Print this article | Return to Article | Return to CFO.com
With SAP alleged in a lawsuit by archrival Oracle to have stolen data--and with SAP conceding that there was some abuse by one of its units--the third-party ERP maintenance market is in turmoil.
Kate Plourd, CFO.com | US
July 11, 2007
SAP AG’s admission that its TomorrowNow subsidiary "inappropriately" downloaded material from Oracle Corp. may have its greatest impact in the huge market for third-party maintenance for enterprise-resource-planning (ERP) software. In addition, of course, the concession could hurt SAP in the four-month-old lawsuit filed against it by Oracle.
Daniel Sholler, an analyst at Gartner Inc., told CFO.com that Oracle's lawsuit against archrival SAP is most important "in the context of Oracle’s business model, and in the way [Oracle] can set the ground rules with third-party maintenance." Oracle had alleged that employees of TomorrowNow, described as the third-party maintenance leader, used log-in credentials provided by clients like Honeywell and Metro Machine Corp. to access confidential documents that gave TomorrowNow information about the clients' relationships with Oracle.
Whether the spat between the two ERP giants might cause clients to turn away from third-party vendors because of the access they have to competitors' records still isn't clear. But some analysts said that worries about the vulnerability of client information to this sort of high-level hacking — which is at the center of the claims that Oracle's suit makes against SAP — could undercut the trust that clients have in their third-party providers.
In its maintenance role for customers, SAP's TomorrowNow unit supports clients' use of software made by Peoplesoft, J.D. Edwards, and Siebel, all now owned by Oracle. Customers allow TomorrowNow to access the material by providing passwords.
Oracle's suit alleges that SAP used its access through third-party maintenance to tap in Oracle's customer support data base in an attempt to lure away Oracle clients. While admitting that improper downloading occurred, SAP denied that the company committed "corporate theft," or that SAP used the information to compete with Oracle. In fact, SAP said in its answer to the suit that SAP didn’t have access to the information because its firewall policies "assure that no allegedly confidential material of Oracle obtained by [TomorrowNews] on behalf of customers could reach SAP or SAP America."
Analysts say it’s too early to predict whether the concession by SAP could lead to a settlement of the lawsuit, or whether a nasty trial will still result. But in the meantime, many ERP software users' eyes are focused on the competitive third-party support industry, which Forrester Research analyst Ray Wang calls the fastest-growing area of software, and very profitable. In fact, Wang told CFO.com, profit margins are so high that suppliers "can provide the support for half the cost that a vendor [of ERP software] can charge."
In other fields, software vendor profit margins typically start in the 5-percent range in the first year, doubling or tripling in succeeding years, Wang says. For third-party ERP maintenance providers, though, who don’t enter the scene until after five years or so, profits start at around 50 percent. Clients like third-party arrangements, he says, because it allows them to cut costs and invest in more software-applications upgrades from their software vendors.
Analysts say that nine-year-old TomorrowNow has been a huge success story among third-party providers, growing its client list by about 65 percent during 2005 and 2006. It appeals to clients in part by offering maintenance support for its fee, without the additional software upgrades that many software vendors charge for.