SAP's Ugly (ByDesign) Baby Gets Prettier

Last October, SAP co-CEO Bill McDermott visited InformationWeek's office in Manhattan and told us that SAP was ready to "unleash the tiger and go for the SAP Cloud in a big way." About six weeks later, the company announced its $3.4 billion acquisition of software-as-a-service human capital management (HCM) vendor SuccessFactors.

With that deal finalized in February, SuccessFactors' contribution explains nearly all of the 1,200% year-over-year increase in cloud subscription and support revenues SAP reported with its second-quarter earnings last week. (SAP also has the $4.3 billion acquisition of Ariba in the regulatory approval stage, but that deal is really more about supply chain management than competing with the likes of Salesforce.com.) So we asked McDermott, in a phone call after last week's earnings press conference, "Is the tiger fully unleashed, or are there other big cloud moves likely from SAP?"

"The big move was getting SuccessFactors because we needed the [cloud] DNA and the leadership," responded McDermott. "It just wasn't in the company. We had to get an outsider to tell us, 'your baby is not that great looking.'"

The baby in question was SAP Business ByDesign and the larger SAP cloud strategy. The truth teller with cloud-computing genes is Lars Dalgaard, SuccessFactors' CEO and now the SAP executive board member charged with running the company's entire cloud business.

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The second move, added McDermott, was to forge a better cloud strategy, with services to help potential software buyers manage their employees, sales, suppliers, and money. The employees part is addressed by the SuccessFactors HCM suite, sales by the SAP Sales OnDemand app, suppliers by the pending Ariba acquisition, and money by a more capable Business ByDesign that McDermott said is becoming "more market relevant."

McDermott predicted that SAP will be a 2 billion-euro-a -year supplier of cloud software services by 2015, "so for now, we're not in active pursuit [of more acquisitions]."

SAP announced a number of incremental improvements to Business ByDesign last week. For one thing, currency and regulatory localization and language support has been extended to Denmark, Italy, The Netherlands, and Spain, bringing the total number of countries supported to 14. Austria, Canada, China, France, Germany, India, Mexico, Switzerland, the U.K., and the U.S. were already supported. SAP has also released a software development kit for Business ByDesign through which partners can develop and deliver industry-focused and "micro-vertical" products, such as ByDesign-based applications for maintenance contractors or heavy equipment suppliers. Finally, the suite has been put on the same quarterly update cycle as the SuccessFactors suite, so SAP will deliver customer-requested features and improvements more often.

ByDesign has certainly gone through its ugly stages growing up. The worst was the redesign it was subjected to in 2008 after less than a year on the market. The redesign was mostly about the infrastructure behind the service, not the functionality of the apps themselves. SAP had little experience delivering apps on demand, and its architecture and data-center planning proved woefully inadequate. SAP co-CEO Jim Hagemann-Snabe has said that the redesign effort that delayed ByDesign's general release until 2010 lowered the cost of delivering the suite by 24 times. SAP essentially learned the hard way, very publically.

Even after ByDesign's general release, SAP set a cautious goal of reaching 1,000 customers by the end of 2011. Meanwhile, SaaS vendors were steadily racking up double-digit gains and Salesforce.com, for one, had scaled up to serve tens of thousands of customers.

SAP met its measly 1,000-customer goal last year, but at the company's annual Sapphire event in May, Dalgaard (after three months in charge) told a press and analyst gathering that Business ByDesign offered sound technology but that it "hadn't been marketed right or positioned right. There isn't much about it that has gone right in terms of go-to-market."

In particular, Dalgaard said he wanted the option to offer smaller services aimed at one discrete problem, such as financial management, as well as a complete suite. That's the approach of SuccessFactors' BizX, which is offered as a complete suite, or as the individual, focused component services for employee performance reviews and goal setting, recruiting, variable pay and compensation management, succession and workforce planning, and social collaboration. Flash forward to last week and McDermott alluding to the upcoming Financials OnDemand release (first announced at Sapphire).

McDermott also touted Business ByDesign's largest deal to date, a $14.5 million, 8,500-employee deal with NWS Trade & Investment in which he says SAP beat Oracle and Workday. The deal with the Australian public agency, roughly equivalent to the state of New South Wales' department of commerce, is heavily focused on the Business ByDesign financials and payroll functionality, but the agency is using the complete suite, according to Chris Horak, global VP cloud marketing at SAP.

When Financials OnDemand is released, sometime in the fourth quarter, many customers will likely use it independently or in combination with services from the SuccessFactors suite. SAP originally envisioned financials exclusively as the core and usual starting point for those using ByDesign. The thinking has evolved toward greater flexibility.

"If you have the Financials module working with Employee Central, the core module of SuccessFactors, all of a sudden you have something that looks really good compared to Workday," said Horak, noting that SuccessFactors couldn't previously offer a financials component. Workday offers cloud-based human resources and financials software.

Ugly babies and gangly teenagers often grow into their faces and bodies. McDermott said the efforts to improve ByDesign's performance and its user interface and to simplify the platform are now paying off. "It's very nice now, it's running well, and it's winning," he added, sounding ever more like a proud papa.