Should SAP Turn A Little More Inorganic?

SAP has been the goliath of the industry for several decades and despite what detractors may say, the fact of the matter is the SAP still leads in its core area of expertise i.e. business applications. Over the last couple of years, it has continuously shown solid, double digit growth and with roughly 24% of market share in the business applications arena it seems untouchable. Well, at least for the time being.

It’s better to develop than acquire

As a company, SAP has always championed the cause of organic growth. From the very beginning, it has followed the ideals of organic software development and considered it a better option than integrating acquired software capabilities in its software portfolio.

According to Geraldine McBride, president, APAC region, SAP, “We have always cared for IP that creates value for our customers and enhances our existing portfolio of offerings. If there’s a company that is a strategic fit to our overall goal, only then will we pursue it, however, if it doesn’t meet our criteria then there is no reason for us to acquire it. We’d rather do it ourselves and develop those capabilities in-house.”

There are two aspects to this philosophy. First is that SAP treats acquisition as a secondary option and the other, perhaps more important aspect of this is SAP’s innate confidence in its ability to innovate newer products. It is perhaps this self-belief that allows it to think rationally under competitive pressure and react in a more calculated manner.

A clear example of this was seen a few months ago when Oracle purchased business intelligence (BI) vendor Hyperion. A majority of industry watchers around the world expected SAP to respond to Oracle’s move by grabbing a BI specialist of its own. But as we all know that never happened.

However, it doesn’t mean that SAP is completely averse to the idea of acquiring IP that is developed by another vendor or it has never acquired other companies. All it means is that unlike its competitors SAP exercises a higher degree of restraint when it comes to taking the inorganic route.

Is SAP’s organic strategy valid today?

Though we’ve already established SAP’s take on inorganic growth, it is interesting to see if it can actually afford to remain that way for long. Because, the general feeling is that despite its current standing and market leadership, competitors, one in particular (any guesses?) has been making big strides in the business applications space.

Oracle, which has been buying companies left right and centre over the last three years is constantly looking to enter into new markets and even gain entry into SAP customer accounts by purchasing customer bases of already established tech vendors. By doing this, it has closed in on SAP and is challenging its sovereignty.

It is for this reason that many are wondering if SAP should become a little more inorganic in its approach and mellow down on the organic philosophy.

“Though SAP has repeatedly reiterated an organic growth strategy, perhaps it is time now for them to revisit that overall strategy and see if it still is valid in today’s market place,” said Ray Wang, principal analyst, Forrester Research.

However, as far as Oracle’s acquisitions are concerned, Wang views the acquisitions made by Oracle mainly as exercises to expand its customer base, something that SAP doesn’t have to worry about.

Daniel Sholler, research VP, Gartner thinks that though SAP’s predominately organic methodology has worked well up until now and in all probability will continue to work in the future, one can’t completely rule out the possibility of growth through acquisitions for the vendor.

According to him, “There’s no question that while there are growth opportunities in SAP’s traditional markets, these opportunities are becoming more and more segmented. For instance, the scope for selling new ERP systems to the large enterprises in geographies like Europe is relatively small and that market is fairly saturated, but on the other hand there are areas in which they can create solutions that could potentially bring substantial growth. Also, to some extent you have to be clear when you talk about growth because at the end of the day SAP still has a huge customer base and if SAP were to continue to develop offerings and cater to this customer base, it would still prove to be an effective business strategy and generate growth for them. So there is no dearth of avenues for the company, but the real question is how much growth can you get using one of those strategies?”

“For a company that in the recent times has talked about aggressive growth plans, new products, acquiring new customers, entering new geographies and market segments, it seems unlikely that it would rule out other forms of growth strategies including acquisitions,” added Sholler.

Is there room for consolidation?

In light of these arguments if SAP does decide to buy will there be good enough IP for it to buy? Is there any more room for consolidation in the business applications space?

Alan Tong, research manager, Asia/Pacific Enterprise Applications Research, IDC thinks that the current market does present scope consolidation.

“There is definitely room for further consolidation with possibly global vendors focusing on niche solution providers that can add value to the vendors’ product suite or at the regional/local providers as a strategic move for market presence,” Tong said.

Gartner’s Sholler concurs with Tong’s views and thinks that there will be a lot of consolidation done through acquisition in the coming months, but it’s not just SAP or Oracle that will make the plays.

“While there’s room for consolidation in the business applications space, one mustn’t only think about SAP and Oracle. There are lots of other companies that are in the space in one form or the other and each of these potential acquirers has a very different viewpoint of which markets segments it is going to go after or how it is going to adjust to the needs of those segments. So I think we are at a point where there is a fair amount of competition and in all probability we will see acquisitions done on a segment-by-segment basis wherein these players will make acquisitions to either strengthen or change their position in a given segment,” informed Sholler.

But will SAP do it?

It is difficult to say for sure if SAP will actually do it or not.

When asked the question, Jim Snabe, GM, Industry Solutions, SAP had this to say.

“The market is fragmented at this stage, but we have chosen a different strategy than some of our competitors. Lately the fragmentation has gone down because there’ve been a lot of acquisitions. This now presents a challenge for those who want to buy because the market is now left with relatively smaller players and if you believe that you can dominate the market by buying, you will need to buy not one or two but many smaller companies because each of these companies will have smaller market share.”

Speaking further Snabe said, “Our approach however, is a different one. We believe in organic growth, simply because the business model in the software needs to have integrity and if you buy too many things then it won’t fit together. We want to promote an ecosystem approach, where we are saying, don’t consolidate, open up the market, allow innovation, let smaller players come out with newer niche products and lets promote it jointly. This is our approach and if we are lucky, then we won’t consolidate the market but we will create gravity around a few of our platforms. I think that this is a better approach, one that gives us more opportunities at the end of the day.”

So there you have it. Will SAP change its ways or will it continue to persist with its current approach? Whatever SAP does, one thing is for sure it is going to create extremely interesting market equations in the coming months. And we’ll be watching.