SAP Hopes Two Contracts Are Seeds Of Growth for Government Division
By Andrea Novotny
SAP AG executives are betting on two key accounts to bolster the company's presence in the state and local market and grow its newly formed government arm by $50 million this year.
The Waldorf, Germany-based software giant, which established SAP America Public Sector Inc. in Reston, Va., last September, will open its permanent headquarters in Washington this spring. Its grand opening at the Ronald Reagan Building is slated for June 9, company officials said.
SAP managers are hopeful that integrated software solutions used by the city of Phoenix and the county of Sacramento, Calif., will be adopted by other key customers, said John Greaney, director of SAP's public sector center of expertise.
Both localities are using a broad range of SAP's automated R/3 software solutions, which link disparate systems and allow them to share financial, human resources, materials management and procurement data across organizational borders.
SAP officials will target sales of these integrated solutions to governments, educational entities and non-profit customers. But the world's fourth-largest independent software company, faces a stiff challenge from rivals Oracle Corp., Redwood Shores, Calif., and PeopleSoft Inc., Pleasanton, Calif.
SAP had estimated revenues of $3.7 billion for the most recent four quarters. That places the company ahead of PeopleSoft's $815 million for the same time period, but Oracle leads with $6.7 billion.
| ||SAP managers are hopeful that integrated software solutions used by the city of Phoenix and county of Sacramento, Calif., will be adopted by other key customers.|
-John Greaney, SAP
SAP provides enterprisewide software solutions to commercial and government clients worldwide. While its biggest thrust has been in the manufacturing realm, the company has gained market share during the past five years in the service industries, company officials said.
SAP has been involved in the U.S. state and local government market for two years. The company dedicated a business unit to that sector last December.
So far, SAP's public sector roster has 13 clients, including government, education and non-profit organizations, such as universities, state and local school districts and the World Bank. Next year, the subsidiary is projecting $100 million in revenues, which would put SAP in the same league as its competitors, analysts said.
These so-called enterprise resource planning solutions are a strong sell to all levels of government. That's because they are easy to implement across wide sections of government that want to manage from the top down and standardize across the organization, said Leslie Kao, public sector market analyst with G2R Inc., Mountain View, Calif.
While the initial investment is often expensive, governments save money in the long run and avoid many costs associated with customizing the system, Kao said.
Another benefit is that enterprise resource planning solutions can solve year 2000 issues by replacing legacy systems, she said.
SAP's strength traditionally has been with large organizations, said Tom Gormley, senior analyst at Forrester Research Inc., Cambridge, Mass. Now the company will have to show it can quickly implement systems for smaller organizations, which cannot afford to spend years to get their systems up and running, he said.
The county of Sacramento has been using the full suite of SAP software since October, including modules for financials, logistics and human resources. County officials said they expect to provide more productivity for end users through the availability of information that the software provides online.
The city of Phoenix will go live in July with an integrated solution for its accounting processes. The city plans to use additional R/3 functionality to handle its treasury and plant maintenance requirements, company officials said. By using SAP's software, city officials hope to eliminate redundant data systems and improve access to information.
| ||The demand for integrated solutions will grow as the federal government continues to shift responsibilities down to the states, including the implementation of welfare reform.|
-Tim Hoechst, Oracle
Phoenix is touted by SAP officials as an industry leader for its well-managed business processes. In 1993, Phoenix won the Carl Bertelsmann Award for the "best run city in the world." And in 1994, Financial World, an investor-oriented publication, named Phoenix the best managed of the nation's 30 largest cities.
Officials in Phoenix and Sacramento, as well as SAP officials, would not comment on the costs of their systems.
But SAP officials are striving to replicate the company's international success in the U.S. government market.
In the United Kingdom and Australia, municipal and state governments have been using SAP's integrated solutions for accounting, financials and other functions of government for several years. In Queensland, Australia, the capital costs for an R/3 implementation range from $20 million for a major department to completely re-engineer its business processes, to a few thousand dollars for a turnkey solution for a single user with part-time access to the accounting system.
|SAP America Public Sector Inc.|
Headquarters: Washington, D.C.
1998 Estimated Revenues:$50 million
1999 Estimated Revenues:$100 million
Customers: 4 universities, 7 state and local, 1 federal, 1 non-profit
SAP officials said the government expects a complete return on investment by 2000.
"Integration is the key," said Milford Sprecher, industry segment manager for SAP America's center of expertise. "State and local governments are trying to emulate the best practices of the private sector, and ... a fully integrated system gives them the tools they need to streamline business processes and increase efficiency."
But SAP's public-sector marketing strategy isn't anything new, analysts said. As in other industries, the company is attempting to create footing with a couple significant organizations and use that as leverage with other potential clients, they said.
"SAP's success in the [government] market [will] not be [from] a lot of new functionality and capability, but rather from its marketing prowess," Gormley said.
By targeting the top officials in the government sales cycle and using its commercial and overseas success to persuade new clients, SAP has gained an edge over several other vendors that are still learning the art of marketing, he said.
Oracle Corp., which provides an entire spectrum of enterprise applications, database, tools, consulting, education and support, has had a group focused on selling to state and local governments for the last five years, said Sherrill Clements, director of programs for Oracle's Government, Education and Health division. The unit accounted for 10 percent of the company's $6.7 billion in overall revenues last year.
The demand for integrated solutions will grow as the federal government continues to shift responsibilities down to states, including the implementation of welfare reform, said Tim Hoechst, vice president of technology for Oracle's public sector division.
Earlier this month, Oakland, Calif., selected Oracle to provide an end-to-end solution that will use a single database to link the city's financial, payroll and human resources applications.
Similar integrated systems are now in use in Detroit and in Chicago-area public schools, Oracle said.