- SAP states that they offer cloud services to customers, but in most cases, this is simply outsourced to other entities that SAP places a margin upon.
- SAP only recommends entities that allow it to markup their services.
I wrote this in a previous article.
The purpose of this article is not to announce anything but to get customers thinking about using more SAP cloud offerings. However, this is really a white flag of surrender. SAP has not been successful with its own cloud, and there are many reasons why. One is that SAP is not even interested in hosting. They outsource the hosting to companies like IBM, WiPro. All while pitching to Wall Street they are a big cloud company. How they do this is the subject of a future article.
However, IBM has been losing very significant data center business to AWS and to a lesser extent Azure. CSC, another dinosaur like IBM has been losing business to AWS and Azure in a similar fashion. I mean what I take from it is that SAP realizes their goose is cooked and their old strategy did not work. Even Salesforce now uses AWS. Evernote now hosts with Google. So it is demonstrating that the large scale economies of scale of companies that provide hosting.
Secret SAP Hosting
What is explained in this article is not public information. SAP keeps a lid on this and even the customers are not told. But what may be even more intesting that what SAP is doing is why they have been doing it.
SAP’s marketing materials show many cloud-based third-party applications. However, SAP does little of its own hosting except for its newly acquired applications that were already cloud-based before they were purchased. Therefore, most of SAP’s database and applications revenue is from applications not in the cloud.
How Interested is SAP in Hosting?
For years the vendors most dedicated to SaaS, vendors like Arena Solutions and SalesForce, hosted their own applications. Yet as the IaaS market has matured, that model is more being called into question. Even Salesforce, the largest SaaS vendor recently began outsourcing its hosting to Amazon Web Services. Even for SAP, who tries to heavily market that it hosts its own applications, many companies are now offering third party hosting for SAP software. Overall, it seems that SAP is actually not all that interested in providing hosting, which raises questions about how a vendor like SAP deals with third parties hosting their software.
The Evidence that SAP Has Been Secretly Outsourcing its Hosting
What I learned is that SAP sends out a hosting proposal to their consulting partners to perform the hosting. Interestingly, the customer is not even made aware that their hosting is not provided by SAP. It is laid out in the book SAP Nation 2.0 that SAP is not even interested in hosting. But one questions how much of this disinterest is based upon the traditional manufacturer/retail relationship. Under this relationship, a manufacturer must be careful to not upset its dealer network by offering its items directly to consumers. For instance, you cannot go directly to Ford to purchase a truck. It would certainly cost less to do so, and even if you are willing to drive the truck away from the factory location where the truck is produced, Ford still won’t sell it to you. You must go through their dealer network. As with on-premises software, this dealer network was created before the Internet was created. Previously, all communication was handled by the dealer. But now customers go to the Ford website to learn about the truck, but then place their order through the dealer, not through the Ford website. Dealers are in fact increasingly less of a source of information about cars for car buyers.
This is explained in the following quotation from the Economist on car dealers.
The internet was supposed to do away with all sorts of middlemen. Yet house sales are mostly conducted by estate agents, and car sales are still finalised in cavernous showrooms that smell of tyres. Technology is diminishing the role of car dealers, however. Customers are using the internet for much of the process of choosing a new car, and are increasingly getting loans and insurance online rather than buying them from the dealer who sells them their car. In many cases car buyers turn up having already decided which model and which options they require; and, having checked price-comparison websites, how much they will pay.
There were, in fact, legal bans that prevented automakers from circumventing dealers.
Two decades ago Ford and General Motors tried to revive this idea from the industry’s early days, but they were deterred by resistant dealers and restrictive laws in some American states. The legislation, enacted in the 1950s to protect dealers from onerous terms that carmakers were trying to impose on them, is now being used to put the brakes on Tesla. It has battled to open stores in several states where direct sales are banned or restricted (see diagram). And it is winning most of its fights. New Jersey and Maryland recently overturned bans, though the struggle continues in Arizona, Michigan, Texas, and West Virginia.
However, while the auto manufacturers may like to circumvent dealers if it were not for state laws that were encouraged through dealer lobbying, SAP’s situation is different. SAP is dependent upon its “dealer network” of consulting companies to recommend SAP. SAP tells Wall Steet and the world that customers pick SAP software because they think it is the best. That is far from the case. Instead, these consulting companies recommend SAP no matter what the quality of alternatives because it is profit maximizing for them to do so. SAP consulting companies don’t generally care what the best software is, or what meets best with a client’s business requirements. They need to maximize their billable hours, and SAP allows them to do this. SAP is one of the few software vendors to outsource nearly all of their consulting to other consulting companies. Of all software, SAP takes the longest to install and the most billable hours to implement and then to maintain. (See online calculation at Brightwork Research & Analysis.
Consulting companies will recommend SAP, adjust RFQs to match with what SAP can do, and generally tilt the playing field as much in SAP’s favor as possible. They, of course, admit to none of this and like to present themselves as looking out for their client’s interests. However, historically they have only kept either Oracle or SAP application consultants on staff (although this is slowly changing). SAP needs constant recommendations by its dealer network to maintain its position. Therefore it is of two minds on SaaS and Cloud.
- Satisfying Wall Street and the Current Trend: Because of pressure from Wall Street and somewhat from customers, SAP must continue to tout itself as a SaaS or Cloud vendor.
- Satisfying SAP Consulting Partners..i.e. the Dealer Network: Because most of its software portfolio is still primarily on premises, and on-premises software has proven more effective at locking in accounts combined with the fact that its dealer network make money primarily implementing on-premises software, SAP either needs to keep selling on-premises software, or need to bring in their consulting partners on hosting, or risk losing their endorsement as they see themselves cut out of the revenues. And SAP knows the only reason they are recommended by the major consulting companies is that SAP “socks it to their partner’s pockets.”
The Uncompetitiveness of Consulting Company Hosting
SAP faces a problem when bringing its consulting partners into the hosting loop. And that is none of them are competitive at it. If we take IBM and CSC, which have historically had the largest data center and hosting businesses, even these firms are rapidly losing market share to AWS. IBM and CSC are so dated in their offering versus AWS and Azure that this will continue into the future. And all of the other consulting partners, like WiPro or Accenture, have even less ability to compete than having IBM and CSC. So SAP’s answer is to outsource to partners that have lost already to AWS. Secondly, SAP has essentially given up its fight against AWS and Azure and has elected to make their SAP Cloud more compatible with AWS and Azure. I covered this topic in the article How to Best Understand SAP’s Multicloud Announcement.
SAP has been trying to have it both ways as they have increased their hosted offerings. They want to project being Cloud to customers and to Wall Street. They want to continue to enrich their consulting partners for whom they rely upon for recommendations against all reason to SAP customers. This is a textbook reason why a company that has a basis on in the previous era of technology is the wrong company to be the leader in a new era of technology. They have too many arrangements to protect under the previous model, that worked spectacularly for SAP. But now they are forced to pretend to be in a new era when their approaches are still based in the previous era.
The Problem: A Lack of Fact-Checking of SAP
There are two fundamental problems around SAP. The first is the exaggeration of SAP, which means that companies that purchased SAP end up getting far less than they were promised. The second is that the SAP consulting companies simply repeat whatever SAP says. This means that on virtually all accounts there is no independent entity that can contradict statements by SAP.
The Necessity of Fact Checking
We ask a question that anyone working in enterprise software should ask.
Should decisions be made based on sales information from 100% financially biased parties like consulting firms, IT analysts, and vendors to companies that do not specialize in fact-checking?
If the answer is “No,” then perhaps there should be a change to the present approach to IT decision making.
In a market where inaccurate information is commonplace, our conclusion from our research is that software project problems and failures correlate to a lack of fact checking of the claims made by vendors and consulting firms. If you are worried that you don’t have the real story from your current sources, we offer the solution.
Financial Bias Disclosure
Neither this article nor any other article on the Brightwork website is paid for by a software vendor, including Oracle, SAP or their competitors. As part of our commitment to publishing independent, unbiased research; no paid media placements, commissions or incentives of any nature are allowed.
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Research by Eric Marti, Garth Saloner, and Michael Spence has concluded that as much as 30 percent of the cost of a car is the cost of distribution.
But as Gerald Bodish wrote in a 2009 analysis from the US Department of Justice, the most expensive part of the whole process is hiding in plain sight — it’s the stockpiles of unsold vehicles sitting around on dealers’ lots. He observes that in late 2008, there was a staggering $100 billion worth of unsold dealer inventory, with an annual carrying cost of $890 million.
Bodish cites a Goldman Sachs analysis indicating that replacing the current inventory-heavy method with a more efficient build-to-order method could reduce costs by 8.6 percent. Real-world experience from Brazil, where Chevrolet sells Celtas direct to consumers, shows a somewhat more modest savings of 6 percent relative to what’s paid at traditional dealerships.