The following article is from XYY's reading notes, written by Xiao Yanyan
作者：肖俨衍 | 来源：XYY的读书笔记
Guide
SAP pioneered enterprise management software, and its company name is basically synonymous with ERP software. Unlike most of the leading software companies from the United States, SAP was founded in Germany and has become a global ERP leader with advanced and reliable products. In this article, we take a look at the understated SAP past and present based on Inside the Secret Software Power by Gerd Meissner.
01
Five co-founders from IBM
The five founders of IBM Times and SAP. Based on the monopoly on early commercial computing, IBM is the originator of the modern enterprise service model. Before the 1960s, IBM's computers were all software and hardware integration models, and software was more of a product function that came with the purchase of computers by customers. However, in 1969, under antitrust pressure, IBM was required to stop selling bundled software, giving birth to the entire software industry. By 1972, the word computer was almost synonymous with the IBM 360 series of large-scale commercial computing, when there were more than 80,000 computers in use in the United States and only one-tenth in Germany.
Claus Wellenreuther was already a mid-level and senior leader at IBM at the time, he drove a Porsche, always wore a suit, his specialty was corporate accounting software, and he developed the bookkeeping system for IBM after him. In 1971, IBM was preparing to centralize its accounting software division, and Wellenreuther was considered the most likely person in charge, but it didn't happen. In 1971 he left IBM to start his own business, and his decision influenced two young men, Deitmar Hopp and Hasso Plattner.
▲Image source: SAP official website
Dietmar Hopp was a programmer at IBM at the time, and his main focus was on dialog programming, where computers were mainly running programs at night and doing other computing work during the day. Dialog Programming, on the other hand, allowed computers to respond to programming instructions in real time, which was high-tech at the time. At that time, Hopp would visit many IBM customers to help them deploy management software such as accounting and process, and he found that most enterprises were facing similar needs and problems, so there must be a market for developing a standardized software product for these enterprise management software needs.
Hasso Plattner, who majored in teleprocessing at IBM, is based on the concept that different computers can transmit data to each other based on telephone lines (similar to the concept of the Internet). In addition, he helped the company develop order processing and corporate travel software for ICI's customer needs. Hopp and Plattner felt that IBM limited their ideas, so they were ready to do it themselves, and they were confident that they would convince Wellenreuther to do it with them, and the latter did yes.
Klaus Tschira and Hans-Werner Hector. The former is an operating system expert who can help the software with the adaptation of different operating systems, and he later helped SAP develop the core part of the HR management software. Hector is familiar with software products such as accounting software and production planning.
With the completion of the R1 system, real-time analysis became an advantage. In 1972, the five founders were in place, and the company was officially established under the name System Analysis, Program Development, or SAP. At a time when commercial mainframes were expensive, SAP convinced its customers to use their computers to develop software for them.
▲Image source: SAP official website
In 1973, SAP's first enterprise management software R1 was developed, and real-time data input, analysis and management became the core highlight, where R stands for Real time data processing. In fact, before the R1 came out, enterprise data management was to collect and store data first, and then process it together at a specific time (commercial machines can only run programs at night), which has a lag effect. The latter brings a lot of problems, such as inventory cannot be managed in real time, and it often faces urgent stockouts. Real-time data processing enables enterprises to collect and process data in a unified manner, while traditional data collection requires specialized input personnel and then unified specialized analysts. However, the real-time data analysis function allows the enterprise to analyze any data input sequentially, which can save a lot of labor costs (replace workers).
Due to the negative impact of SAP's layout on employment, the company was very low-key at the beginning. In addition, SAP's R1 forward-looking layout of the IBM 370 new host, so that SAP has stronger compatibility after the new machine comes out. In addition, SAP has released the ABAP/4 programming language, which is capable of generating analysis reports for specific instructions. Based on each customer order, SAP continued to iterate and update its products, and in 1980, the company finally purchased its first commercial computer from Siemens.
02
R2 and R3: SAP becomes the king of enterprise management software
R/2 software - the whole process of enterprise management software. In 1977, SAP headquarters moved to Walldorf, Germany, and in 1980, SAP ranked 17th among the top 20 software companies in Germany, and 50 of the top 100 German companies were SAP customers. In 1982, the company's revenue was 10 million US dollars, and the low-key SAP continued to accumulate customer reputation. In 1978, the company began to develop R/2, which is characterized by the ability to cover all management processes of enterprise customers, and the target hardware of R/2 is still IBM's commercial mainframe, but it is programmed on the basis of Basic System and can be compatible with other mainframe products, including Siemens.
图片来源：SAP官网 Screen R/2 System
In 1981, R/2 was developed with 10 modules: RA (Fixed Asset Accounting), RF (Accounting), RK (Cost Accounting), RK-P (Project Management), RM (Equipment Maintenance), RM-Mat (Material and Process Management), RM-PPS (Production Planning), RM-QSS (Quality Management), RP (Human Resource Management), RV (Sales, Logistics, Invoicing, etc.). R/2 is very powerful, but it is also very complex, and it is time-consuming and expensive for enterprises to lay out R/2 - it takes an astonishing 6-8 years to lay out the entire system, and due to the scarcity of professionals who understand system layout, the layout cost is high. However, because of the possibility of digital management from 0 to 1 for enterprises, it is still popular with many large enterprise customers, and until 1997, the R/2 system still had 1400 corporate customers, and SAP is constantly updated. In 1980, one of the big things for SAP was that co-founder Wellenreuther left the company due to illness.
Expand into international markets. SAP's internationalization is inseparable from the internationalization of its enterprise customers themselves. In 1978, John Deere, an American manufacturer of agricultural equipment, decided to adopt SAP's accounting software in its European and African divisions, and even translated its own products into French, making it one of the first corporate customers to internationalize SAP products. In 1984, SAP overseas branches were established, and because R/2 is compatible with Siemens' commercial computers, Siemens has also become the driving force behind the internationalization of SAP products. In 1987, SAP built its first international training center overseas, and continued to open offices in Europe, the United States and other places. In 1991, it entered the Japanese market. In addition, in 1988 SAP was listed in Germany.
Image source: SAP official website
R/3 – The most powerful enterprise management software. In 1987, SAP began to develop R/3, and the biggest change compared to R/2 was that R/3 was not based on large commercial machines, but conformed to new server-based hardware models such as workstations and PCs. In fact, in the 1980s, IBM's traditional advantages were impacted by two forces, one was the personal computer PC, at the beginning IBM was still leading the era, but later Compaq and other manufacturers began to erode market share; As a representative, server workstations based on the Unix open source operating system began to replace large IBM business machines (if you want to trace the source, it is actually the CPU instruction set of the RISC architecture invented by IBM itself).
In fact, since the five founders are from IBM, they have a natural affection for IBM computers, and the initial R/2 industry was mainly built for IBM mainframes, and it also served large enterprise customers. When R/3 is positioned as a medium-sized enterprise customer, it still chooses to follow in the footsteps of IBM - the latter releases a new application & operating system architecture SAA, which is based on C language programming and uses a relational database (Relational Database, see [Reading] Oracle Development History: Based on Database, Layout of the Whole Chain of Enterprise Services), SAP is convinced of the SAA architecture, and is ready to develop R/3 based on this (R/2 needs to be rewritten).
Image source: SAP official website
R/3 is mainly based on non-IBM computers, but it is actually forced - SAP's R/3 does not perform well on IBM's midsize AS/400, and SAP is forced to bet on UNIX-based server workstations and Oracle for databases. In addition, another revolution of R/3 is that it is the world's first enterprise management software developed based on a graphical operation interface (GUI) (as shown in the figure below), and its competition is mainly based on DOS code at this time. R/3 allows businesses to transfer data over a local area network (and later the Internet) and can be managed globally. Thanks to the close cooperation with Microsoft, R/3 can allow third parties to develop corresponding plug-ins, so as to further meet the customization needs of enterprises on the one hand, and build their own platform and establish their own ecosystem. Finally, SAP benefits from its own advantages of international success, R/3 software is translated into more than 20 Chinese languages, which can easily process data across time zones, which also provides great convenience for multinational enterprises operating internationally or overseas enterprises to deploy R/3.
Vobis – R/3 Use Case. The R/3 software is mainly divided into three modules: accounting (FI), control (CO) and human resources (HR), and the customer procurement software is also priced in modules, and the license cost of each terminal was about 2,700 to 4,000 US dollars by 1996. Vobis is a large German electronic retail chain, and its products are mainly computer-based, and the user experience is poor in the traditional mode - the store staff does not care about serving customers, and customers often get the model they did not order, only to find out after going home and unpacking. However, Vobis spent $14 million (R/3 has a minimum purchase threshold of $4 million) and the R/3 has ushered in a dramatic change, greatly improving inventory management efficiency (reducing inventory by 20%), automatically placing orders to replenish when the system recognizes that a particular product is below a set value, and greatly reducing the waiting time for users to order.
From the perspective of R/3 deployment, it is mainly divided into three levels, the first is the bottom layer of the data server, the database can be based on Oracle, can also be based on Microsoft database, etc., the server can be HP server; the second layer is the application server of R/3, based on the network server workstation, running the core R/3 software part, based on the purchase of different modules for deployment. The third layer is the use of terminals, which are generally based on PC and Windows operating systems, based on user analysis needs, and based on GUI to display the desired data processing and analysis results.
03
Cooperate with external consulting companies to develop the market
Adopt an outsourced consulting model. When a company wants to deploy R/3 products, due to the complexity of the product, it generally needs to rely on external IT experts to help the company deploy, but due to the advanced nature of R/3 products at that time, such expert resources are very scarce, resulting in high deployment labor costs. For R/3, the ratio of product procurement cost to product deployment cost can reach an astonishing 1:5 or even 1:10, so that competitors such as Oracle, Baan, etc. use lower deployment costs as a selling point, and they advertise the ratio of procurement to deployment is 1:2, and in 1995 Hopp himself admitted that R/3 deployment efficiency needed to be improved. As of 1997, SAP had 2,400 technical support-related employees, accounting for 18%, six education and training centers, and 4,200 consulting experts (accounting for 33% of employees), but these are far from enough, and its main use is outsourcing cooperation - cooperation with software companies and consulting companies (System). integrators), which outsourced more than 30,000 consulting experts.
In fact, SAP was the first mainstream enterprise software company at the time to adopt such a large-scale cooperation model with external consulting firms, and its product manager Alexander, said: "We don't think SAP is a large-scale project management expert, but we are the most professional in the product." In order to further unify the skill level of consulting experts, SAP has also launched professional skills certification exams, and experts also need to be certified to work.
Image source: SAP official website
The consulting firm also doubles as sales, helping the company reach out to the top of the client. Plattner, who leads the SAP outsourcing consulting model, believes that SAP can certainly do this on its own, but it will certainly be a distraction for the company. But in fact, this model has also achieved SAP's sales miracle in R/3 - although the IT consulting company is nominally from the perspective of enterprise customers, providing them with professional advice on IT deployment, and standing in the gray position of consulting and sales, they assume the sales channel function of SAP products - In particular, they can help SAP reach directly to high-level executives, such as CEOs of enterprise customers, so that they can make efficient purchasing decisions (like Oracle, SAP ignores the IT head and goes straight to the top). Partnering with consulting firms can also feed back SAP's own products, such as Hans Georg's company's management software, which was adopted by SAP as part of its R/2 and R/3 products. R/3 creates huge economic value, and this outsourcing model creates a huge ecosystem, which is really groundbreaking, and the following figure shows the current scale of the global IT software consulting industry, as well as the top consulting companies.
SAP conquers the U.S. market. In 1989 and 1990, SAP's revenue in the United States was $7 million and $16 million, and the R/2 product was not in the U.S. market, and the competition was fierce (IBM host was eliminated earlier), and by 1993, only 70 of the SAP1800 customers were in the United States, and the SAP brand was not well-known in the United States, and was even read as sap, which was later corrected by the company to be the three letters S.A.P. All the changes are R/3, after the launch of this epoch-making product, SAP chose to cooperate with the six major consulting companies in the United States to promote products, which started from specific industries such as petrochemical industry and medicine, and canceled the upper limit of sales commission incentives (increase enthusiasm), and soon harvested Chevron's large order - R/3 and server workstations were originally intended to serve medium-sized enterprises, and it turned out that it was also suitable for large enterprises, and SAP was the only manufacturer that provided this option, so R/ 3 began to be very popular.
AutoDesk also quickly became an SAP customer, with 20,000 codes in its 40 products, but after the R/3 deployment, it dropped to 1,600. The delivery time after the customer places the order is initially 2 weeks, and drops to 24 hours after the deployment of R/3. In 1994, IBM became a major customer of SAP and was ready to use R/3 to manage purchases and orders, among other things. In 1995, Microsoft also became a major SAP customer (in fact, Microsoft and SAP were partners in the early days, and later became its main competitor). However, there are times when they miss, such as when Boeing was snatched away by rival Baan. SAP continues to expand its presence in the U.S. and opens a development center in Silicon Valley, where Plattner spends one-third of its time. SAP's revenue in the U.S. increased from $60 million in 1992 to $1.2 billion in 1997, accounting for 35% of the company's revenue.
04
SAP has a flat company culture
SAP's corporate culture is similar to HP's. The HP Way: The Originator of Entrepreneurship in Silicon Valley, we have talked about the culture of the contract spirit between HP and employees, that is, I give you freedom, you give me creativity, I give you stability (no layoffs), and you give me returns, which is actually a contract spirit between employees and the company. Hopp has also publicly said that SAP's open company culture is similar to HP's, and it can be summed up in four main points: 1. Context not control, 2. Trust employees instead of mechanical bureaucratic preaching, 3. Flat company culture, and 4. Quality control is ubiquitous.
Image source: SAP official website
In 1989, a media report said that SAP had no job description, no employee title, no dress code (compared to IBM blue suite), and no deadline (happiness). The company encourages employees to communicate and encourage various social activities to enhance mutual understanding. SAP has free working hours if employees want to go home at any time. The company provides lifelong learning opportunities for employees (SAP has a bit of a university-like atmosphere), and employees have the right to voluntarily decide whether or not to rotate internally.
In terms of employee treatment, in the 1990s, the average salary of a college graduate to SAP was 42,000 US dollars (more than 300,000 yuan, in the 1990s, it was very high), and any employee who traveled more than 10,000 kilometers a year was equipped with a car, and the company also had a profit sharing plan, which could generally account for 15% of the salary. Finally, SAP encourages a low-key culture, and as mentioned earlier, because SAP does things that replace a lot of people's work, sometimes he has to keep a low profile. Overall, SAP's employee turnover rate is only 2%, compared to the industry average of 10-20%.
05
SAP at its peak in the 1990s
The 1990s were SAP's golden age, on the one hand, it led the wave of enterprise IT digitalization, rather than the subsequent wave of cloud computing, and on the other hand, it mainly served large customers and generally embraced digitalization earlier. These two factors determine why this is the era. As can be seen from Figure 1 below, from 1994 to 1997, when R/3 was popularized, the compound growth rate of SAP revenue reached an astonishing 55% (note that compared with before, SAP's revenue has been very large, and this growth rate is even more difficult, which also reflects the advanced nature of R/3).
In 1997, SAP's revenue reached $3.5 billion, up 62% year-on-year, and it has become the largest software provider in Europe and the fourth largest software company in the world. The company's excellent performance also turned the company's stock into a favorite of the German stock market, and in 1998, in order to embrace more international investors, SAP was listed in the United States at the same time. Interestingly, in the second ranking in the figure below, in 1997, basically Microsoft was the only rank, the other three were a rank, and the latter was far behind, among which the founder of Computer Associates, which ranked second, was a Chinese-American Charles Wang, who was also an enterprise software service, and was acquired by Broadcom for $19 billion in 2018.
Target medium-sized enterprise customers, and the industry is more refined. R/3's products are advanced enough to be embraced by many large enterprises, and SAP has also directly benefited. However, on the one hand, the number of large enterprises is limited, and on the other hand, the high price of R/3 directly leads to too high entry barriers - users can only buy the full version, even if many functions are not used, as SAP needs to develop medium-sized customers in the future, the way of playing must change, and it will reorganize R/3 into three parts: accounting, process (Logitistics) and human resources, these software can be purchased separately, and there is an independent third-party application ecosystem.
In 1995, SAP began outsourced its mid-sized enterprise customers with annual revenues of less than $150 million to 29 partners. More and more customers prefer to deploy in six months, and R/3 complex deployments give competitors an opportunity to take advantage of them. In addition, SAP is increasingly focusing on industry segmentation solutions, increasing to 16 industry solutions. At that time, SAP also began to embrace the Internet wave, but because enterprise customers are generally relatively cautious about the application of new technologies, their attempts should not be too advanced. As for investment and M&A, it has been rumored that SAP may acquire Software AG, the second largest software company in Germany at the time, which owns database software exactly what SAP needs, but this acquisition never happened, and the two companies later became a joint venture.
06
Postscript: It is still a leading enterprise software service company, but the halo is no longer dazzling
Entering 2000, SAP's growth potential is still very strong, Coca-Cola, Burger King and other large companies have become its customers, even in 2001, the dot-com bubble burst, the year of the 911 crisis, the company's revenue growth is still 17%. In 2004, SAP launched the SAP ERP system to provide further refined solutions for different industries. Since then, SAP has continued to expand its SMB customers through acquisitions, and the launch of SAP Business Suite 7 has further provided customers with a one-stop solution. In the 2010s, SAN launched the HANA database, which is equivalent to horizontal expansion. In 2015, the company launched SAP S/4HANA, a new UI, and an important layout for the company to fully embrace the general trend of cloud computing. As of 2022, the number of SAP S/4HANA customers has increased from 360 in 2015 to 20,000 in Q2 2022, which also drives the proportion of the company's cloud business revenue to continue to increase.
The core of SAP is to empower enterprise management, which is nothing but financial rights, human rights, and affairs rights, which correspond to the three major systems of ERP: accounting, process and HR human resources. From this point of view, our last Intuit, in fact, can be regarded as ERP software that started from the C-end (infiltration into small B), but for small enterprises, taxation is a rigid pain point, management is not a core problem, with the expansion of the scale of the enterprise, management is becoming more and more important.
On the other hand, SAP is no longer leading in the era of cloud computing, and I think there are several reasons, on the one hand, Salesforce and other companies based on the accumulation of Internet data advantages, began to cut into success from the perspective of enterprise revenue generation (CRM), and directly inserted into SAP's weak small and medium-sized enterprise customer market, and then through horizontal expansion to open up the whole process of enterprise management. Oracle, Microsoft has used its position in the core traffic entrance of databases and operating systems to horizontally expand ERP and gain market share. What's more, the trend of cloud computing, the three cloud computing giants are a bit of an operating system, and this paradigm shift also brings opportunities to others. Finally, the caution of the Germans also made SAP not participate in the industry M&A war, and did not do particularly large-scale M&A integration (medium-scale, billions of dollars is still a lot). In short, it is too early to say that SAP is outdated, but it is indeed not as dominant as it was then.