InformationWeek

At its European user conference in Berlin last week, SAP rejected its bias toward internally developed products and said it will partner with other software developers to fill gaps in its product line. "Application software is exploding," says SAP co-chairman, CEO, and co-founder Hasso Plattner. "No matter what we do, we'll never be able to cover everything."

SAP plans to invest up to $1 billion in software partners this year and will incorporate their products into mySAP .com, Plattner says. "They're acknowledging market reality," says Bruce Richardson, a VP at AMR Research.

Partnering is one significant change in strategy. Here's another: SAP signaled that it's moving away from being an operator of electronic marketplaces in favor of being a platform provider.

Despite the efforts of its 6,000 highly touted developers, SAP has been plagued by delays and functional shortcomings in several mySAP.com components, including customer-relationship management, supply-chain management, and Internet procurement applications. Last month's agreement to resell call-center software from Clarify Inc. was intended to bolster its CRM capabilities.

Where does SAP turn next? Speculation among analysts and conference attendees was that SAP may be working out a deal with E-marketplace software vendor Commerce One Inc. SAP officials wouldn't confirm the deal, but they came close. "We're looking at Commerce One as a marketplace provider we want to have a relationship with," Plattner says. SAP already has a small stake in Commerce One.

The likeliest scenario, analysts say, would be a joint relationship that combines Commerce One's trading platform and SAP's back-office integration and supply-chain management functions. The deal would better position both vendors against an existing E-marketplace alliance that includes Ariba, IBM, and i2 Technologies.

But the strategy has its risks. Plattner says SAP will continue to compete with its partners where appropriate, which means it could lose business to them. "It's a schizophrenic message," Richardson says. And bringing in best-of-breed partners will force SAP to compromise the business-process integration that has always been its strong point.

The vendor says it will try to shield customers from added complexity by pre-integrating its partners' components, using the Extensible Markup Language and its own set of published APIs. But at least one analyst says end-to-end integration of enterprise software is no longer a top requirement for some businesses, which could bode well for SAP's new partnering philosophy. "That's why SAP's outward-facing applications are stalled-if you're in a hurry, you want functionality and you go with best of breed," says Forrester Research's Laurie Orlov.

Not all companies agree. MySAP .com customer Osram Sylvania has used R/3 for ERP for several years and is now implementing the Internet Sales component for the strong ties it will have to SAP's order-management and accounting applications. "Before SAP, we had all kinds of packages interconnecting. It was a nightmare," says Mehrdad Laghaeian, VP of IT at the lighting manufacturer. "From a business standpoint, the accuracy and timeliness of the data is of utmost importance." And you can't get that, he says, without seamless integration.

SAP is also changing its strategy in the online marketplaces arena. After declaring earlier this year that it planned at least 10 joint ventures with industry leaders to build and brand online marketplaces, SAP now favors selling technology to marketplaces in which it has little or no stake. "We are a software company; we deliver software to marketplaces," says Plattner. "The idea that we can run marketplaces that we own 50% of won't work. We have some marketplaces where we have made an investment. That has changed."

SAP was smarting from being left out of the automotive trading exchange formed by DaimlerChrysler, Ford, and General Motors-all SAP customers. Also, marketplace deals SAP announced earlier this year with German pharmaceutical companies Bayer and BASF, and with Norwegian Stat Oil, have been scaled back or scrapped altogether.

There were drawbacks to that approach anyway, Plattner now says, because if SAP aligned with only one marketplace per industry, it couldn't provide software to competing exchanges. He also questions the sustainability of marketplace business models that charge transaction fees. "It's unthinkable that a marketplace could profit at the expense of the companies that create it," he says.

SAP sees more opportunity in providing software to help companies set up private exchanges for the exclusive use of their partners. "That's where I see the biggest market," Plattner says, "because only close trading partners will share strategic data."

SAP Markets, a spin-off focused on developing marketplace technology, has 200 employees working on expanding the SAP marketplace platform to support dynamic pricing, auctioning, and comparison shopping. It has also won a handful of new customers, mostly outside the United States. To bolster U.S. sales, the new CEO of SAP America, Wolfgang Kemna, plans to streamline operations. "We have up to seven layers in the managerial organization," he says. "I would like to adjust that."

But critics say SAP's biggest challenge is communication-it doesn't seem to be articulating the mySAP .com message clearly. "SAP is making the right moves," says AMR Research analyst John Hagerty. But its marketing is "convoluted and fragmented."