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SAP's Software-Only Innovation Challenge

The software strategy is making a lot of sense as an innovative wedge into the enterprise. But the real challenge lies ahead in delivering long-term value.

SAP has spent several years and several billion dollars trying to formulate a strategy that propels it ahead of an unprecedented set of market forces, and this year's TechEd helped set the stage for a 2012 that's poised to be the year SAP finally crosses the innovation Rubicon.

Of course, as students of history will tell you, crossing the Rubicon was only the beginning of the journey that made an emperor out of the general who led his army over the forbidden river. SAP faces a similar journey: The real test will be in seeing how well the company can marshal its technology, field sales efforts, and partner ecosystem into a fighting force ready for historic conquest. By contrast, showcasing a growing palette of innovation--which SAP did in spades this week at TechEd--is the easy part.

More and more SAP's battle is truly epic, at least in the otherwise mundane world of technology, precisely because of the massive bets its board has laid on the table. As the sole, standalone enterprise software giant, SAP is fighting perhaps its greatest battle against market perceptions that bundling hardware and services is the only way to reap the margins and profitability, which Wall Street believes are required of successful technology companies.

Those market perceptions have seen Oracle and its hardware focus become the standard of excellence for the sector, despite massive questions about the role of innovation at Oracle. Those perceptions also have lead Hewlett-Packard to embrace software and services, and Dell to embrace services as adjuncts to their respective innovation Rubicons.

Meanwhile, SAP has chosen largely to stick with its software-only strategy, though more of its offering are requiring a level of services that's making the concept of out-of-the-box functionality even more mythological than ever. Importantly, SAP's software-inter-pares focus has made it the company to watch as Oracle prepares for its OpenWorld user conference and a quarterly results call that will put a spotlight on whether it can make good on Oracle president Safra Catz's promise to get the company back to software-like margins, now that Sun has been fully digested.

The problem for Oracle is that SAP's software strategy is making a lot of sense as an innovative wedge into the enterprise, one that has the potential to challenge the bundling and hardware-based low TCO strategy that's at the core of the Oracle way. SAP's challenge is to prove that the advantages of its software innovation strategy provide a better long-term value than Oracle's dual software rollup and Exa-twins strategy.

The potential advantages to SAP's strategy were out in force at TechEd, from the gamification theme to the focus on mobility to the HANA drumbeat (actually drum and bugle corps is a better description) to the continual progress on cloud-based analytics. In conversations with customers and partners, it was clear that the top-level message that SAP is innovating in areas that are near and dear to the market's heart was being heard in all the right quarters.

The mobility and HANA stories were most impressive to me. SAP has made it clear that its reading of the enterprise tea leaves have shown that the mobile experience is the design center for the enterprise of the future. I spent the first day at TechEd asking SAP execs of all stripes about this, and the answer was consistent: If you're a customer or partner and want to develop a new enterprise app, your design starts with the mobile user experience. That app can use HANA, pull data from the Business Suite, and be as transactional or analytical as you'd like, but if it doesn't look good on an iPad, it's back to the drawing board.

This is consistent with where other market leaders and innovators are headed, and it also shows the recognition that even the most modern SAP Business Suite user experience pales usability-wise when compared with the standard mobile app: Which of course makes SAP's Sybase investment make all the more sense. That was the observation number two from TechEd: The DNA strands from Sybase are increasingly tightly interwoven with SAP's core DNA, and the evolutionary advantages are starting to show.

Meanwhile, TechEd was HANA's own Rubicon. SAP announced that the dream of HANA as an OLTP engine for the Business Suite is now within reach, and that the company is actively working to move several thousand SAP Business Warehouse customers off their Oracle RDBMS platforms and onto HANA. While many of these customers have to run the gauntlet of Oracle's contract lawyers in order exit their license agreements without incurring huge penalties, SAP is busily preparing a business case for BW customers that will make it cost-effective for them to make the shift.

The prospect that SAP could be presenting these customers with a faster, better, and cheaper way to run their data warehouses as compared with Oracle should rattle a few cages over at Oracle. And with HANA-ready apps and services, HANA as a platform play in the cloud, and other parts of the SAP in-memory strategy coming to fruition, it's no wonder that SAP is touting HANA as the fastest growing pipeline for an SAP product in the company's history. (OK, so the bar might be set a little low, it's still an impressive claim.)

This prospect of a major HANA pipeline--and that's before SAP taps the multi-billion dollar BW replacement market--was a major reason for SAP's success in its last quarter, a point emphasized by SAP co-CEO Bill McDermott when I spoke to him about the quarter in July.

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