SAP Sizzles, Siebel Fizzles

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Tom Siebel played coy at his company’s last financial analyst call, but the fix was already in. The once high-flying terror of the CRM market slipped into the enterprise software danger zone last quarter, and Tom was pretending that all was for the best in this best of all possible worlds. It wasn’t.

Meanwhile, SAP’s Hasso Plattner also played coy at his company’s quarterly financial call, but Hasso had something to be coy about. It took a couple of weeks until the announcement could be made. Once it was, the writing was on the wall: SAP is poised for a strong 2002 that could herald the return of the scorching success that put ERP, and SAP, on the map.

The difference between the two companies speaks volumes about what succeeds, and fails, in enterprise software. In both cases, it’s all about the installed base of customers. For Siebel, the installed base is cause for concern. For SAP, it’s the source of salvation.

Siebel’s last quarter came with an ominous statistic. More than 70% of the company’s license revenues came from new customers. Tom played down the importance of this number, but in enterprise software, it means one thing: Siebel is having trouble selling to its installed base, and the timing couldn’t be worse.

The trick to success in the enterprise software is to grow new customers in good times and up-sell like crazy to them in bad times. This was abundantly true in the 1999-2000 enterprise software slump, and it’s equally true now.

Why is Siebel having this problem? It’s hard to know for sure, but let me share my best guess. First of all, Siebel’s customers already have a lot of functionality that they haven’t used yet – Siebel’s reputation as one of the leading shelf-ware vendors is pretty solid. The second reason is that Siebel doesn’t have a whole lot to sell besides customer-relationship management software. The third is that former non-competes like SAP, PeopleSoft, and Oracle are suddenly making a dent in the market.

So with deal size shrinking, up-sell hard, and three big competitors, Siebel’s revenues have only one direction to go: south, to the tune of 37% less than the previous quarter.

Meanwhile, SAP’s strengths just get stronger. The installed base has been good to SAP, accounting for 63% of last quarter’s revenues. License revenues also fell, but only by 7%. And more importantly, the old guard was buying new software: Products like CRM, portals, and e-markets grew as a percent of revenues from quarter to quarter. That’s the key: Unlike Siebel, SAP has lots of new products to sell. The company can sell old-line ERP products like finance and human resources as well as newer products like e-markets, portals, and product life-cycle management.

The latest addition to this product spread was what Plattner was able to announce at the company’s Tech Ed conference in early November. Basically, SAP is heading for two new software markets and a new set of direct competitors: enterprise application integration (EAI) tools and applications servers.

The trick is that SAP doesn’t actually have to become number one or even number two in these markets, which are currently the purview of companies like Tibco and Webmethods on the EAI front and IBM, BEA, Sun, and Oracle on the application server front. All SAP has to do is become number one in its 18,000-plus installed base and Plattner can keep laughing all the way to the bank.

And if he succeeds he gets to nail another competitor as well, the systems integrators that make a mint installing EAI and web server software. Hence the recent announcement that SAP was setting up a global services organization and increasing its stake in SAP Systems Integration AG, a (formerly) independent integration firm.

There’s a lot of ground to cover between now and a full-blown recovery in enterprise software, and Tom could still pull a rabbit out of his hat. But his options are few: It’s pretty much too late to follow SAP’s lead. Siebel can live a long time in the enterprise software danger zone as a company, but it won’t be pretty. This isn’t a company, or a CEO, that settles for second rate.