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McDermott: No fear of Oracle as SAP looks ahead with CRM, ESA

NEWTOWN SQUARE, Pa. -- SAP America chief Bill McDermott is always on the run. After meeting with potential clients he gave a keynote recently at a Chicago business conference and quickly jetted off to Germany before SAP released its third quarter financial results. He's downright giddy over what appears to be a continued chipping away at archrival Oracle's application market share in the United States and SAP's overall 20% growth over the same period last quarter. Now the CEO looks to make good on SAP's promise to service-enable its entire application suite by 2007 and plans to bolster its market presence among small and midsized businesses. recently interviewed McDermott while visiting the SAP U.S. headquarters in Philadelphia. He addressed Oracle's OffSAP program, possible plans for a hosted CRM product and SAP's challenges in the midmarket.

Does Oracle's OffSAP program pose a threat to SAP right now? Can you talk about what you are seeing in terms of uptake in customers interested in SAP via the Safe Passage program?
It's hard to take Oracle too seriously in the applications space. Obviously, they are a database company, and a quality database company in terms of their market leading position. But in terms of applications, one just needs to look at the scoreboard to realize that this was a foray into applications that is apparently going to cost their shareholders dearly.

They are losing revenue, carrying $20 billion in acquisition costs on their balance sheet, and they're losing market share at a very fast pace. So they obviously have their work cut out for them. Oracle's Siebel acquisition makes it an even bigger threat to SAP in the CRM market, doesn't it?
The threat is less so now than it ever was before. Oracle is making another risky bet on a company that has been declining for some time. Siebel lost their leadership position in CRM as measured by license revenue sales in 2003.

was after the first quarter in 2003 that SAP became No. 1. And they have consistently declined in revenues, consistently declined in market share. And obviously their shareholder price is less. Now that they are no longer separate entities and the world understands that they too will be tucked into the Oracle portfolio is a less focused model. You have the complexity of integration with these two companies. The disparate cultures and the longstanding history of how well we know they didn't get along over many, many years.

SAP's Bill McDermott:

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With Oracle losing so much in applications, they are now getting hurt in their core business. Their database business only grew 1% in last quarter. They're seeing tremendous competition from both Microsoft and IBM, so they really have a war on three fronts. One is IBM, two is Microsoft, and three is SAP and applications. What do you have to say about Oracle rolling out its SOA middleware? Oracle said that most of its middleware has been services-enabled and SAP is playing catch up to that by inventing its enterprise services architecture (ESA) strategy.
They also said 11i was going to be the next coming and we all know how well that didn't do. So the early quotes from the CEO at that time were proven to be false and obviously failed abysmally. They seem to be better at saying things than doing things.

One aspect of the conversation is middleware and [Oracle's] is well known in terms of its deficiencies. To begin with, they have disparate application platforms from multiple separate companies. So they're carrying multiple sets of code, multiple sets of companies and company cultures. Clients are looking for a solution that is tailored for their industry, that is scaled for their business and that's right for their future. In terms of the industry, SAP has 29 industry verticals that we focus on. Our solutions are custom tailored for those industries with out-of-the-box best practices representative of the best ran businesses in the world.

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You recently talked publicly about SAP's organic growth strategy. But you also hinted at smaller, targeted acquisitions in the future. Can you give an example of areas where SAP might need to make acquisitions, such as in the service verticals, for example?
We have been focusing on industry verticals for 33 years, so if we see technology in the millions of dollars, certainly not billions of dollars, that can give our customers more functionality and therefore we can actually buy it faster than we can build it. We're open to those [type of] conversations.

It would be true for, as you pointed out, a certain horizontal piece of the technology market. Again, if you can buy it faster than you can build it, these businesses are cash positive and profitable. They're on modern platforms that are easily integrated into the SAP architecture. It's always a viable conversation with a successful company like SAP to look at those things. It's in line with what we've done all along. We often hear from customers that ESA is adding a lot of complexity to integration. Do you have any concrete steps to ease the pain in terms of integration?
Upward of 80% of a company's IT budgets are spent maintaining or building legacy systems, and that is quite sad. They're tied up in yesterday's news and in some cases don't have enough free cash flow to innovate. So I think from a stepping-stone standpoint, you have to have an integrated suite of applications.

Secondly, the success of NetWeaver, with a few thousand referenced clients using more than a couple of components of NetWeaver, is the beginning stages of truly integrating the landscape for IT applications. With that combined with SAP's expertise on consulting and partner ecosystem, I think we've gone a long way to helping customers navigate through the tough challenges of cleaning up their operations. We've done this for literally thousands of customers. We've heard SAP CEO Henning Kagermann hint at a possible hosted CRM launch. When will we hear more about those plans?
I think the big idea is really having an onramp to business process CRM. How do you create value offerings for clients, where ultimately clients want to integrate their business processes across the enterprise? The Holy Grail is really attaching the supply chain, the warehouse all the way through to the end customer relationship to have a 360-degree view of your business. For some clients, as you point out, they're not ready to make that leap in a single day. So we have very nice hosted offerings today to help clients get started. In that regard, we're always looking for new opportunities to satisfy the customer.

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Site Editor Matt Danielsson and Assistant Editor Lauren Hoyt contributed to this report

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