves extending its ‘customer focus’. “We have to continue to get even closer to our customers,” he says.
Practical measures SAP has already undertaken to achieve this include reorganising its account management structure to reflect the needs of customers of different sizes and industries, says Noble.
“Our larger contracts now have one account manager who is responsible for that customer globally,” he explains.
“The SME space is a growth area for SAP, and that’s all about having people who understand the specific requirements of an SME,” he adds. Meanwhile, the company has built cross-functional teams that focus on vertical industries.
“The real benefit of this is that the customer will get a better experience, better knowledge and better contribution from SAP,” Noble says. “[Higher sales] will follow.”
But is this customer focus, or sales focus? For all its ‘customer-focused’ account management restructuring, some customers would question whether SAP does truly understand their predicament when it is proposing to increase the cost of its support services, even as IT departments are being called upon to slash costs across the board.
Enterprise support troubles
SAP’s support saga began in 2008, when it announced plans to phase out its standard support package – priced at 17% of software licence fees – in favour of ‘Enterprise Support’, which costs 22% of the licence fees. Enterprise Support would benefit customers, the company said, because it would cover support for its infrastructure products and custom-developed code, as well as the applications themselves.
The announcement was met with vociferous opposition from user groups, and SAP was forced to postpone the mandatory introduction of Enterprise Support.
In April 2009, the company reached an agreement with the SAP User Group Executive Network (SUGEN), a body representing user groups from across the globe.
SAP promised that it would not make Enterprise Support mandatory until it could prove that customers would benefit from the enhanced support offering, as measured by a number of key performance indicators (KPIs) defined by SUGEN with Gartner acting as an independent adjudicator.
In December 2009, SAP announced that “The 2009 KPI achievements of the SUGEN SAP Enterprise Support programme have shown clear value to participating SAP customers.” However, it gave little detail of the precise findings, and said that the introduction of Enterprise Support would be postponed until after another round of consultation with users. The announcement was preceded by the resignation of two user group representatives leading the project.
The controversy, in other words, is far from over. “Enterprise Support is still the main bone of contention with SAP [among customers],” said Alan Bowling, chairman of the SAP UK and Ireland User Group at its annual convention in November 2009. UPDATE SAP backs down over Enterprise Support
To explain why SAP would endanger the goodwill of its customers at such a crucial juncture, Gartner’s Otter points again to history. There was a time when SAP’s competitive strategy was a war on many fronts against numerous ‘best of breed’ application vendors such as JD Edwards and PeopleSoft, he explains. Since then, however, those companies and many more have been acquired by Oracle, leaving SAP with a single target for its competitive strategy.
“SAP really suffers from Oracle-myopia,” says Otter. The introduction of Enterprise Support is a reaction to the fact that Oracle’s support and maintenance fees are higher than SAP’s existing rates, he explains.
Return on innovation
Enterprise Support may be the principal bone of contention, but it is not the only thing troubling SAP customers. A number of otherwise satisfied customers at the user group event indicated that they are perplexed by the breadth and density of SAP’s software offerings, and that they would benefit from greater clarity into what functionality is available now and in future, and how it might help solve their problems.
According to Altimeter Group’s Wang, the failure to get new functionality out to customers is an endemic problem at SAP. “Customers hope to have SAP as an innovation partner, but for the past five years it has failed to live up to that,” he explains.
This is not for lack of trying, he adds. SAP invests nearly 20% of its revenues in research and development, almost double the relative investment of, for example, software-as-a-service (SaaS) pioneer Salesforce.com, a company considered to be innovative.
But legion are now the SAP innovation projects that have so far failed to deliver the promised benefits for customers, he says: Microsoft Office integration tool Duet, SaaS application offering Business ByDesign, the service-oriented architecture platform NetWeaver, to name but a few. “SAP has not executed,” he says.
Even when it does innovate successfully, says Wang, SAP fails to capitalise on it. In November 2009, Salesforce.com announced with typical fanfare new ‘microblogging’ functionality called Chatter, which it bills as ‘Twitter for the enterprise’. “The SAP mentors and some volunteers from SAP built a social messaging tool called ESME,” long before Chatter, Wang explains. “But SAP walked away from it.”
Wang acknowledges that SAP has attempted to address its innovation problem. “One of the things you can give (SAP CEO) Léo Apotheker credit for is that he has tried to streamline the R&D operation,” he explains. “In some cases, there were six teams working on the same problem. That’s bad stewardship of the maintenance dollar.”
But he also adds that such is the extent of the problem that customers have to take matters into their own hands. “Customers need to take control of their own destiny,” says Wang. “They can no longer allow SAP to take decisions [about innovation and product strategy] in their ivory tower. There’s so much innovation within SAP that is untapped, but right now its management structure is bloated, and it’s extremely bureaucratic. The market should decide [which innovation reaches customers], not a bureaucrat or a middle manager.”
SAP, then, is perhaps best characterised as an organisation that has acknowledged that it has problems with, for example, customer focus, but has only begun to resolve them. “SAP is desperately trying to be closer to its customers,” says user group chairman Bowling. “But it’s a long journey.”
If Conway’s Law holds true, resolving those problems, however long it takes, should improve not only the organisation itself but also the systems it produces.