More Sap's lunch for ORCL!!! They just can compete with ORCL. IBM decided to use Sap's DB2 earlier, hope they don't go down with Hershey, Whirlpool, Bang & Olufsen Holding A/S and a lot of others like them .
This is from Bloomberg; (ps: Bloomberg is becoming one of my favorite tech news source these days.)
Technology News
Thu, 20 Jan 2000, 7:31am EST
SAP Battles the Side Effects of Success: Service Problems, Raids on Sraff
By Kevin O'Brien
SAP Battles Side Effects of Success: Service Woes, Staff Raids
Walldorf, Germany, Jan. 20 (Bloomberg) -- Hershey Foods
Corp. couldn't ship its chocolates to stores in time for
Halloween, losing about $100 million in sales in the
process.
Whirlpool Corp., the world's largest home-appliance maker,
experienced delivery delays across North America to all but
its biggest clients.
Executives at Bang & Olufsen Holding A/S, the Danish stereo
and television manufacturer, watched in horror as their
production lines slowed, deliveries were delayed and angry
customers canceled orders. The mess eventually cost B&O
about $3.4 million.
These major companies -- and a lot of others like them --
are blaming their problems on systems developed by the
German software maker SAP AG. As a result, 28-year-old SAP
is fighting to maintain its position as one of Europe's
entrepreneurial role models.
It is also struggling to stay atop the annual $22 billion
global market for so-called enterprise resource planning
software, a hot product because it lets businesses manage
orders, billing, inventory, manufacturing and pricing with
a single system.
SAP won't easily weather this storm. Because of its rapid
success in the early 1990s, the company sold more systems
than it could install and maintain with its own employees.
It began to rely on outside consultants, some of them not
fully trained. The result: devastating software errors for
high-profile clients.
The company is suffering the fallout from some of these
disasters directly. SAP's sales rose 19 percent in 1999 to
$5.4 billion, the smallest increase in seven years.
Analysts said they expect profit to fall about 18 percent
in 1999, to $447 million. Return on equity peaked in 1997
at 35 percent, fell to 31 percent in 1998 and continued to
tumble in 1999.
Stock Rallies
SAP went public in November 1988, and three founders own
two- thirds of the common shares. The rest of the common
and 44 million preferred shares trade widely. SAP's
preferred shares, the most- actively traded, rose 52
percent in 1999, to 601 euros ($619). That was 11 percent
below the all-time high posted in July 1998.
SAP's 1999 stock price would have been far lower without a
spirited late-year run that saw preferred shares jump 62
percent last month on Hewlett-Packard Co.'s decision to buy
the Internet-friendly MySAP.com, along with a move by IBM,
the world's largest computer maker, to aggressively market
its DB2 database with SAP business software worldwide.
The Walldorf, Germany-based company's share of the
enterprise resource planning market -- a market it helped create -- will fall to 28 percent in 2000 from 34 percent
in 1995, according to AMR Research of Boston.
More important over the long run, botched SAP projects may
cause big clients such as Microsoft Corp., Hewlett-Packard,
Dow-Corning Corp. and Lockheed Martin Corp. to ask why they
should spend additional millions on complicated systems
that have proved difficult to install.
Competitors are taking advantage of SAP's plight.
Competitors Move In
Oracle Corp., the world's largest maker of corporate
database software, has a 16 percent share of the global ERP
market. Oracle and smaller niche companies, such as Siebel
Systems Inc., Infinium Software Inc., Ariba Inc. and
Commerce One Inc., are luring SAP clients with software
that's cheaper, more Internet-friendly and quicker to
install. They're also poaching SAP workers with bonuses
and stock options, which the German company has been slow
to match.
``SAP needs to make some radical changes, or things are
continuing to go downhill,' says Klaus Besier, 48, who was
president and chief executive of SAP's U.S. subsidiary, SAP
America, from 1992 to 1996.
``The company has become too far removed from its
customers,' added Besier, who is now chief executive of
FirePond Inc., a Waltham, Massachusetts-based maker of
software that helps companies do business on the Internet.
``That can be fatal.'
The roots of SAP's predicament go back to 1993, when the
company began selling its R/3 system in the United States.
The software lets companies switch from a patchwork of
homegrown systems to a single SAP system built from
``modules' that use the same procedures for tasks such as
accounting, sales, distribution and purchasing. Once tasks
are standardized, information can flow freely from
department to department.
How R/3 Works
Managers use R/3 -- a software license can cost as much as
$8,000 per worker per year -- to reduce expenses and set in
motion huge reorganizations that can span countries and
continents. With R/3, companies can make procedures for
order taking, shipping and production uniform across
markets. Orders that once took days to travel from sales
reps to factories can take seconds.
Later versions of R/3 inoculated companies against Y2K
problems and process transactions in 47 different
currencies, including the euro, in compliance with local
laws and customs.
The lure has been powerful. Pirelli SpA, Europe's biggest
maker of utility cables and its third-largest tire company,
is spending $58 million on an SAP system to reorganize six
separate European sales companies into a financial holding
company based in Basel, Switzerland.
The job, which began in 1994, is supposed to end this year.
Milan-based Pirelli reckons it will save $354 million over
the six- year period with R/3, by better managing its
inventories and purchasing, and lowering the cost of
processing orders.
Worth the Wait
``The software definitely works,' says Kevin McKay, 46,
chief executive of SAP America. ``We have 12,200 customers
around the world we support 24 hours a day, seven days a
week. If you look at the Top 10 most profitable companies
in a given industrial sector, they're principally SAP customers.'
Success came fast to SAP, and it carried a price. The surge
in U.S. orders that began in 1993 taxed the limits of the
little- known German company founded in 1972 by five former
IBM executives -- Dietmar Hopp, Hasso Plattner, Hans-Werner
Hector, Klaus Tschira and Claus Wellenreuther.
``Demand was overwhelming,' says McKay, who joined SAP
America as chief financial officer and chief operating
officer in 1995. In September 1998, he succeeded Paul Wahl,
now chief executive of a SAP niche competitor, San Mateo,
California-based Siebel Systems, the world leader in e-commerce software.
When U.S. companies began clamoring for Y2K-safe software,
SAP couldn't hire and train enough people to install all of its
products. So SAP made a fateful decision, one that contributed to
the problems it faces at companies such as Bang & Olufsen.
Success -- at First
SAP turned to IBM and the Big Five accounting firms -- Arthur
Andersen LLC, PricewaterhouseCoopers, KPMG International, Deloitte
& Touche LLP and Ernst & Young LLP -- to install its software and
keep customers happy.
The strategy appeared to work -- for a while. SAP focused on
selling and improving its software, leaving others to install it.
SAP's sales rose to $4.4 billion by 1998, 17 times the 1990 level.
In 1999, customers including Hershey, Whirlpool and B&O began
to air problems with SAP projects. Volkswagen, Europe's largest
automaker, complained that spare part deliveries to dealers across
Germany had slowed after it turned on a new SAP system.
Last September, a U.S. District Court judge cleared the way
for FoxMeyer, a bankrupt Texas pharmaceuticals distributor, to put
SAP and its U.S. subsidiary on trial on fraud charges for software
the U.S. company claims led to its collapse in 1996.
Once the U.S.'s fourth-largest pharmaceuticals wholesaler,
FoxMeyer amassed debt of about $1 billion. FoxMeyer's bankruptcy
trustee is seeking $500 million in damages from SAP. ``SAP just
way oversold what their system could do,' says Mark Ressler, a
lawyer representing FoxMeyer's trustee.
Consultants vs. Control
``Consultants are one reason SAP grew so quickly,' says
Charles Phillips, an analyst at Morgan Stanley Dean Witter & Co.
who rated SAP stock ``neutral' in December. ``The downside is SAP
doesn't always control the installation. Inexperienced people are
often used. The customer ends up being disappointed.'
Since SAP began selling R/3 in the United States, the company
has certified 20,000 consultants to install its software. Demand
is so great there are at least 20,000 more unqualified consultants
who are installing SAP products, says Andreas Willumeit, marketing
manager for SAP services.
Even these renegade consultants aren't enough to meet demand.
In North America, there's a shortage of perhaps 8,000 consultants,
says Jon Reed, SAP hiring director at Allen Davis & Associates in
Amherst, Massachusetts, an information technology recruiting firm.
Among certified consultants, only about 5,000 have so-called
quality experience, meaning they have worked through at least two
installations.
``The lack of qualified consultants is a big reason for the
problems,' says Reed, coauthor of a 260-page training manual
that's considered the industry standard. ``Even though you have a
ton of consultants, you don't have many qualified consultants out
there. This is a big issue.'
`Can You Spell SAP?'
Freelance SAP consultant Ken Kroes knows he's in demand. He
gets calls in the middle of the night at his home in Roseville,
California, from companies that have just bought R/3 4.6 -- the
latest version -- and need qualified people to install it.
``Demand is still pretty strong,' says Kroes, 35.
``Sometimes, they'll offer to pay me $200 to $250 an hour. The
interview typically goes: 'Can you spell SAP? You can? Good,
you're hired.'
Allied Waste Industries Inc., the second-largest U.S. waste
disposal company, scrapped a new $130-million R/3 system last
year, worried it couldn't find enough trained people to run it.
The Scottsdale, Arizona-based company acquired the R/3 system in
August 1999, when it bought Browning-Ferris Industries Inc.
``Whether it's true or not, SAP has the reputation for being
a very expensive and very labor-intensive system to maintain,'
says David Hunts, an Allied Waste technology officer. ``Our board
members liked SAP, but reports from the field, from the people who
used it, were that it was difficult to work with.'
Buying Brainpower
SAP software still has great appeal for companies because it
incorporates thousands of ``best practice' business procedures
culled from SAP's 12,200 corporate clients. When a company buys
SAP software, in a sense it buys the combined wisdom of the
world's biggest corporations.
As some clients are learning to their dismay, however, there
is a downside to all that complexity. The bigger the installation,
the greater the chance for error, says Sam Wee, an engineer who
installed the first R/3 system in the U.S., at Computervision
Corp., a minicomputer maker in Bedford, Massachusetts.
Wee's team of three started in 1993 and finished three years
later. By then, they had installed, synchronized and tuned R/3 to
perform 123 different tasks on 400 minicomputers at Computervision
offices around the world.
The job cost $12 million. By today's standards, tiny. Still,
it wasn't easy.
``The reason these jobs can be difficult is that for most
companies, it's the biggest reorganization they've ever tried,'
says Wee, now a consultant at Benchmarking Partners of Cambridge,
Massachusetts. ``SAP software spans most of a company's functions
and everyone is involved. You run into a different level of
politics.'
Fundamental Change
When an SAP installation goes wrong, the damage can be
dramatic. Installing R/3 in computer systems across a company is
like performing open-heart surgery; a business can't just turn it
off if it won't work properly. The fix must be done in real time.
Sometimes that takes weeks, or even months.
Most companies that run into SAP problems underestimate the
magnitude of the job or the cultural transformation the software
brings to the innermost workings of their business. SAP doesn't
just upgrade a company's software. It alters the way people in a
company work, requiring them to change habits and relationships
built up over years, even decades.
Factory workers who use R/3, for example, not only have to
ensure they have enough tools, supplies and parts to do their own
jobs, they must make sure their work pace doesn't overload or idle
colleagues down the production line.
When a salesman in the field enters an order on a palmtop
computer, it is instantly flashed to the people in accounting,
manufacturing and supply who make the job happen.
Training ranges from a few days to several weeks, depending
on how much an employee uses R/3. Typically, 10 percent of workers
use the SAP system each day, and the rest use it less frequently.
Bang Crash
At Bang & Olufsen, paint shop worker Anders Hilligsoe was in
his 27th year on the factory floor when the company switched on
its R/3 system on Feb. 1, 1999. Among other things, he embosses
the B&O logo onto custom-made stereos and televisions.
But on the day R/3 went live, SAP wouldn't tell Hilligsoe how
many 32-inch, flat-panel BeoVision Avant TVs had been made and
were ready for the B&O logo. That meant he couldn't tell coworkers
down the line in assembly how many sets to put together.
They in turn couldn't tell colleagues in the shipping center
how many TVs would be leaving the factory that day. The domino
effect rolled right down the line, disrupting deliveries across
Europe.
Trucks carrying $10,000 BeoSound 9000 stereo systems sat for
days at a distribution hub near Munich because R/3 wouldn't send
invoices telling drivers where to deliver the equipment. Salesmen
in B&O's European stores couldn't find out what equipment was in
stock. ``It was bad, really bad,' recalls Hilligsoe.
Bang & Olufsen demanded answers of IBM/Maas, a joint venture
of the U.S. company and a Copenhagen consultant that installed the
system. All consultants on the project had been certified by SAP.
Eventually, SAP flew in its own experts. Within two weeks, Bang &
Olufsen's production and deliveries had approached normal.
Fighting Gremlins
Still, it took 10 months after the switch to fix some parts
of the system. In much of Western Europe, Bang & Olufsen had to
extend its five-day delivery guarantee to eight days to give the
system the extra time needed to process custom orders. The five-
day guarantee returned after SAP installed a new planning module
that let B&O sales representatives view factory inventory.
``I'm not saying SAP is totally to blame for this,' says
Christian Levorsen, 31, the Bang & Olufsen manager responsible for
the SAP project. ``We could have been better prepared ourselves,
better trained. But SAP could have also better prepared us for
this huge drop in performance.'
Henrik Rasmussen, director of SAP Denmark, said there were
questions about whether SAP was apprised quickly enough of the
problems at B&O.
``But look, SAP isn't blameless in the Bang & Olufsen
situation,' he said. ``Whenever one of our customers has a
problem, we have a problem. We had a tendency in the past to sell
the software and become removed from the actual project. We're
working to address that. Our reputation is at stake too.'
SAP Gets Tough
In December, SAP began writing into its software licensing
contracts a requirement that its employees be permitted to make
key checks of projects and report results and problems to a
client's upper management.
In the past, technicians reluctant to bring problems or a
request for more hardware spending to top management sometimes
sidetracked SAP warnings.
``What would happen is we'd alert a client to a potential
problem,' said McKay. ``An IT person would tell us 'I'll take
care of it,' but it would never reach the right levels. We're
being a lot more diligent that we reach the right peer group.'
New sales continue.
Hewlett-Packard, the world's second-biggest computer maker,
is installing MySAP.com to run its growing Internet business. The
software will let as many as 10,000 HP employees create Internet
``marketplaces,' where they can buy and sell goods and services
with suppliers and clients.
Mannesmann AG, Germany's biggest mobile phone company, is
using SAP software to create a marketplace on the Internet for its
suppliers.
Stock Options
``We are taking a greater role and responsibility in the
success of the customer than just to sell them software,' McKay
says. ``It's in our best interests. If you take care of the
customer, you don't have an image problem.'
On Tuesday, SAP shareholders approved the company's first
stock option program for employees, geared to stem the flight of
workers to rivals. The plan will give executives as many as 6.25
million shares worth 4.5 billion euros to halt defections to U.S.
start-ups.
SAP sued Siebel Systems last October, claiming the competitor
poached 27 top managers. SAP also sued two of its former U.S. vice
presidents, Andrew Zoldan and Nirna Sippy, for allegedly taking
trade secrets with them to Siebel.
Analysts expect SAP's profit to recover from its 1999 skid.
The company said its pretax profits doubled in the fourth quarter
of 1999 from a year earlier, reaching about $553.2 million.
Fourth quarter sales rose 25 percent, to about $1.6 billion.
Morgan Stanley Dean Witter's Charles Phillips is particularly
bullish about MySAP.Com. ``For SAP, I think the worst is over,'
he says.
Better Than Baan
The company is certainly faring better than competitor Baan
NV of the Netherlands, which expects a fourth-quarter loss of as
much as $250 million, its sixth quarterly loss in a row. Baan
Chief Executive Mary Coleman quit in January after only six months
on the job.
During an interview in Walldorf, SAP America's McKay says,
unprompted: ``By the way, I'm not leaving. There are rumors I'm
leaving. They're not true. I'm optimistic about SAP.'
Despite his company's wrenching introduction to R/3, Bang &
Olufsen Chief Finance Officer Peter Thostrup said he's confident
the new $6.8-million SAP system will help expansion in Europe and
the U.S.
Bang & Olufsen is already seeing benefits. Factory workers
begin working on custom stereo and TV orders -- the majority of
orders -- within an hour after a salesman makes them. Before R/3,
that process took a full day.
Hilligsoe, the Bang & Olufsen worker who lived through last
February's meltdown, says life is pretty much back to normal at
the factory.
``The system works just fine now,' he said.
For SAP, the challenge will be to keep it that way.
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