For five years between 1996 and 2001, companies selling SAP services were hot property. As the world's multinationals became convinced of the efficiencies of using enterprise resource planning (ERP) software to globalise, automate and integrate their business processes, an ecosystem emerged to service customers of SAP's R/3 software.
Specialists such as Druid, Team 121, Diagonal and Axon – as well as dedicated SAP practices within the larger IT services companies – were provided with lucrative consultancy opportunities for fitting SAP to new and adapted business process, multi-year implementations, the integration of SAP software with other packaged applications and homegrown code, and bespoke development for enhancing R/3 with industry-specific modules.
That translated into big numbers. At the top end of the food chain, IT services giant Accenture boasted of having 6,700 SAP-trained professionals. And, even as late as 2001, companies such as Diagonal were reporting revenue growth in SAP services of 37%, as customers fought for scarce SAP talent – and were willing to pay high fees to get their hands on it.
Today, that picture has changed radically. There is still substantial demand for SAP services but the mix of services, the competitive landscape and the margins that service providers can command are all different. Even so, after two years in which the market calmed – a factor of the maturing of the sector, concerns about the actual business value delivered by such vast implementations, and greater parsimony among customers following the dot-com crash – there is now evidence that the SAP services sector is rebounding.
Analysts such as Shore Capital's George O'Connor see some green shoots appearing in the sector and a greater willingness by end users to spend again on SAP services – a sentiment echoed by Philip Carnelley, who tracks the sector for IT research company Ovum. "It's a buoyant market compared with other IT areas," says Carnelley, although the scope has changed from ‘big bang' implementations to incremental work, helping existing SAP customers to optimise their use of the product and refine their business processes. The upgrades, maintenance and application management businesses are thriving, says Carnelley. In the absence of big-ticket implementation business, though, many of the original names are not around to take advantage of that, having been swallowed up by broader services companies.
And that has made SAP powerhouses out of some. LogicaCMG may be a middle-ranking company in the global IT services league, but its acquisitions of the UK-based SAP services provider Team 121 and more recently the IT business of Portugal's EDP has ensured that it remains in the top three European SAP services companies. In another case, SAP consultancy Diagonal, recently acquired by IT resellers Morse, had itself built up expertise in pharmaceuticals, manufacturing and telcos, through several acquisitions, including Partners for Change.
A key factor in that wave of consolidation has been the maturing of the SAP market. In 1997, SAP had 8,500 customers; today it has 25,000. Over that period, SAP – along with Oracle, PeopleSoft and a few other ERP suppliers – have soaked up the bulk of demand from the world's largest companies.
Moreover, as the high end of the market has become saturated, existing customers have become increasingly "SAP savvy", says Liz Benison, head of SAP practice at Capgemini. "Customers know the ups and downs that accompany major ERP implementations," she says, although they are still in the market for expert advice. "Their needs range from devising the optimum roadmap for migrating to a new version and extending the SAP footprint into new areas like customer or supplier relationship management, to helping them pull numerous versions of SAP back into a more manageable portfolio," says Benison.
SAP services companies are tracking the software giant's market in other ways. As it pushes down into the mid-market and into the public sector, they are following. ITNet, for example, which specialises in the public sector, has grown its SAP practice substantially as a result of 20 implementation projects at local authorities that were trying to hit e-government deadlines. (Reflecting that, the company has recently been acquired by services conglomerate Serco.)
With enterprise-level opportunities running thin, many SAP service providers are also targeting smaller companies and that means working with less ambitious projects and tighter budgets. "Success in this area means managing to tight, fixed prices, the use of template approaches and often involves the services partner hosting the application on their own infrastructure," says Benison.
SAP is doing all it can to make its applications as appealing as possible to that small and medium-sized business (SMB) market, with its pre-packaged All-in-One product aimed at mid-sized organisations and SAP Business One targeted at the low end. This has changed the game for SAP services companies. While customers with annual revenues greater than £700 million can expect implementation to stretch to two years or more, those below that still face at least a year-long ERP roll-out for their main business processes, says Dave Cottom, strategy director at Morse's Diagonal unit.
For the lower-end products, those kind of multi-year implementations are unacceptable, with companies expecting results in months rather than years.
In some cases, that push downmarket has enabled the services companies to take a wider role, becoming the source of both the software and related services. Ovum's Carnelley says the new vice president of SAP's SMB division, Donna Troy, has done a good job in clarifying the company's strategy. "A year ago, SAP didn't really understand the necessity of selling through channels," Carnelley says.
Meanwhile, SAP services companies are pouncing on other opportunities elsewhere. ITNet, for example, has targeted de-mergers, picking up subsidiaries or divisions of large SAP users that have been sold off and left without their SAP systems. For example, at the start of 2004, when the Compass Group de-merged, Travelodge and Little Chef called in ITNet to implement HR and payroll systems within a deadline of three months, and a finance system within five months.
Diagonal's Cottom predicts that implementation projects will increasingly require such rapid delivery and demand more ‘plug and play' capabilities, triggering growth in the requirement for SAP consultants. Currently, he estimates that 80% of time is spent on the technology side and 20% on consultancy. He believes this will even out at 50/50 over the next two years.
One way to drive down costs and enable customers to benefit quicker from their investment is to call in offshore SAP resources. Many IT services companies in the UK have been rapidly growing their SAP skills base offshore, while India-headquartered outsourcers, such as Wipro and Infosys, have been targeting customers in Europe and North America with cheaper alternative sources of SAP talent.
"We have worked hard to develop a distributed delivery framework which effectively enables the team to work as an integrated whole, whether the consultants are on-site with the client, in one of our specialist centres of excellence in a near-shore location or in our delivery centre in Mumbai in India," says Capgemini's Benison.
Another trend sweeping the market – and one that reflects customer concerns over project overrun and the delivery of business value – is the sharing of risk with clients. In some contracts full payment is conditional on the service provider meeting pre-set targets. "Clients want vendors to put themselves on the line, and they get rewarded for doing so," says Diagonal's Cottom.
Another spur to the market is expected from the evolution of SAP technology. The company's new integration and application platform, NetWeaver, provides opportunities for service companies as customers move to a more flexible applications infrastructure built around a service-oriented architecture.
SAP expects a significant proportion of its customer base to migrate to NetWeaver as they seek to develop composite applications. However, analysts at IT market research house Gartner believe that SAP needs to better communicate its strategy on how service partners will help fulfil this requirement.
Service company executives are also concerned that SAP is not doing enough to encourage its customer base to upgrade from R/3 to the follow-on product line, mySAP. Gartner analysts estimate that more than 70% of companies are likely to put off their upgrade to mySAP to beyond 2008.
There have also been concerns that SAP has designs on building a large services business of its own. "A lot of worry and nervousness on the part of the services companies arose when SAP beefed up its services [around 2002], but the company now seems to have settled on its core strength: domain-specific software knowledge," says Shore Capital's O'Connor.
Over the past four years, SAP's own services revenues (from consulting and training) have actually fallen as a percentage of overall business from 35% in 2001 to 30% in 2004. Nevertheless, that is still a E2.27 billion chunk of its operations.
Historically, when SAP does well, so do its services partners. The evidence is there to suggest that customers are increasing their investments in the company's software. SAP now expects software sales during 2005 to increase by between 10% and 12% over those in 2004. And in the final quarter of the year, revenues in the US grew by 37% (at constant currency rates). The days when companies would spend four or five pounds on services for every pound they spent on R/3 may be over, but SAP's rising sales will inevitably have a reviving impact on its services ecosystem.