SAP's TomorrowNow to Shut Down but the Jury's Still Out

On the eve of SAP's second-quarter earnings announcement last week, Oracle attempted to steal the spotlight by filing an amended complaint in a long-running suit against its rival -- and this time, Oracle's accusations are directed at top-level executives. Observers view Oracle's amended lawsuit more as a gambit for publicity -- albeit a costly one -- as opposed to having significant ramifications for the German software company's future. Meanwhile, SAP customers are struggling with what the latest news means for them: Not only did SAP announce that it was shuttering TomorrowNow, the third-party provider of technology support that was responsible for Oracle's charges, but also informed all SAP customers that maintenance costs would increase from 17 percent to 22 percent of license fees.

The TomorrowNow case, according to Oracle's filings, "is about a conspiracy, led by German software conglomerate SAP AG, to engage in and cover-up corporate theft of Oracle intellectual property on the grandest scale." According to the newly amended complaint -- which has now been amended twice -- Oracle alleges that, after further investigation, SAP executives, including Chief Executive Officer Henning Kagermann, were cognizant of TomorrowNow's illegal access to files and electronic documents belonging to Oracle prior to SAP's 2005 acquisition of the Texas-based provider of services for Oracle PeopleSoft users. In the suit, Oracle states that SAP AG was warned in a pre-acquisition presentation given by TomorrowNow executives that apparently "made clear that TomorrowNow did not operate legally," and, in fact, posed "likely legal action" from Oracle. 

Oracle suspects SAP AG ignored the potential threats of endorsing TomorrowNow's business model for two reasons:

• SAP did not want to sacrifice the maintenance revenue and future application sales of PeopleSoft; and
• SAP "wrongly predicted" that Oracle would not take legal action under the assumption that Oracle would have to sue its own (PeopleSoft) customers as well.
  

SAP says that it will respond to Oracle's accusations in court on September 11. In September 2007, however, SAP publicly declared that inappropriate downloads were exclusively restricted to TomorrowNow employees and that no information crossed over to SAP Americas or SAP AG.  Regardless of the veracity of Oracle's amended claims, SAP announced on July 21 its plans to shut down operations at TomorrowNow by Oct. 31, 2008.

After admitting to Oracle's initial allegations last year, SAP has repeatedly voiced its desire for the case to be resolved as soon as possible. Oracle, on the other hand, seems not to mind the long haul: The California company has not objected to the fact that the case is set to go to trial in the U.S. District Court for the Northern District of California in February 2010. 

Industry observers have speculated whether or not this will hurt SAP's reputation or its customer base. So far, though, the only ramification, says Ray Wang, principal analyst at Forrester Research, is "a definition of what can be done in third-party maintenance: What's legal? What protects IT? How can people go down this path?" One thing's for sure: Wang believes third-party maintenance should be available to customers, especially when the market holds only a handful of options, creating a noncompetitive environment where the cost of ownership becomes very high. Quoting another industry pundit, Wang says, "If I could only service my Porsche at a Porsche dealer, what would that be like?"

In its second-quarter earnings announcement, SAP announced revenue growth in software and software-related services of 16 percent (19 percent at constant currency basis), marking the 14th consecutive quarter of double-digit revenue growth. Investors, it seems, are more concerned about the company's earnings than the lawsuit: On the day of its earnings, SAP hit a seven-month high, gaining 2.47 euros, or 7.3 percent, to 36.42 euros.

Customers, too, seem to be worried about other things, namely SAP Americas' announcement to increase maintenance fees to 22 percent, from the current 17 percent level. "The overwhelming consensus is that while it sounds like a wonderful maintenance plan, it's an insurance policy they're not going to use," Wang says. Most customers, he explains, talk to SAP for support-related issues maybe four to five times a year. At a rate of, say, $500,000 a year, he adds, it hardly seems worth it to be spending $100,000 a call.

Wang advises customers to examine the components of SAP that they're using today, and to put SAP customer support to the test, taking advantage of the features SAP currently offers, which are technically free until January. Wang, however, is skeptical that SAP will be able to put its money where its mouth is. "They're not ready to support the number of customers who are going to come after them," he says. Customers, he adds, need to ask themselves, "Did you get the functionality requirements you asked for in the last four years? Have [the dollars] been put back into the product with the maintenance fees that you've purchased?"

Wang does credit Bob Stutz, senior vice president and general manager of CRM global strategy and product development at SAP, with having made significant progress in SAP CRM. "They've been very active in working with customers, getting requirements in there, and understanding that CRM customers are much more demanding," he says. He adds, however, that, despite SAP's market-share leadership in CRM -- a measure that Wang says fails to reflect actual software deployment -- the company needs to play catch-up to other CRM industry peers in terms of functionality and customer service. It's rare, he notes, that an SAP customer purchases SAP CRM as a standalone application.

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