SAP can't blame everything on the Y2K bug

Although the effect of the Year 2000 glitch on computer-related buying is being blamed for a number of business problems, SAP can't lump the sum of its troubles on a little old bug.

Kim Girard
Kim Girard has written about business and technology for more than a decade, as an editor at CNET News.com, senior writer at Business 2.0 magazine and online writer at Red Herring. As a freelancer, she's written for publications including Fast Company, CIO and Berkeley's Haas School of Business. She also assisted Business Week's Peter Burrows with his 2003 book Backfire, which covered the travails of controversial Hewlett-Packard CEO Carly Fiorina. An avid cook, she's blogged about the joy of cheap wine and thinks about food most days in ways some find obsessive.
Kim Girard
3 min read
Although the effect of the Year 2000 glitch on computer-related buying is being blamed for a number of business problems, SAP can't lump the sum of its troubles on a little old bug.

Enterprise resource planning (ERP) companies like SAP, Baan, J.D. Edwards, and PeopleSoft have been bitten especially hard by the millennium bug. All of the firms have cited Y2K concerns in the wake of disappointing financial results for the first half of 1999.

Yet SAP's co-chief executive Hasso Plattner said the problems that have sent his company's second-quarter profits falling 7 percent and new software licenses tumbling 15 percent cover a number of serious issues, not just the Year 2000 glitch.

Increased competition from players like Oracle, price cuts, and late products have all given Plattner and his firm something to worry about.

"Clearly the industry turmoil around the Internet is impacting us," Plattner said in an interview with CNET News.com. "The Internet is affecting the enterprise's business, in general, much quicker than expected, and that has an impact on business software as well."

While critics say SAP and its rivals are lagging with their Internet plans, Plattner argued that over the past several years, the company has been tied while its R/3 customers grappled with the introduction of Web-enabled applications--applications designed to handle human resources, accounting, manufacturing, and other back-office needs.

"Has SAP responded fast enough to the Net?" Plattner asked. "Our customer base did not work with us [at first] and perhaps we were not aggressive enough. It's now the other way around...You always react to market trends and customer requirements."

SAP is now working to make its core R/3 software Internet-friendly through its MySAP program, and plans to change how it deals with its business partners over the Web, Plattner said. It is also marketing a suite of new products, called New Dimensions, intended to automate a customer's front office sales and marketing needs, supply chain, and procurement requirements.

Joshua Greenbaum, head of Enterprise Applications Consulting in Berkeley, California, said SAP is smart to target its installed base. But Greenbaum said SAP faces one main hurdle: the majority of its users are several generations behind the platform necessary to use the new Internet-friendly applications.

"Easily two-thirds of their users are thinking about this (Internet) problem but a lot are thinking about how they can install this software on top of this (older) software," Greenbaum said. "SAP can't require a (version) 4.5 upgrade to let everyone run this stuff."

Tackling the tough stuff

SAP faces tough competition from Oracle and Siebel in its future fight for the front-office or customer relationship management (CRM) market. In its fourth quarter, Oracle, second only to SAP in the ERP market, reported its core applications business for ERP software increased 7 percent, crediting some of that growth to its new front office business. The company said it has signed on 105 CRM customers.

Meanwhile, SAP has been late to roll out a suite of customer relationship management (CRM) products--used to manage field sales, call centers, and customer service concerns. The entire suite is due out next year, but development glitches have held up shipping parts of the line.

Plattner said that SAP expects to get 10 percent of its total revenue from CRM sales within the next two years.

"The key is now the front-office product," said Andrew Roskill, analyst at Warburg Dillon Reed, adding that after this quarter, SAP can't hid behind the Y2K bug for its poor results.

Roskill expects SAP to rebound in the fourth quarter. "I think it's possible we could see license revenue bounce to back to 25 percent in 2001," Roskill said, adding, "I don't think we'll see a return to 45 percent growth in 1997 or 1998."

Hambrecht & Quist analyst James Pickrel said the Year 2000 problem contributed to a 7-percent drop in profits for SAP this quarter, but the bigger issue is market saturation. He added that competitive price cuts have also hurt SAP's revenues.

SAP now claims 30 percent of the enterprise resource planning (ERP) software market, with such clients as General Motors, Pratt & Whitney, and Dow Corning.

SAP's profits for the quarter dipped to $146 million from $158 million a year ago, while sales rose 13 percent to $1.3 billion. The company's U.S. shares, once trading in the 60s, have since been cut in half to now trade in the 30s.