News
6/29/2004
11:33 AM

Billion Dollar Bet

Inspired by a relative newcomer, SAP is banking on its Web-services-based NetWeaver to become an IT-platform vendor.



SAP's future began on a cold February day in 2002 during the company's annual retreat at Sylt, an island in the North Sea just off the coast of Germany. There, dozens of SAP executives first saw a technology that ultimately will replace almost all the code and logic underscoring SAP's existing and extremely successful applications portfolio. The architect: Shai Agassi, a 36-year-old Israeli who's been with the company for just four years.

NetWeaver architect Shai Agassi introduced the Web-services-based application and integration platform two years ago. Photo by Angela Wyant

NetWeaver architect Shai Agassi introduced the Web-services-based application and integration platform two years ago.

Photo by Angela Wyant
It's a future that looks markedly different from SAP's heritage as the company that defined the market for enterprise-resource-planning software. Though SAP is the world's third-largest software vendor, with more than 22,000 customers in 120 countries and $8.9 billion in revenue last year, the company is thinking bigger. It's remaking itself into a platform vendor that will sell everything from application servers to middleware to Web services. It will offer slivers of applications--called composite or "snap-on" apps built using services from other SAP apps--up to full-blown business-process sets such as cash management.

If SAP chairman and CEO Henning Kagermann has his way, this future will put SAP even closer to the top of the software world, just behind Microsoft and ahead of current No. 2 Oracle. "You cannot decouple integration from applications in the future," Kagermann says. "To deliver good software solutions, you need deep application knowledge, integration infrastructure, and application components that together make the solution. We want to deliver all of those."

SAP's strategy in large part is riding on NetWeaver, the application and integration platform that's the result of a blueprint Agassi outlined on that freezing day two years ago. Unveiled in January 2003, NetWeaver now is the multipurpose engine inside most of SAP's mySAP Business Suite, which includes ERP software, supplier- and customer-relationship-management apps, and supply-chain and product-life-cycle-management software. Initially, SAP leaders thought NetWeaver, which incorporates Web services, would merely bridge SAP and non-SAP environments. But as Web services have grown in popularity, and as SAP has put its technology to the test, the vision has broadened. The technology now puts SAP "in the unique position to be the biggest player" in a new IT ecosystem, Agassi says, at the center of customers' jumbles of applications, services, business-process sets, and even other application and integration platforms, such as Microsoft's .Net and IBM's WebSphere.

Gaining substantial ground as a platform provider will require some serious jostling with IBM and Microsoft-- recently a partner in abandoned merger talks--and Oracle. Each wants to increase its share of mind and market by being the technology partner on which everything else rests, says AMR Research senior VP Jim Shepherd. "SAP would like its customers to view SAP as their primary information-system platform," he says, basing all their business-technology decisions on the fact that they've standardized on an SAP environment.

Because SAP's software is the system of record for some of the largest organizations on the planet, the company has had to tread carefully. According to research firm Gartner, SAP in 2002 had the biggest bite, about 25%, of the worldwide ERP market. "Almost half the industrialized world goes through SAP at one point or another, and if we take a risk and our systems fail, the risk is so high that we could put lots of businesses in jeopardy," Agassi says.


Whirlpool is ready to leverage NetWeaver components, CIO Esat Sezer says, to help the company manage innovation. Photo by Chris Lake

Whirlpool is ready to leverage NetWeaver components, CIO Esat Sezer says, to help the company manage innovation.

Photo by Chris Lake
As it considered making NetWeaver a bigger part of its strategy, SAP leaders weren't at all sure the degree to which the company could move its applications to NetWeaver and what the vendor calls its Enterprise Services Architecture, which exploits all of NetWeaver's Web services to enable an integrated system where business processes can be assembled on the fly. "The bar is very high for SAP," Shepherd says. "Its software has to scale to extraordinary degrees. Web services in a very complex, robust application environment were an unknown entity. Nobody had ever approached that."

But some customers seemed eager for such an effort. "We need to simplify our application infrastructure," says Esat Sezer, CIO at Whirlpool Corp., which uses SAP ERP, supply-chain, and CRM applications all over the world. "We've said to them, 'Why can't you leverage your discipline and strength on business-process integration and create a technology that could give us a step-by-step approach to do that?'"

The gutsy undertaking has played a big role in the massive NetWeaver project, the 32-year-old company's largest development effort ever. It's bigger than the project that put SAP on the software map--the retooling of its mainframe-based R/2 software to its client-server R/3 apps. NetWeaver and the Enterprise Services Architecture have so far taken the equivalent of 250,000 days of work spread across engineers in Bulgaria, France, Germany, India, Israel, Japan, and the United States, at a cost of more than $1 billion.

And it's not yet complete, with a target date of 2007 for SAP to retool its entire software suite to run on NetWeaver and the Enterprise Services Architecture. SAP engineers still are researching better ways to build applications from the ground up on its Web-services architecture. "Typically, you think from within the existing application outwards, and so you add to the application in increments," Agassi says.

Engineers trying to build a highly scalable invoicing-notification function, for example, created a design that notifies the right people, provides specific recommendations, and "takes away the need to focus on the 99% of events that are insignificant," Agassi says. "It is proactive ERP, where the system drives forward to the user all the events in [that user's] world."

For some customers, at least, SAP's intense development efforts already are paying off. Whirlpool, which closes 95% of its books on an SAP ERP system, is ready to leverage the NetWeaver components and SAP's first wave of NetWeaver-based composite applications, called xApps.

Scalability of those applications is critical for the $12.2 billion-a-year company, which uses SAP's xApp Resource and Portfolio Management to track and manage product development around the world among 800 engineers. Its users work in an integrated platform; product development can be viewed across the company or in categories (such as refrigeration or air conditioning); and Whirlpool can quickly assess which resources are allocated to different initiatives, as well as what stage of development each project is at, Sezer explains. With anywhere from 300 to 500 product ideas in play at any given time, SAP's xApp Product Definition helps Whirlpool generate and track hard-to-manage innovation. "XPD helps us initiate and create a pipeline for a new product and to look for alignment among brands. It helps move an idea to concept level," Sezer says.

SAP has acknowledged Microsoft's and IBM's platform power by deepening integration between NetWeaver, .Net, and WebSphere. Just last month, for example, SAP and Microsoft extended their development partnership, and it's spilling over into efforts for individual customers. Microsoft is funding research to help chewing-gum maker Wrigley Co. connect Office apps under SAP's Enterprise Portal, the umbrella user interface that's built on NetWeaver. Both Microsoft and SAP realize there's a lot of potential revenue to be shared between the two--as much as $7 billion, estimates Applications Consulting analyst Joshua Greenbaum--and the ongoing partnership is all about protecting it. "Nobody wants to kill this golden goose, even though down the road they'd like to eat each other's lunch," Greenbaum says. SAP's biggest competitor in the platform space, he adds, "five years or even two years from now could be Microsoft."

Agassi, a dark-haired, dark-eyed man who's quick with a smile, argues there's plenty of opportunity for all platform providers in this market because companies will want to buy the simplified, highly functional application components that flexible ecosystems built on Web-services-based architectures can create. Competitors and third-party vendors "can take 80% of the revenue, and SAP only takes 20%," he says. "That's what this market needs, a benevolent center of gravity."

Calling one's company benevolent sounds like hyperbole, especially in the cutthroat software industry, but analysts and customers are listening. "Shai is very sincere about that," Greenbaum says. "SAP wants to define a technology platform that's not just valuable to SAP but to other software companies as well."

This year, SAP plans to deliver enterprise "services" software that Agassi says will help companies better collaborate with their customers and business partners. Next year, SAP will roll out more services and also will deliver an initial version of an Enterprise Services Repository, which will serve as a directory for all the services that leverage NetWeaver, even those developed by third parties. "This is a big commitment from SAP," Kagermann told a crowded auditorium at SAP's Sapphire conference last month in New Orleans. "And we will deliver."

SAP now ships every application with a free version of NetWeaver. Agassi declines to say how many companies so far use all the tools that comprise NetWeaver. They include the portal, a mobile component, a data-management system, the Exchange Infrastructure for application-to-application integration, a Web-application server, the Composite Application Framework for developing service-based apps, and a management tool for configuring and monitoring the application environment. SAP will say only that at least one piece of NetWeaver is in use at more than 14,000 customer sites. And by year's end, it expects to have 1,000 customers willing to talk about the technology. As more companies sign on, Agassi predicts that the technology--complex enough that it's already spawned a 414-page NetWeaver For Dummies book--will win converts.

So far, Whirlpool is happy with the benefits it has gained from NetWeaver, particularly with the technology's role as an equalizer. "We won't need to maintain separate skill sets in the IT department, different application-integration platforms, different programs, or languages," Sezer says. Whirlpool envisions continuing on its track of increasing IT productivity while not increasing operating costs. "This creates a self-funding model, and this is a dream for us," Sezer says.

Others also see value in NetWeaver's promise. "The individual tools [in SAP's suite] originally had a lot of value to us. As SAP starts to move to this more-cohesive strategy, it makes sense to us," says Eric Soll, E-business technology manager for IT with Rohm and Haas Co., whose businesses range from specialty chemicals to circuit-board technologies to Morton Salt. Rohm and Haas uses several SAP apps, including CRM and ERP, and Soll says parts of NetWeaver, such as the portal, are particularly compelling. For example, a single user interface that could be used by financial planners across the company's different businesses would be easier to manage.


Reebok's CIO Peter Burrows likes NetWeaver but won't rip out existing middleware.

Reebok's CIO Peter Burrows likes NetWeaver but won't rip out existing middleware.
But for some customers, NetWeaver is late to the party. Reebok Ltd., which sold $3.5 billion worth of shoes and clothing last year, is a longtime SAP customer and was a pivotal player in SAP's development of an enterprise-application suite for its industry. But Reebok isn't about to rip out the middleware that connects its SAP software with a warehouse-management system from another vendor. "We haven't embraced the entire strategy of using [NetWeaver] as middleware," CIO Peter Burrows says. "Sure, I'd prefer not to have another vendor in here, but I'm not going to change the middleware I've already implemented."

Some believe the NetWeaver technology was born less out of innovation and more out of necessity. Former SAP exec Michael Campbell, now CEO of TempoSoft, a provider of workforce-management software for the retail industry, says NetWeaver was a reaction to SAP's own disconnected software. Campbell, who says some of the best people he's ever worked with were SAP employees, headed five different SAP business units from 1999 to 2002. "In order to be adaptive, SAP took some risks. They pushed CRM out the door without it playing nicely with R/3," Campbell says. "NetWeaver is the reaction to, 'Oh, my God, our applications no longer work well together.'"

NetWeaver certainly was hatched out of hard times. In 2002, the economy was stalled, along with companies' IT budgets. Few were sinking millions of dollars into big ERP projects anymore. Gone was SAP's 40% annualized sales-rate increases, common in the second half of the 1990s. In 2002, SAP's license sales fell 11% to $2.5 billion, from $2.8 billion in 2001. Total product revenue in 2002, which includes license and maintenance revenue, stayed flat at $5.7 billion.

This was the climate in which Agassi, then the CEO of a newly combined SAP subsidiary that included SAP Portals and SAP Markets, flashed his vision of the subsidiary's strategic direction on a single slide--now known everywhere in the company as the five-fingered rainbow--and kicked off a four-hour discussion. The slide depicted one hand made of five apps: ERP, CRM, supplier-relationship management, supply-chain management, and product-life-cycle management. "Combine all those together, and you have a very strong effect. If you create a punch with that hand, that is R/3," says Agassi, a technology wunderkind who was accepted into the Israel Institute of Technology at 15 and founded four software companies before the age of 34. But when you start opening that fist up to non-SAP apps, "there is space between the applications. The rainbow is NetWeaver, and it connects everything."

By the end of the discussions, SAP's executive team realized the idea was far too important to drive only a single subsidiary. Within two months, SAP folded the subsidiary--and Agassi's vision--back into SAP. The five-fingered rainbow became SAP's future.

Hasso Plattner, SAP's chairman and one of five ex-IBM executives who formed SAP in 1972, quickly took to the NetWeaver idea. "I showed him the early ideas, and he immediately came out and charted the direction for the next 18 to 24 months," Agassi says. "His point was that this is exactly what SAP was looking for in the R/3 days: the ability to offer a complete solution and manage that solution--even all the components that don't come from SAP."

Agassi's greatest strength may be his ability to get others on board with his vision. "One of the things that is most impressive about him was to really take that personal vision and turn it into the vision of the company," analyst Greenbaum says. "That wasn't easy. He was a newcomer, very young, and an outsider." Agassi came to SAP when TopTier Software Inc., the enterprise portal company he founded, sold, and then stayed with as CEO, was bought out by SAP in 2001 for about $400 million. About 90% of TopTier's people still work for SAP today, says Aliza Peleg, managing director of SAP's North American labs, herself a former TopTier employee.

"Once SAP was committed [to NetWeaver], we knew we'd be very, very successful," says Peter Graf, SAP's VP of market strategy. "But it took someone like Shai Agassi to emotionalize it and get everyone rolling in the same direction."

According to Kagermann, SAP's evolving services-based architecture will make it easier for businesses to ramp up or down, as business conditions dictate, an important idea given the extended downturn of the past three or four years. "We have an architecture that allows them to switch between bullish, innovation, [and] growth, or bearish and conservative," he says. The idea of using Web services to piece together and pull apart complex but flexible information systems in new processes that suit the business needs of the moment is appealing. And if SAP does it right, it may meet again with the astounding success it enjoyed at the start of the client-server era.

It was SAP's early bet on client-server software that won over Reebok. In 1988, CIO Burrows (who was at a different company at the time) met Plattner and heard his ideas about client-server computing. "I started listening to Hasso talk and thought, 'I'd better pay attention to where this is going,'" Burrows recalls. "It planted a seed in my mind that SAP was certainly a company that was worth watching." Nearly 10 years later, after Burrows had joined Reebok and the company was choosing the software to run its business, Burrows went with SAP.

SAP's gamble is that IT leaders increasingly will respond to its platform vision the way Burrows and others responded to its client-server architecture revolution: by opening up their wallets. "There was a profound change that caused companies to go out and replace business systems and infrastructure," says AMR's Shepherd.

Will SAP's Web-services vision result in a similar change? Financially, the company is regaining strength. At the end of last year, SAP execs predicted 2004 would bring improvement and still say they expect software revenue to increase about 10%. So far, so good. The company reported revenue of $1.9 billion for its first quarter ended March 31, compared with $1.8 billion the same period a year ago. SAP's operating income increased about 12%, to $395.2 million. ERP, Kagermann says, is the company's fastest-growing product area.

As a free offering, NetWeaver won't contribute directly to SAP's revenue growth. But Meta Group analyst Dennis Klappich offers a comparison about how it will contribute to SAP's success. "Think of Microsoft. Back in the '80s, people started writing stuff for Microsoft," he says. As more and more people did that, it solidified Microsoft's position as a platform. "Say 10 years from now there are 1,000 composite apps for SAP, and then there's another vendor who is still cobbling together different things," he says. "Who wins? SAP."

That's Agassi's goal. He's confident, seemingly without a shred of concern that a multibillion-dollar company's future is riding on his idea. Says Agassi, "We will become the platform for businesses' growth."

--With John Foley

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