META Report: SAP Takes Bigger Slice of Consulting Pie

News Item: SAP’s most recent financial results reflect the continued rapid growth of its consulting business. In 3Q01, consulting revenues grew by 30% compared to 3Q00, far outpacing the growth rates for product revenues (9%), license revenues (7%), and training revenues (19%). During the past four years, SAP’s consulting business has grown from a negligible level to an expected $1.5 billion for FY01 – about 30% of SAP’s total revenues.

Situation Analysis: SAP traditionally delegated much of the work of implementing its popular enterprise resource planning (ERP) software to large systems integrators (SIs) and other consulting firms. SAP was forced to modify this stance in the late 1990s in response to complaints that implementations of its products had become too time consuming, expensive, and poorly executed.

The initial deployment of SAP consultants to streamline ERP implementations was welcomed by many user organizations, and SAP’s nascent professional services organization worked effectively with full-service integrators and consultants selling SAP products. SAP accelerated its commitment to consulting after the 1999 (Y2K-related) slump in demand for new ERP purchases, when ongoing consulting engagements helped sustain the company’s financial results.

SAP’s Global Professional Services Organization (Global PSO) is becoming more aggressive as it attempts to sustain its high growth rate. Our research indicates SAP is seeking more engagements as the prime or sole integrator on projects for both Global 2000 as well as midsize companies. Although some boutique integrators will continue to serve the midmarket, the devastation wrought in this market by the dot-bust represents an opportunity for SAP and other application vendors to grow their consulting revenues in this sector.

For larger enterprise customers, though it continues to collaborate with its traditional integrator partners (Accenture, PricewaterhouseCoopers, IBM Global Services, Andersen, et al.), SAP also hopes to grow its share of the consulting revenues generated by these projects.

As its consulting revenues start to loom nearly as large as its software business, SAP’s business model is effectively shifting toward a bundled offering of software and services. Instead of limiting itself to nuts-and-bolts work directly tied to software package implementation details, SAP’s PSO has expanded its scope to offer related strategic planning and business process consulting.

The scope (not size) of SAP’s consulting approach now resembles that of Oracle. Oracle’s long-standing commitment to offer end-to-end consulting in support of its products has resulted in a consulting group with 15,000 staff members and services revenues that exceed Oracle’s product revenues. Although SAP’s and Oracle’s consultants cannot rival in size or breadth the offerings of global integrators like IBM Global Services, CSC, EDS, Accenture, PricewaterhouseCoopers et al., they offer considerably more than the circumscribed implementation services traditionally offered by software package vendors.

In general, we view strong consulting offerings from application vendors as an advantage for users. For major enterprise application deployments, engaging consultants from the software vendor (e.g., for 20% of the total consulting seats) in conjunction with the prime SI is frequently a wise course. The software maker “knows where the cobwebs are hidden” and can frequently outperform traditional SIs in avoiding problems and speeding implementation of a specific application. The vendor’s consultants have the most in-depth knowledge of the product and a direct line to corporate headquarters for solving problems or answering questions. This can be an advantage, particularly when adding new components or upgrades that need to be integrated with an existing installation.

SAP’s strategy in bolstering its consulting organization is sound. As it reshapes itself as a provider of componentized e-solutions instead of an “ERP gorilla,” SAP will profit from being able to deploy a strong services organization to facilitate implementation (and thereby sales) of its products. By broadening its services capabilities with related strategy, business process engineering, and change management capabilities, SAP will be able to take more consulting money off the table – for example, by acting as the prime integrator for point solutions implemented at midsize firms. SAP can also exploit opportunities for its expanded consulting business to help market its products to other consultants, a model that has worked well for IBM.

However, SAP must not permit the rapid growth of its services business to distract it from maintaining strong relationships with the larger SIs, which will continue to be the most important channel to enterprise customers. Although SAP doubtless hopes to grow its share of the consulting dollars spent by large customers implementing its products, it achieved its current success as a consequence of its strong relationships with third-party integrators and consultants – and we believe it will be careful keep these crucial partnerships more cooperative than competitive in the services realm.

In this regard, SAP has learned from the experience of Oracle, whose aggressive posture toward consulting has sometimes resulted in difficulties in partnering with large integrators. The growth of Oracle’s consulting business has slowed in recent quarters as it attempts to “play nice” with the SIs and increase its license sales.

Although the large integrators are not yet suffering from the growth of SAP’s consulting business, they are certainly alert to SAP’s growing energy as a services provider. By remaking its capabilities so it can move from 10%-12% of implementation projects to 20%-30%, SAP (like Oracle) is asking for a bigger share of “core implementation” revenues than it has enjoyed in the past. This may eventually increase the pressure on large integrators to stake out more differentiated roles that SAP and other application vendors do not provide (change management, integration, strategy, etc.).

User Action: Global 2000 organizations sourcing systems integration services can benefit from application vendor consultants working in conjunction with a larger prime SI that has broader skill sets, experience, and integration capabilities across applications from multiple software makers.

In general, user organizations should try to understand all the roles that consultants can play (e.g., management consulting, business process engineering, product strategy, package selection, application provisioning, implementation) and how well these skill sets are represented by the different integrators and consultants they might engage. Implementation cost, risk exposures, time needed to implement, and application selection are some of the key criteria that should be evaluated.

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It is especially important to understand how application selection might be influenced by the corporate allegiance or marketing partnerships of the integrator to a specific software maker. Selecting the application should be separate from the implementation process, and an integrator that helps in the selection process can be rehired (perhaps) to assist with implementation.

META Group analysts Michael Doane, Barry Wilderman, David Scott Lewis, David Lindheimer, Steve Bonadio, William Zachmann, David Cearley, Val Sribar, Carolyn White, David Yockelson, and Mark Coggin contributed to this article.

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