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Analysis: SAP's Software Architecture Shift Shows Results

Posted by iMark - 2005-10-23

SAP AG's high-stakes gambit to rip apart its enterprise applications suite and build them on a services orientated architecture (SOA) platform is showing results, as reflected in a solid earnings report this week. But the project isn't complete.
SAP customer contracts signed between July 1 and Sept. 30 with Applied Materials, Carrier Corp., North Carolina Office of the State Controller, and more than a dozen other companies boosted its software sales 20 percent in the third quarter to $707 million compared with the year-ago quarter, SAP reported on Thursday.

But the strongest growth, 258 percent to $51.5 million, came from SAP NetWeaver, a service oriented application and integration platform, and other related products. Net profit for the quarter rose by 15 percent, which came at the expense of rival Oracle Corp. thanks to growth in the United States. "We just delivered the highest third quarter performance in the history of SAP America and the twelfth consecutive quarter of unprecedented growth," said Bill McDermott, president and CEO of SAP America.

SAP's move to deliver slivers of applications called composites or snap-on applications as Web Services seems to be working, but by no means is complete. The software vendor hasn't finished converting mySAP into Web Services, and "until they take the giant application and break it into thousands of Web Services, I don't consider the application a services orientated architecture platform," said AMR analyst Jim Shepherd. "Today, SAP has several hundred Web Services posted to the SAP development network, so developers and partners can work with them, but they haven't by any means finished rebuilding the core of the mySAP product, which SAP said will be complete in 2007."

Nevertheless, SAP's step has proved a bold move. Companies typically rewrite their applications code out of desperation when they are struggling to recover. Not when they lead the market. "SAP's move is one of the great business gambles of all times," said Shepherd. "They are bold engineers, and I don't think an American company could do this because the pressure on management in U.S. public companies would make it too difficult."

The complete services orientated architecture consists of the platform that began as NetWeaver. As it evolves, SAP will build up more capabilities on the platform. McDermott insists that today it is a fully integrated suite of business applications tailored to 29 industries, which on top sits composite applications such as Mendocino, a project with Microsoft Corp. to build an application that merges Microsoft Office products with SAP platforms. Above that is the analytics and portal. Mendocino is on track to begin shipping in December, with general availability in spring 2006. Analytical applications will also be launched next year.

SAP also is attracting business with less than $1.5 billion in revenue, specifically in the United States with the Web Services approach. The market makes up about 40% of the $237.8 million in revenues SAP America garnered last quarter, said McDermott. "Our medium and small business division is growing at a torrid pace, up more than 50 percent year over year," he said.

Meanwhile, SAP closest rival Oracle's chairman Larry Ellison has set his sites on the enterprise applications market. To do this, Oracle has focused on acquisitions, spending about $18 billion in 2005. Its acquisition binge this year has seen it buy-up companies such as PeopleSoft, which had recently acquired J.D. Edwards, followed by retail specialist Retek, and then customer relationship management (CRM) software maker Siebel Systems for $5.85 billion.

Compare that with SAP's CRM business, which grew 71% in North America in the third quarter. Allen Family Foods, Bose, Jim Beam Brands, and Warner Chilcott all signed on to the mySAP CRM platform last quarter.

Ironically, the Siebel acquisition will push Oracle's global CRM revenue this year to $1.727 billion, up from $286 million in 2004. It puts Oracle squarely in line with SAP's estimated $1.727 billion revenue in 2005, according to AMR Research.

Oracle's roadmap put the first Fusion V. 1 release that includes all the core applications in customers' hands by 2008. "We started with the Oracle code base as the foundation because that is the one built using standards Java, sequel and not proprietary languages," said Jesper Andersen, senior vice president, Application Strategy, Oracle. "Then we take the intellectual property and code the applications from PeopleSoft and J.D. Edwards, and pull it all together to code based on standards on Fusion Middleware."

Maybe, but integrating software applications and code sets from the string of Oracle's acquisitions, which focus on about 22 specific industries and sit on Java, .Net and analytics, could complicate finishing Project Fusion because it brings the total solution sets to about 66, estimates Dale Hagemeyer, research director at Gartner industry advisory services. '"When Oracle bought Siebel, because it has so many applications, it was like buying the Vanderbilt mansion with 345 rooms," said Hagemeyer. "You can see it on paper, but until you spend the time to visit all 345 rooms and compare the square footage it's difficult to see what you really have."

Project Fusion, Oracle's vision for its next generation of enterprise applications, will fuse numerous code structures to build product suites. The suites will leverage Oracle Fusion Middleware (OFM) and provide access to Java and composite applications built on service-oriented architecture, master data consolidation and grid computing. OFM is a portfolio of software designed to integrate with non-Oracle products and databases across a variety of vendors including IBM, Microsoft and SAP.

Analysts believe SAP is benefiting from the chaos of Oracle attempting to pull the "best of bread" capabilities from applications it acquired. Gartner believes it will be somewhere around 2010 before that's realized.

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