Software Licensing & Master Service Agreements : Chicago Software Licensing Lawyer & Attorney : Sam Conforti Law Firm : Master Service Agreements, Negotiations, Outsourcing : Cook County, Illinois

SAP has set the goal of increasing revenue from 12.5 billion EUROS to 20 billion EUROS annually by 2015. First we have to start out with Full Disclosure: I worked for SAP negotiating and drafting contracts in the late 90’s and early 2000’s. I learned my trade there dealing with Fortune 500’s and also the SME market space. Additionally, as a sole practitioner, my largest client is a National SAP Channel Partner for a global entity.  Needless to say, I am very familiar with the corporate culture and I also have a bias toward increasing revenues, because as the saying goes a rising tide raises all ships.

Dan Woods, chief technology officer and editor of CITO Research, a firm focused on the needs of CTOs and CIOs, reports in his article in FORBES entitled How SAP is Betting Its Growth on Partnerships that SAP will need to change its approach to its partners and be more open to working with them and allowing these partners to share in the revenue potential from new sales and new innovations as it had in the past with system integrators. Woods refers to the old corporate culture as “historically insular”. As the person whose duties included acting as the primary contract support for SAP’s national network of VARs (these VARs were originally referred to as CBS ‘Certified Business Solutions' providers, revised to the SMB market place, finally revised to the SME market space) and now as outside counsel to a large SAP Channel Partner, I have been on both sides of the table. I can attest to Woods’ description as being accurate.

Woods refers to an interview given by Eric Duffaut, President SAP Global Ecosystem and Channels. Duffaut came to SAP from Oracle, where he spent 15 years working in the SME Channel. Upon arrival to SAP in 2005, Duffaut headed up the SME market for EMEA (Europe, Middle East, Asia). In the interview Duffaut states that while the industry average is 40%, that in 2005 only 7% of sales were through Channel partners. This increased to 20% by 2010 and 25% through the second quarter of 2011.

Duffaut states that the new strategy to expand revenue by utilizing its Channel partners is centered on a 3 prong approach:

1.       Consolidation of all partner activity under Duffaut’s leadership (developments, sales, and service).

2.       Expansion of its co-development program. ERP is no longer the sole product, although it remains the central focus. Business Objects and the Sybase mobility capability are two other platforms to build upon. The new direction encompasses new solutions for these platforms, through co-developments with partners.

3.       Increase the availability of competent service integrators and execute new engagements and transfer these to the partners (i.e. “SAP will become much more like an incubator for new service offerings …”).

The cultural shift for SAP will be tough. The two obstacles Woods points to are:

a.       SAP’s product standards for the resale of SAP products and also to allow SAP to sell others products are extremely rigorous, and

b.      The certification process to become an SAP Partner is onerous and arduous to say the least.

Woods lays out the salient issue facing Duffaut quiet succinctly. SAP can succeed in growing its revenue through its Channel partners by allowing its Channel Partners to keep more of the expanding revenue that is generated. As Woods states it, “SAP will have to get good at making its partners rich.”

Time will tell …..

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There is a revolution of sorts going on in the computing world. I do not want to over-dramatize this fact; however I am reminded of author and pamphleteer Thomas Pain who wrote:

• “Lead, follow, or get out of the way”
• “These are the times that try men’s souls”
• “The harder the conflict, the more glorious the triumph” (yes, this is drama)

Why all the drama? Well, I recommend you read Tien Tzuo’s article entitled The Global Transformation to On-Demand. Tzuo’s subtitle may aid in understanding my reference to the drama (i.e. “Why the world is moving to subscriptions and what it means for businesses”). This article should be read in conjunction with Daniel Druker’s article Different is hard: SAP - (Not Too Much) Business by Design.

Let’s start with Tzuo’s rather succinct history of the change in the paradigm from on-premises computing to subscription buying via the internet. Tzuo was on the cusp of the wave that brought in the SaaS business model. The guiding ideology for Tzuo and his contemporaries regarding SaaS is that

“ … software belonged on the Internet, not on a CD, and in that process it is transformed from a product that you buy to a service that you subscribe to.”

Tzuo’s analysis of why the trend towards subscriptions (i.e. On Demand or SaaS) rather than the traditional purchase or licensing model covers a broader spectrum than just the software industry. He explains that the internet has transformed the way people buy. The purchaser now has more options from more packages and as their needs change so can their subscription. Buyer’s remorse is eliminated.

“no large up front investment, no ongoing maintenance costs or hassles, no insurance costs – just pay for how much you use.”

Tzuo points out that there are significant differences between the processes for managing a subscription business versus the traditional product for sale business. These differences are:

• The ability to offer your product in parts, as well as full packages
• Invoicing and payment terms must be able to track the flexibility in the product offerings
• There are constant changes in the subscription and the revenue collection process becomes convoluted
• The metrics for this type of business differ from the usual billing metrics and so the ability to measure success and redirect efforts must adapt

The difficulties in managing a subscription business can be demonstrated by reference to the current situation at SAP and its announced delays and reduction in investment in its hoped for SaaS offering, Business by Design. Daniel Druker presents an in-depth analysis to the possible problems facing SAP. He lays out the trials and tribulations that a mega-corporation must face when trying to adapt to the changes in the industry. Instead of the purported technical issues facing this new service such as the “Mega-tenancy” model that a company the size of SAP is trying to implement, Druker sees the problem as the age-old issue of resistance to change. He labels this the “innovators dilemma”. The best and the brightest personnel shun the new innovation, especially if the promise of returns is far removed from the fundamental business model. It almost seems as though the company sets up its own barriers. A matrix organization, such as SAP, organized by country or region, is more inclined to focus on hitting their sales goals for the quarter or month and less likely to assist in the latest project.

In addition to the innovators dilemma, Druker also includes a discussion much like Tzuo’s differences between a subscription run business and that of the traditional product driven business model. Simply put, the business processes needed to run a subscription business do not yet exist, and when these new business processes do come on line, they will be incompatible with the existing business processes for a large enterprise software company.

Druker concludes by stating that, “SAP is an amazing, well run company”. It remains to be seen how well they will manage this latest innovation in the computing world.

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