SAP's Top Four Challenges In 2008

SAP is expected to wrap up 2007 reporting double-digit sales growth with revenue very close to -" if not exceeding -- $15 billion. The software giant also has taken some aggressive steps this year to grow its business, from acquiring Business Objects and several other companies to making its first broad foray into the realm of on-demand software.

But SAP is closing out 2007 with some unfinished business that will carry over into 2008. Here are four challenges that will top SAP's "To Do" list in the new year:

1. Integrate Business Objects - But Not Too Much

SAP expects to complete its $6.8 billion acquisition of business intelligence software vendor Business Objects sometime early in 2008. But SAP must carefully balance integrating Business Objects technology with its own applications and NetWeaver application integration system without compromising Business Objects' platform independence.

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One of the biggest selling points of BI tools from independent vendors such as Business Objects, Cognos and others is that they work with databases, applications and other software from many suppliers. But those companies are disappearing in a wave of consolidation -- Oracle acquiring Hyperion, SAP buying Business Objects and IBM snapping up Cognos -- and the worry is that BI capabilities could become just another layer within the big companies' software stacks. That could limit solution providers' ability to offer their customers a choice of BI products.

SAP has vowed to operate Business Objects as a separate subsidiary. At this week's SAP Influencer Summit in Boston, however, SAP CEO Henning Kagermann said he has always held the view that BI wasn't destined to be a separate software product category, but should be tightly integrated with transaction processing systems that generate the data that BI software analyzes.

Kagermann is correct in that tight integration of BI tools with operational systems will make it easier to analyze data in near-real time and reduce the amount of integration development work solution providers or their customers have to do. But tying Business Objects too closely to SAP could ultimately limit the BI software's appeal outside of the SAP ecosystem.

2. Embrace The Channel For SAP Business ByDesign

In September SAP debuted its SAP Business ByDesign on-demand application set for mid-market customers. At the time SAP touted the product's capabilities and said as many as 1,000 channel partners would eventually account for the majority of Business ByDesign sales.

But SAP is being very cautious in rolling out Business ByDesign. This week Kagermann said the product is solid, but the company wants to be sure it has all the necessary services and support capabilities in place before making the on-demand software generally available.

Currently there are "only a small number" of paying customers for Business ByDesign, Kagermann said. And while the company is talking to its 1,000 Business All-in-One and 1,300 BusinessOne resellers about carrying Business ByDesign, there are only 22 solution providers in the Business ByDesign channel program, said Hans-Peter Klaey, SAP president of small and midsize enterprises.

What's more, channel partners will only be allowed to act as sales agents for the Business ByDesign applications for the immediate future, earning referral fees in the process, with SAP handling all hosting and post-sales service chores, Kagermann and Klaey said. Eventually channel partners will be allowed to host the software, but just when hasn't been determined. And Kagermann said service opportunities will be limited because SAP won't allow modification of the application set.

SAP is right to be cautious not to push the Business ByDesign product out too quickly. To this day some current and former BusinessOne resellers complain that they were encouraged to sell that software before it was fully functional and paid a high price with unhappy customers. But it sounds like the cautious approach with Business ByDesign isn't due to the technology, but instead with everything that surrounds the product such as support and services. SAP would do well to tap into the expertise of its channel partners as much as possible while it's building the market for Business ByDesign, rather than waiting until the company thinks it has all the pieces in place.

Next: Fix Its TomorrowNow Mess

3. Fix Its TomorrowNow Mess

SAP's acquisition of third-party application support company TomorrowNow in January 2005 certainly seemed to make sense at the time. Coming on the heels of Oracle's $10.3 billion PeopleSoft acquisition, owning a company that provided support services for PeopleSoft and JD Edwards software could help bring disaffected owners of those applications into the SAP orbit "- or so the thinking went.

But TomorrowNow has become more of a liability than an asset. Earlier this year Oracle sued SAP claiming TomorrowNow employees posed as Oracle customers to illegally acquire Oracle software and support materials. SAP has acknowledged that "some inappropriate downloads of [Oracle] fixes and support documents" occurred at TomorrowNow, but denies SAP had access to the intellectual property. The suit is ongoing and Oracle and SAP are due to meet in court in February.

Last month SAP announced that top TomorrowNow executives, including CEO Andrew Nelson, had resigned and that SAP was considering its options, including selling off the company.

It's hard to envision any business engaging with TomorrowNow for its services when the legality of its business practices have been called into question. TomorrowNow has become a liability for SAP and the software giant must take steps to remove the distraction. That means either selling the subsidiary or even shutting it down and in some way resolving the Oracle lawsuit.

4. Convince ERP Application Customers To Upgrade To ERP 6.0

While it's been more than 18 months since SAP debuted SAP ERP 6.0 (previously known as MySAP 2005), only about 6,000 of the company's 33,000 or so ERP software customers have upgraded to the latest version of the company's flagship product. The majority remain on the aging R/3 generation of applications or MySAP ERP 2004.

SAP's strategy is to maintain ERP 6.0 as the core of its application set until 2010, delivering new functionality and improvements through enhancement packages that customers implement as needed instead of requiring total system upgrades. But those enhancement packages only work if customers have the ERP 6.0 foundation.

Upgrading from an older version of SAP's applications to the new release isn't trivial, especially for businesses with large-scale deployments. Analysts say some customers have weighed the costs and hassle of upgrading against the gains in new functionality and are opting to sit tight for the moment.

There's no easy answer here, but SAP must find a way to convince its customer base that it's time to move up. It must do a better job of stating the value proposition of upgrading to ERP 6.0, somehow helping to defray upgrade costs and working with systems integrators and other channel partners to reduce the pain of upgrading are all possible steps.