September 17, 1999 3:30 PM PDT

SAP banks on e-business portal

PHILADELPHIA--German business software giant SAP could soon become one of the biggest e-commerce players that you've never heard of.

SAP doesn't intend to become a Web retailer like Amazon.com. Nor does it plan to run auctions as eBay does. Instead, SAP hopes to expand its stake in the business-to-business e-commerce market and build the largest global network of business buyers and sellers online.

The ambitious plan hinges on Internet technology that took three years to develop--and which, by many accounts, is late to market--making it the company's loftiest and riskiest project of the decade.

SAP makes enterprise resource planning (ERP) software to help companies track their finances, human resources, logistics, and other business needs. The company gradually began clarifying its complex plan during Sapphire, its annual show for U.S. users held here this week.

Although impressed by SAP's determination, industry experts say SAP will face tough competition from rival Oracle and smaller, more nimble competitors such as Ariba and Commerce One, which have already built automated purchasing networks.

Other competitors include supply chain software companies such as i2 Technologies. Many merchants, from steel manufacturers to energy corporations have also set up their own communities online, called exchanges, to cater to trading within their specific industry.

SAP's ace in the whole, according to AMR Research analyst Scott Lundstrom, is its huge base of more than 20,000 sites worldwide. The company says it has already signed up about 1,000 companies for a business directory that customers will use to find each other online.

"SAP's installed base is a huge advantage here," Lundstrom said. "It will allow them to eclipse Ariba's installations in the blink of an eye. There are 20,000 to 30,000 SAP sites vs. 35 to 50 Ariba sites. SAP needs to get 1 percent or 2 percent of their installed base to have more live sites than most of its best-of-breed competitors," he said.

Yankee Group analyst Harry Tse added: "They clearly understand where they want to go. They've got a really elaborate, well-thought-out strategy."

But will companies trust an ERP firm to build an advanced business-to-business Internet strategy? After all, some have been burned by complicated back-office software installations that have cost millions and taken years to complete.

"ERP vendors are not known for this area of competency and they've got a long way to go," said Varda Lief, e-commerce analyst at Forrester Research. Lief argued that ERP sellers will have "major problems" if they try to sell e-commerce software outside of their core customer base. "If you don't already have an [ERP] system installed there's not a whole lot of value with going with one of these vendors," she contended. "There's a hell of a lot more innovation in the start-up community than within these companies."

Not so, according to SAP America chief executive Kevin McKay, who said the company's research and development surrounding the Internet has led to tremendous excitement among users and SAP employees. McKay said SAP has no intent to compete with existing online exchanges, but instead will host the trading communities on SAP's software.

SAP plans to make money both by selling new software licenses and by using its business partners, including EDS and Qwest, to host supply chain and procurement applications for new and existing customers.

"We are not attempting to fight the exchanges," McKay said. "First of all it would require us to acquire talent and cash to replace the exchanges that came into being by the requests of the customers."

But SAP is fighting Oracle, which has a lead on SAP in the procurement area. Oracle increased its license revenue just in procurement software last quarter by 163 percent, to $31 million.

Electronic procurement automates paper-based processes, reducing costs and streamlining efforts in ordering routine supplies. Besides Oracle and ERP competitor PeopleSoft, the increasingly attractive niche has also drawn software makers Trilogy and Spaceworks.

The road ahead
To succeed in online buying and selling, SAP is banking on two core parts of the mySAP.com strategy: a trading hub called the mySAP Marketplace and a personalized business desktop called mySAP Workplace. SAP is hoping that customers will use Workplace to access their own internal applications, the Internet, and SAP's applications.

Less than 10 percent of employees within companies that buy SAP are licensed to use it. MySAP Workplace is SAP's attempt to get its applications on more corporate desktops by selling licenses at a cheaper rate to the more casual users.

For example, a company administrative assistant, who may need to use SAP applications for a couple of hours a week to buy new telephones or check on airline flights, would be a prime user.

"The real trick for them is going to be to get users to start their day at mySAP.com, and end their day there even though there's Oracle and Ariba and a hundred other portals out there," said Joshua Greenbaum, an analyst with Enterprise Applications Consulting in Berkeley, California. "That's going to be hard to do."

Ariba's customers include Cisco Systems, the No. 1 maker of Internet equipment; Federal Express, the world's largest express-delivery company; and Hewlett-Packard, the world's second-largest computer maker. Meanwhile, Oracle launched the Oracle Exchange in July with more than 260 suppliers of office supplies, books, computers, and temporary staffing.

SAP, for now, has just two live customers running its procurement software, but as customers upgrade to newer versions of the company's software, that will change, analysts said.

"The real revenue stream from Marketplace will in the growth of the SAP system, not in the transaction fees that come from the trading," Greenbaum said.

Gartner Group analyst Vinnie Mirchandani said there are huge opportunities for SAP to build trading communities within retail, banking, and insurance markets, which are largely untapped.

But building those new markets isn't going to happen overnight, said Greenbaum, who predicts it will take at least a year for SAP to get a critical mass of users participating in the online Marketplace.

"The jury is still out and will remain out for awhile," Greenbaum said. "But if anyone has a chance of pulling this one off SAP does."

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