Will SAP Fall Victim To The Innovator's Dilemma? – Thoughts From SAPPHIRE NOW 2010

TECH DEVELOPMENTS: I have been re-reading Clayton M. Christensen’s The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail in preparation for a session that Chris Mines and I are running on adapting to the Next Big Thing at Forrester’s IT Forum 2010.*  Last week, I attended SAP’s SAPPHIRE NOW conference in Orlando, listened to co-CEOs Bill McDermott and Jim Hagemann Snabe, and met with McDermott along with other Forrester colleagues.  The juxtaposition of the book and the event caused me to wonder: is SAP like one of the highly successful companies in Christensen’s book that failed to adapt to disruptive technologies?  As Christensen noted, “the managers of the companies studied here had a great track record in understanding customers’ future needs, identifying which technologies could best address those needs, and in investing to develop and implement them.” 

Everything that McDermott and Snabe said was consistent with these characteristics.  They talked about how companies were facing a world of mobile, empowered customers; their need to be connected with each other to optimize the value chain through to the end consumer; the desire for new process flows; and the importance to them of fast decision-making.  They identified a combination of on-premise, on-demand, and on-device solutions that SAP will be offering to meet these needs.  They discussed SAP’s investments and new offerings in these areas, including its acquisition of Sybase for its mobile solutions and real-time analytics capabilities. 

All of these statements are strategically sound if the technology changes that SAP (like other vendors) is facing – whether cloud computing in its various manifestations or Smart Computing as we have described – are “sustaining technologies” in the Christenson framework.  Remember, Christenson defined sustaining technologies as ones that “improve the performance of established products, along the dimensions of performance that mainstream customers in major markets have historically valued.”  But what if cloud computing and Smart Computing are disruptive technologies? These are technologies that “bring to market a very different value proposition than had been available previously.  Products based on disruptive technologies are typically cheaper, simpler, smaller, and, frequently, more convenient to use.” 

Stefan Ried, a Forrester colleague who used to work at SAP, reports that Christenson’s book is must reading for all SAP upper managers.  So, SAP’s leaders are aware of the difference between sustaining and disruptive technologies.  But the announcements at SAPPHIRE suggested that either they view cloud and smart computing as sustaining technologies, or they are ignoring the risk that they are in fact disruptive technologies.

Here are things SAP didn’t say that supports this hypothesis:

  • SAP didn’t say which new offerings were aimed at which industries.  McDermott started his talk by citing the flood of data that companies were facing from sensors, RFID, and the other new awareness technologies that Forrester has identified as one of the key elements of Smart Computing.  However, the company examples that McDermott cited in his remarks – Procter & Gamble, HP, a Swiss grocery chain – were mostly manufacturers – industries in which SAP has a long presence.  But he did not cite any of the industries that we believe the disruptive technologies of Smart Computing will impact, such as healthcare, education, government, utilities, transportation, or professional services. SAP does have offerings in these areas, as it does for virtually all industries.  However, apart from utilities (where it has a smart meter solution) and oil & gas, SAP’s industry offerings are mostly assemblies of existing application modules for transactional process automation, not newly tailored or acquired solutions designed to address core balance sheet problems in the industries.  To me, it sounded like SAP is bolting analytics onto its existing products, rather than starting with the key business problems these industries face and then building the analytics-rich solutions needed to solve them.  As such, it seems that SAP is ignoring Christenson’s advice to “embed projects to develop and commercialize disruptive technologies within an organization whose customers needed them.” 
  • SAP did not define the new markets it would be entering.  SAP Business ByDesign, which got a splashy re-launch, has been SAP’s not so successful product for the SMB market.  While SAP Business ByDesign is a SaaS product and thus an example of cloud computing, it is by no means clear that SMBs universally want a SaaS product.  Some do, of course, but many don’t.  SAP’s other On-Demand products extended the value of Business Suite by making on-demand solutions for smaller processes, like sales force automation, expense management, and talent management.  But here SAP is playing catch up with specialist vendors who already have products in these areas. So, SAP’s offerings sounded mostly like selling product extensions to existing clients or copy-cat offerings to markets that already had similar products. In other words, SAP did not follow Christensen’s principles for companies that navigated through disruptive technologies:  “they found or developed new markets that valued the attributes of the disruptive products.”
  • SAP did not set low expectations for how much its new offerings would add to SAP revenues.  Coming out of a recession in which SAP’s total revenues fell in 2009 by 8% in euros and 12% in US dollars, it’s understandable that SAP wants to be bullish about its growth prospects.  But its new offerings of On-Demand products, On Device mobile apps, in-memory analytics, and re-launch of its Business ByDesign product line for SMBs will take time to gain traction.  SAP avoided the mistake it made before of predicting how much revenues Business ByDesign would generate, talking instead about number of new clients.  But the reality is that SAP will need almost €1 billion in new revenues in 2010 to bring its revenues above 2008 levels, and similar amounts in future years to deliver 10% revenue growth.  That puts enormous pressure on the managers of these new offerings to deliver revenues fast.  So these managers will tend to place priority on those that will have the best chance of adding to revenues soon.  New, riskier ideas will get pushed aside.  That violates Christensen’s principle to place “projects to develop disruptive technologies in organizations small enough to get excited about small opportunities and small wins.”
  • SAP did not describe how it would be organized to create new technologies while supporting the old.  SAP’s engineering heritage has placed a premium on having all its offerings on a single technology platform, based on a single design and development philosophy.  It is not yet there, with its On-Demand offerings today based at least five different platforms (Frictionless, NetWeaver, Business ByDesign, BusinessObjects, and Clear Standards). As a result, unlike Oracle or IBM, SAP has been conservative in making acquisitions and deliberate in bringing acquired companies into the SAP way of doing things.  While McDermott did say that Sybase would be run semi-autonomously (to help preserve its innovative culture), Snabe emphasized that SAP was “committed to orchestrate [its offerings] across all three layers of software, end to end.”  In contrast, companies that successfully managed disruptive technologies “utilized some of the resources of the mainstream organization to address the disruption, but they were careful not to leverage its processes and values.”  

In many ways, the SAP strategy laid out at SAPPHIRE NOW 2010 is a massive bet that cloud computing, Smart Computing, and related technologies like real-time analytics are sustaining technologies, not disruptive technologies.  SAP could well be right.  Software as an industry has not experienced the rapid cycles of innovation that hit the 1980s disk-drive manufacturers and provided so many compelling examples for Christensen’s analysis.  Once companies have re-engineered their processes around the applications of a vendor like SAP, it is extremely difficult to switch to another vendor.  So, software innovations tend, by force of customer inertia, to be sustaining rather than disruptive.

But, these new technologies could be more disruptive than SAP realizes.  While companies will stick to their core ERP vendor like SAP for their core applications, they may well turn for SaaS solutions in new areas to vendors who have built these as SaaS from the ground up, not tried to rearchitect an on-premise solution to be a SaaS solution.  And they may turn to a combination of smaller specialist software vendors and major services vendors for the vertical solutions that they will need to solve new business problems.  Meanwhile, SAP will struggle with maintaining version consistency between its on-premise products with their long release cycles and its SaaS offerings with their frequent, regular updates.  

*Clayton M. Christensen, The Innovator’s Dilemma – When New Technologies Cause Great Firms to Fail, Harvard Business Press, 1997, especially pages 98 and 99.

Comments

re: Thoughts From SAPPHIRE NOW 2010

Andrew; - Very interesting, I heard different messaging on current and future direction than what you point to in the article, and I attended the same Sapphire. SAP's strategy included their On Demand capabilities and their Composition strategy, either one of which they talked about new possibilities or ways they will remain relevant in the organization. Either way they can address new or changed business models and embrace disruptive technologies. They will support or sustain too, but have strategies to address disruptive as well. Their tooling has wide enough reach to approach any industry new or old, I came away encouraged that they realized their weaknesses and put measures in place to address them. The New SAP will be more responsive with relevant technology or be replaced. They know it comes down to that.

I had the opportunity to work

I had the opportunity to work with consultants who focused on the question of whether a technology was disruptive or not. Much money was paid flying these people to and from our offices, to focus group sessions, and other meetings. In the end, the answer to the question was probably no further along than when we started though there was a sense that they saw the technology as potentially disruptive. The company's product did go to market but ultimately failed.

The company, the market and the marketing team, and in the end, customers really determine what is going to be disruptive versus not. Mr. Christensen succeeded in selling a book on a principle that can only be applied to the past. Indeed, my experience is that this was a futile exercise that incurred great expense to the company.