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SAP hits 50: Entrenched, spread out and fully middle-aged

Tech’s posterchild of German industrial success must face its failures as it succumbs to midlife angst

Feature Like so many stories in the history of computing, it involves Xerox. Scientific Data Systems was sold by Xerox to IBM as part of a hardware deal. When Big Blue canned a related software project, a group of five German engineers saw an opportunity.

Dietmar Hopp, Klaus Tschira, Hans-Werner Hector, Hasso Plattner, and Claus Wellenreuther, all from Mannheim, Baden-Württemberg, thought that businesses would be able to see functional company data as they are working, rather than waiting for hours for punchcards to be punched and read as was the fashion at the time. On April 1, 1972, SAP was born.

Celebrating its 50th birthday, the German company is now the largest European business technology firm and, until recently, the highest valued company on the German stock exchange.

In five decades of existence, it has come to define the software category of enterprise resource planning (ERP) which, loosely speaking, lets organisations know how much stuff they have, what stuff they're going to need and when they're going to need it.

It's important stuff. European industrial giants like Airbus, EADS, Siemens and Volkswagen Group all rely on SAP. It is – more or less – a standard.

But in an age where consumers are glued to hyper-intuitive phone-based apps, SAP is no longer sexy, according to one senior executive who worked on SAP projects at a massive German manufacturer for more than 10 years.

"I've been involved in applications and UIs. One thing always struck me: it's not sexy to go into SAP," says Denis Torii, Gartner senior director and analyst.

"Everybody is used to phone apps and their slick interfaces. It's not like you want to grab a coffee and go into SAP before you start your day. One thing it has never really understood is to make that transition to having an interface people enjoy. That is a question mark and a challenge for SAP," he says.

Nonetheless, people have to open SAP applications because it is how they do their jobs.

SAP arrived at such a dominant position because it allows companies to map complex business processes onto a robust computing architecture, says Torii.

"Where SAP started to shine was it had a vision of a solution that was based on a strong technical architecture, that would allow people to follow business process best practices, which were designed and deployed SAP.

"It was recognized as that could be implemented and supported by companies that needed a more sophisticated way of doing things that could not be handled by very simple best of breed solutions that by that point in time were existing in the market."

Torii adds: "In the very early days, people didn't recognize SAP as this central application for enterprises. They took some time to go to market and be as successful as they are today. But with a technology vision based on a very strong architecture, joined with some good industry knowledge, they were able to capture the leadership position that they have right now."

From R/1 (R standing for realtime), SAP employed a three-layer architecture that included a presentation layer, an application layer and a database layer. Although this was initially housed in a single mainframe computing tier, it was developed into three-tier architecture (R/3) for client-server computing in the early 1990s. But the basic point is the same, applications are using and changing the same data.

Jens Hungershausen, chairman of DSAG, the influential German-speaking SAP user group, tells The Register: "In the early years of SAP, they saw the high potential of integrated systems and back in 1996 my company decided to switch their IT landscape to SAP, that was one of the main drivers. You have one system, and you can operate the whole company with it.

"Over the decades, one of the most important things was being integrated into all processes, but also integrated across all different departments a company needs to be up and running," he says.

Such was its strength, SAP became an almost "universal language" in German industry. "There weren't many alternatives for having SAP, so all the midsize companies and huge corporations at some point has SAP embedded in into their processes," says Hungershausen.

SAP has become entrenched in German industry, underpinning the nation's astounding industrial success story. The German car industry, for example, generated €378bn, far out-stripping Europe's other large economies France, Italy and the UK.

While there are and have been other enterprise application companies – notably Baan (which became part of Infor) and Oracle, through its acquisition of JD Edwards – but none are quite in SAP's position in ERP.

But being in an entrenched position is both a blessing and a curse for SAP and its customers. Moving away from SAP is very difficult. For SAP, it means that while rivals find it difficult to steal, convincing customers to upgrade is also tough. For customers, it means that while they have a robust system on which to run their business, there is no strong competition driving innovation in business software.

For this reason, SAP has a reputation for moving forward by consensus. Hungershausen says: "We have a good relationship with SAP. We try to identify all the issues our members have with SAP software, and we have a good speaking relationship with SAP's management to address all these issues.

"We can't resolve all of them in a timely fashion, so we have to be a little bit patient but basically, we are on good terms and SAP listens to us. I don't have a hotline to CEO Christian Klein, but when I send him an email, he's pretty quick to reply.

"I think the model of SAP user groups – not only DSAG but Americas' user group ASUG – is pretty unique. I'm not aware of large supplier-specific users groups that are so strong," he said.

UK and Ireland SAP User Group chairman Paul Cooper agrees the model was unusual. "It's an organization that is willing to do that and not hide behind 'corporate-ness' and not engage. The willingness to have dialogue, take feedback, and act on that feedback: that's really powerful."

Investors, investors, investors

But customers are not the only people SAP has to keep happy. Tech investors have seen an explosion in returns from US internet-age start-up including Google, Amazon (AWS), and Facebook. In business applications, Salesforce, Workday and ServiceNow have also seen spectacular growth – albeit from a lower base – that SAP must eye with envy.

SAP's answer to the growth problem was to go shopping. A long list includes Business Objects for business intelligence, for €4.8bn in 2007. But when American Bill McDermott became the co-CEO of SAP in 2010 and then CEO in 2014 the spree really got going. Sybase, SuccessFactors, Ariba, Concur Qualtrics and Fieldglass were among the many others, providing a reach from suppliers sourcing to customer metrics. In part it worked, during McDermott's tenure, SAP's market value increased from $39bn to $156bn.

But the success came at a price. The company famous for offering a single version of the trust now held data in disparate products it was struggling to integrate.

In a revealing interview in 2020, co-founder and supervisory board chairman Hasso Plattner said expansion into the US was not only a struggle for growth, it was a question of survival. "I had set the goal back in the 1980s: SAP can only survive with a strong US business. In principle, of course, it has worked quite well. It's just that Americans think differently from us Europeans in many respects," he said.

That difference in culture came to a head in McDermott's approach to the acquired companies. "For Bill McDermott, competition was the priority. For me, it was always the customer.

"The idea of simply letting every company run independently and autonomously may even have made sense from a business viewpoint. It even stimulated a certain growth dynamic. Nevertheless, technologically, we didn't make the right decision. That cost us a year and a half to two years, but mentally the toll was a lot more," he told German business paper Handelsblatt, a translation of which is helpfully hosted [PDF] by arch-rival Oracle.

"SAP definitely needs a core system. That's been the case since our founding in 1972. And as we now move to the cloud, all our services and applications are naturally required to adapt. This takes time," the co-founder said.

Following McDermott's departure to lead workflow competitor ServiceNow, SAP adopted a joint CEO model for a second time appointing American Jennifer Morgan and German Christian Klein.

It lasted less than a year. Morgan departed to leave Klein as sole CEO and SAP at a cross-roads.

Lifting and shifting

While it has made progress integrating acquired applications, it is still struggling to upgrade customers to its latest S/4HANA.

"SAP's history is similar to a mixed story of some positive impacts for the software industry among the many bad ones," says Forrester's Duncan Jones, vice president and principal analyst.

"From their perspective, among things it got right were creating a business model in which CIOs and consulting firms could benefit personally by persuading their employer and clients to buy SAP, irrespective of whether that was the right thing for the company to do.

"It also got right the 'maintenance' model, which enabled SAP to collect billions of dollars' revenue at more than 90 percent margin in return for promises to enhance the product and keep it up to date, promises which they conspicuously failed to keep. So much so that they're now telling customers to discard the product and to start again with S/4HANA.

"On the whole, I don't think this is a cause for celebration unless you're one of the millions of salespeople, consultants and career SAP implementers who have made good livings from its dominance of the business applications industry," Jones says.

SAP was invited to contribute to this article.

Its birthday is an occasion to look forward as well as back. Will it be here in another 10 years…another 50?

One seasoned SAP user told The Register: "I think it will be there in another 50 years. But will it still be number one? I'm not sure about that." ®

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