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SAP Global Operations CEO Cites Steep Drop In Customer Buying

SAP will boost sales with new software packages to help businesses weather the tough economy, McDermott said, while predicting Oracle's "Frankenstein operation" will scare off software buyers.
At SAP, the impact of the financial markets crisis was almost immediate. "In the second half of September, we saw a steep drop in customer buying," said SAP Global Operations CEO Bill McDermott in an interview Tuesday. The tightening credit market has created a "liquidity crisis" for small and midsize businesses across the globe, and that has fewer of them buying software. Large customer accounts, McDermott said, are largely unchanged.

These developments prompted SAP yesterday to take a sales forecast that it made in July -- of revenue growth of between 24% and 27% for the fiscal year ending Dec. 31 -- and throw it out the window. But rather than revise its sales expectations for the year, the world's largest business application vendor decided not to make any prediction at all, citing uncertainty about the economy's impact on IT buying in the current quarter.

SAP didn't have a horrible fiscal quarter ended Sept. 30; its net income of $495 million was down 5% from the comparable quarter last year on revenue of $3.52 billion, up 14%. And despite slowing sales among small and midsize businesses, SAP added 2,000 new customers in the quarter, McDermott said. But SAP is proceeding as if things could get worse, with plans to cut $255 million from operations costs in the current quarter.

SAP also plans, in some ways, to get back to its roots in licensed software applications and distance itself from the hosted computing business, handing more of its hosting relationships over to business partners such as Accenture, AT&T, and British Telecom, McDermott said. It also will continue to move slowly with its software as a service offering -- the Business ByDesign ERP subscription software service -- which McDermott characterized as still in the pilot stage with a small number of customers. It doesn't plan to run the data centers long-term for that SaaS product, either -- it wants its partners to do that job.

It's not that SAP doesn't support the trend toward cloud computing -- it just doesn't see how it can operate a so-called cloud and bring good returns to shareholders. "We're saying... let's let partners do that, as it's their core competency and core business," McDermott said. "The more hosting we do, the more it dilutes our margins. For [partners], it's perfect, because it's in line with the margin model they have."

McDermott maintained that Business ByDesign is "strategic" to the company, and a broader rollout is planned for 2009. But it wasn't ready for prime time this year. "We learned customers want more functionality and things we need to build into the product that we didn't have in the pilot," McDermott said.

SAP, meanwhile, is preparing to announce several software-and-services packages culled together from existing applications that are designed to help customers weather a tough economy -- all offered with zero percent financing. For example, one package includes software and services that help businesses accelerate cash flow, better manage cash and fluctuations in currency and commodity pricing, and assess financial risks. There also will be packages for managing a workforce in a tough economy, and ones for business planning and consolidation, energy management, and IT resource optimization, among others.

McDermott has other plans for positioning SAP in the market against competitors. SAP views its customer relationship management software offerings as "strategic," with a focus on helping companies up-sell, cross-sell, and develop effective marketing campaigns, compared with the "tactical" offerings of and others that focus on the basics such as contact management.

He also took a shot at staunch competitor Oracle, predicting it will be the "big loser" in enterprise resource planning sales in this economy because of its heavy focus on software acquisition in recent years. "The Frankenstein operation they put together is being milked right now for recurring revenue on maintenance," he said.

"They're not integrated, and can't lower customer costs with end-to-end processes with all that code. They won't be sought after in a down economy because anyone who invests in ERP wants to lower risk."

Meanwhile, businesses will delay purchases on snazzy new mobile phones and upgraded desktops before they put off buying software that can help them run more effective businesses, McDermott said.

And if they need additional enticement, there's always that zero-percent financing offering from SAP.

One thing is certain: when the world's largest ERP vendor withdraws sales forecasts and dangles zero percent financing for its customers, it's clearly not business as usual in the business software market.

This article was edited Oct. 31 to correctly identify Bill McDermott's title.