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SAP's McDermott on ESA strategy, Oracle, part 1

In the first half of a two-part interview, SAP America CEO Bill McDermott discusses SAP's Enterprise Services Architecture strategy and its plan for competing with Oracle.

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BOSTON -- SAP America CEO Bill McDermott is excited by the double-digit growth he's been reporting to the company's Walldorf, Germany, headquarters.

And there's no end to that growth, McDermott said. SAP's new channel partner strategy aimed at small and midsized businesses, and the company's plans to transition its software to be services-oriented architecture-enabled by 2007 will help solidify SAP's grip on the U.S. market, he said.

McDermott also doesn't hold back on his criticism of rival Oracle Corp., which plans to integrate the technologies it acquired from PeopleSoft and J.D. Edwards into a new software suite.

In the first part of a two-part interview with and, McDermott discusses how SAP is educating customers and vendor partners about its ESA strategy and how SAP is preparing to defeat Oracle.

The technology that [Oracle] picked up is going to be more of a problem for them than a benefit. They're going to spend the next five years cleaning up their house.
Bill McDermott,
CEO, SAP America

The theme of this conference seems to be transforming the NetWeaver application and integration platform to the Enterprise Services Architecture. What is SAP's strategy as it shifts to this new architecture?
Some companies are talking about acquisitions, management moves and fusing platforms between now and 2010. What we're doing is focusing on enabling every customer to be a best run business. In regard to the Enterprise Services Architecture, the magic of it is, you take all the best benefits of the [mySAP Business Suite] and NetWeaver and create this platform where you run business applications into the platform, whether they are created by SAP, a partner or even a customer. You are going to see the whole ecosystem build more and more innovation on top of the platform because more and more customers are realizing that as markets consolidate and mature, the big move now is not to acquire, merge or grow through non-adjacent delivery systems or non-adjacent companies, it's to acquire core companies so you nurture your distribution channel, [which keeps] your customers loyal. You keep that channel very much intact; it's really the asset of your company. How are your partners responding to this new architecture?
First, they need to understand what the strategy is and we've done a lot of heavy lifting in educating them. For example, about a month ago we had quite a reception of our partners out in Palo Alto, Calif., where we had the executive board of SAP out there, and we educated them on the strategy; they were extremely receptive to it. At Sapphire you're going to see multiple announcements made from companies that are going to adopt the Enterprise Services Architecture strategy from SAP. They're going to be partnering with SAP, so together we go to market and better serve customers' needs. What kind of investment do companies need to make to actually adopt your strategy?
It will vary by company and what exactly they're trying to achieve, but no company would do it if they didn't have a return on investment business case that would make sense for them. Whatever development efforts they put into it, either on their own or jointly with us, would obviously need to have a positive ROI.

I think a lot of partners look at our ecosystem as it upgrades and as it changes as a great opportunity to increase their revenues. But we've made a bold move into the midmarket and the small and medium-sized business space. We built a whole business division around the midmarket where we go direct to our midmarket customers. We also built out a small and medium-sized business channel where we are going through a reseller channel to get to small companies, and we're bringing the brand down market. As you bring the brand down market, are you finding SAP competing directly with Microsoft in the SMB space?
I personally believe -- and I believe SAP believes -- that Microsoft is a terrific company, and we have an excellent relationship with them, a very strong partnership with them. The Mendocino relationship that we're announcing, in my opinion, is one of the biggest announcements in IT in a while. To take the interoperability between Microsoft Office and SAP business applications -- to improve the productivity of the worker that uses Office each and every day -- is a major breakthrough.

We have won customers based upon this vision and this joint development plan around Mendocino between Microsoft and SAP. Microsoft is a very important partner; they are also an excellent customer. They run their business on SAP and, in the low end of the space, we do see them. Primarily, in the less than 100 million, 150 million established. So I think of Microsoft as a 90% partner and 10% competitor, and we're not losing any sleep about what's going on down there, because if it wasn't them it would be someone else. What do you make of Oracle's strategy to offer a middleware package aimed at SAP customers running NetWeaver?
Their strategy is so flawed. It's project confusion, not project fusion. They're a database company and they're trying to approach business applications from a database model. I think they have a flawed strategy, poor application sales, no domain expertise around business processes, no industry competence or capability, and irrelevance to customers at the enterprise level.

Essentially, they're shooting themselves in the foot with $11 billion in acquisition costs, negative 48% year over year revenue in business applications in the United States, a loss of 4 points of market share last quarter. All this talk with regard to NetWeaver, I think is just damaging their credibility even more, if that is even possible. You are very critical of Oracle, but wouldn't you agree that it picked up valuable technology and expertise through its acquisitions?
The technology that they picked up is going to be more of a problem for them than a benefit. They're going to spend the next five years cleaning up their house. I am critical of Oracle in the business software space. I think they have a good database; I think they're a database company.

If you have 85% of revenue coming from your database, only 15% of revenue coming from apps, and the apps revenue you're getting is completely unprofitable, you've essentially gone away from your core. This is a world where things are maturing and consolidating and generally the successful companies focus on their core competence, their core business. I think this foray into business applications is a risky scheme.

This market is moving quick. It's deciding fast, and I think the market will determine who wins and who loses by mid-2006.

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