In 1993 SAP AG and Microsoft entered into a strategic alliance designed to better integrate R/3 software with the Windows O/S. This paper alliances the nature of a strategic alliance with a company the size of Microsoft: Particularly in light of the recent US anti-trust suit. It concludes by considering how SAP should analyze the relationship and how it should proceed.
Long before he earned the title (sobriquet) of the world’s richest man and before he had ever envisaged constructing the largest private residence in the United States Bill Gates was obsessed with media relations and showmanship. One need only consider the hype and media oriented events surrounding the release of Windows 2000 to see the directions in which Gate’s mind operates. Recall, the original Windows O/S was released at a press conference in Las Vegas. Surely it was the first (and, I believe, the only) computer O/S to be released in Las Vegas, Nevada.
For Microsoft this flair for the dramatic paid off, initially. Microsoft has many critics, and, frankly, its O/S merits criticism. However, this has not stopped it from becoming the primary, virtually the sole, O/S installed in new PCs. Recently Gate’s flair for the dramatic has been tempered by his battles with the US Department of Justice. Media and popular opinion has divided over whether or not Gates is an evil genius or a guru of the future. Clearly, however, during its first fifteen years (1983-1998) Microsoft was both wildly successful, constantly in the media, and succeeded in establishing Windows as the leading PC O/S in the world.
A decade before Microsoft Windows was introduced Systems, Applications, and Products in Data Processing Inc (SAP AG) was established in Mannheim, Germany. SAP AG designs, produces and markets standard software for integrated business solutions. SAP AG has always employed a bottom-up approach to software design. They collaborate closely with their customer base in order to maintain an appreciation of their software’s capabilities and its shortcomings, and to insure that they are aware of their clients needs. In the IT sector the latter is particularly important as the radical and swift pace of changes mean that customer needs also change rapidly. Additionally, SAP AG has always developed its products along modular lines to facilitate its expansion as the size or needs of its clients increase.
Needless to add, this program has proven wildly successful. According to the case “SAP is the largest supplier of business applications software in the world and the world’s fourth largest independent software supplier, overall.” It has over 7,500 customers and supervises over 1,250 employees from its headquarters in Waldorf, Germany. Its final quarter in 1996 saw the highest sales in the company’s history and in Germany its brand name is as well known as Microsoft. The company has been successful, and constantly grown for a quarter of a century.
In the mid-1990s its flagship product was the R/3 System. The R/3 System “presents a standard business software application for client-server computing R/3 optimally supports all business activities by allowing easy adjustment and high flexibility to change and progress.” It is capable of managing data for every aspect of a company’s operations from accounting and controlling through to project management and plant maintenance. Additionally “it allows the integration of banks and other partners into intercompany communications.”
In 1992 SAP began to search for appropriate partners for an alliance. One year later it entered into a technology-based alliance with Microsoft. The alliance was truly a symbiotic relationship. SAP gained access to Microsoft’s technology infrastructure and pledged to work toward integrating R/3 into a selection of pre-existing Microsoft products. In return SAP offered Microsoft access to its core competencies—the product, R/3 and its leading edge in the client-server field. Essentially, they set out to provide a complete system: “Microsoft can provide customers with the network operating system, database, Internet and programming development products and tools, while SAP can provide the business application that sits on top of it.” Fundamentally, the integrated system provides the client with everything from the O/S through a complete selection of integrated software.
In a rather foreboding note, in light of recent developments, it has the potential to integrally and exclusively link the O/S and software. From the perspective of the partners this union meant that the two systems would be integrated before they reached the client.
Any professional can tell horror stories of difficulties that develop when new software applications are added to operating hardware and systems. The difficulties that arise can almost eliminate projected costsavings if the project proves particularly difficult or intractable. SAP and Microsoft proposed to solve these glitches, to fully integrate the systems before they reached the customer and thus, eliminate the potential problems of combining the two in the office. Expressed in these terms the alliance appears to offer nothing but benefits to the client. On the other hand, one might be tempted to liken it to the manner in which the Windows O/S has been integrally linked to Internet Explorer.
At the time Microsoft had a dozen pre-existing partnering programs. According to Microsoft these programs were designed to improve customer service. While Microsoft was able to focus on its core competencies the partnering programs insured that software and customer service provided the client with the best value.
Similarly, SAP was not new to partnering. Moreover, its existing partnering programs were similar to Microsoft’s in both goals and operations. SAP's partnerships were designed to provide clients with endto-end service. Partners handled everything from hardware to management of industry and business practices while SAP continued to focus on “developing leading-edge business application software.”
In retrospect the partnership between SAP and Microsoft seems like a very well founded alliance. Microsoft focused solely on operating systems, SAP focused solely on integrated business application software, both was interested in maintaining their focus on these core competencies. Additionally, both companies were experienced with partnerships and committed to that type of relationship. Complimentary competencies and shared goals make the partnership seem ideal.
Indeed, in many ways it was. As noted above in the last quarter of 1996, well into the partnership, SAP recorded its best sales in its history. Needless to add, between 1993 and 1996 Microsoft were also wildly successful. Many analysts have suggested that Gates ‘missed the boat’ during this period when Netscape and others managed to realize the importance of the Internet sooner and more successfully. The legal consequences of this situation are a key factor in the future of the SAP/Microsoft alliance. However, at the same time the company, continues to dominate the O/S marketplace. Therefore, in partnership, between 1993 and 1996 both SAP and Microsoft enjoyed the best years of their lives.
However, it would be foolish to assume that the partnership was without risk for both parties. Moreover, recent litigation in the United States may be in the process of severely undermining the partnership. The next section will look at the various real and potential problems with the alliance. A subsequent section will then contemplate the future of the alliance. Consideration will be given to issues that Stephen Reitzke will have to monitor closely as they are clearly potential sources of trouble. The manner in which SAP should evaluate the relationship will also be considered and outlined. Finally, on the basis of this analysis SAP’s future alternatives will be outlined.
As noted earlier sales figures for both Microsoft and SAP, in the wake of the alliance, indicated that both partners were continuing to grow and that the alliance was proving fruitful for both. However, it would be both facile and perfunctory to presume that the match was without friction, potential downsides and threats to its future. Interestingly, however, the threats to this alliance are primarily external rather than internal.
Internally, the match is exceptionally good. The two companies have different but complimentary core competencies while SAP’s deserved client-server reputation is something that Microsoft lacks. Moreover, they share the common goal of hoping to become the industry standard. Technologically and within the two companies the alliance is an exceptional fit.
However, circumstances and situations in the external environment point to two significant potential problems. The first is the consequences of the anti-trust suit filed against Microsoft in the United States. This case has both ‘hard’—legal and economic—consequences and ‘soft’ consequences. The former consequences relate to future legal analysis of the SAP Microsoft relationship—does it also violate US anti-trust laws? -- And, more fundamentally, the future of Microsoft itself.
The ‘soft’ consequences concern public image primarily. If Microsoft emerges from this case tarnished as the ‘bad boy’ of the computer world, led by a megalomaniac bent on world domination— excessive phrases yet not unheard in the media today—SAP may suffer from ‘guilt by association.’ This would be particularly damaging for SAP as it has developed a reputation for maintaining an open door with its competitors, suppliers and customers.
In the spring of 1998 the US government charged Microsoft with unfair trade practices when it linked its Internet Explorer browser with the Windows O/S and refused licenses to any of the latter sold without the former already integrated. Specifically, it was suggested that this was an attempt to force Netscape—a superior and more popular browser—out of the marketplace by making it irrelevant. Documents in court have shown that Microsoft realized the threat from Netscape, tried to negotiate an agreement and, when that failed, moved to force it out of the market.
For a variety of reasons, in strictly legal terms, this legal wrangling is unlikely to have an impact on SAP’s relationship with Microsoft. In simplest terms, the cases are entirely different. The decision to link Windows and Internet Explorer was targeted specifically against a competitor and demonstrably followed upon attempts to ‘buy’ their cooperation. SAP/Microsoft’s alliance was in no way directed against a competitor. It was in no way inspired by an attempt to push a third party out of the marketplace. It gives no cause for anti-trust action.
There is also the question of the nature of Internet browsers themselves. In a certain sense a browser is like an O/S in that it is one’s Internet ‘platform.’ Moreover, most people have only two choices, Netscape or Internet Explorer. Thus, the Netscape/Internet Explorer confrontation was a fundamental and binary situation.
However, R/3 is not an analogous system. One might argue that it is a fundamental system, an office or intranet ‘platform.’ However, it is one of dozens. The marketplace is such that one may operate more than one— i.e. some software from one company and some from another—or chose from a range of alternatives. One cannot operate a combination of Netscape and Internet Explorer—it is an either or situation. Additionally, one could not range the marketplace for alternatives, as there are only two. Microsoft’s actions towards Netscape—its only competitor in this area-- were clearly directed to destroy it by absorption and, when that failed, exclusion.
The objective was for Internet Explorer to become the ‘only’ browser—i.e. the industry standard--in the same way that Windows is the ‘only’ O/S. This is the basis of the anti-trust suit and in no way reflects the situation surrounding the SAP/Microsoft alliance.
The consequences of the conviction of Microsoft are impossible to predict at this time. Obviously, significant structural change at Microsoft will impact on the relationship and Rietzke will have to continue to monitor the situation. However, the future inclusion of SAP in an antitrust suit is categorically impossible.
In terms of soft issues SAP must be aware of the extent to which its name is associated with Microsoft’s and, monitor ongoing customer opinion relating to that. While this may be unfair, and unjustified by the facts, it is a reality. Moreover, potentially it could be very directly expressed in falling sales. Again, Reitzke will have to monitor this situation on an ongoing basis.
The question of ‘guilt by association’ is of particular importance to SAP. As noted above SAP has a reputation for an open door both horizontally and vertically. Obviously then, association with a company potentially perceived as a predator (Microsoft) strikes at one of SAP's core values. It may also intimidate others from cooperating if they assume that SAP is simply a front for, or an open door to, Microsoft while Microsoft is perceived as a company that might swallow their technology and leave them bankrupt.
Microsoft’s attitude towards SAP’s cooperative and open door policy might also be a cause for future problems. Microsoft has demonstrated a decided preference for domination in its chosen sectors of the marketplace. It also has a long and storied history of failed relationships and legal wrangling with former associates ranging from IBM to unknown programmers and designers. SAP must be constantly aware of this and monitor its overall relationship with Microsoft carefully.
Specifically, it must resist any attempts by Microsoft to undermine its reputation for an open door. If this were to occur SAP would find itself less and less involved in other partnerships. Proportionally, its interaction with Microsoft would increase. In turn, SAP would find itself increasingly reliant upon Microsoft. This would have an inevitable impact on SAP’s independence and ability to maneuver in the marketplace. It would be a dangerous development and must be resisted even at the cost of the alliance.
The fundamental reality of the situation relates to the relative size and influence of the companies. SAP is a huge world-renowned firm. However, Microsoft is of astronomical size at present. Even a company the size of SAP does not enter into an equal partnership with Microsoft. This financial situation originates in, and is buttressed by, Microsoft’s control of the operating system. Quite seriously, Reitzke and his team would benefit from analyzing the historic relationship between Finland and the Russia/USSR. For centuries Finland has maintained its tenuous autonomy while residing beside a bear in the same way that SAP is ‘dancing with a bear.’
Evaluation of the relationship in this situation is complex. Clearly, and most obviously the bottom line must be considered. As noted above, in the wake of the alliance both companies’ have profited with SAP recording some of the highest gross sales in its history. In most partnerships or alliances this would be the primary consideration in the relationship. However, SAP must also consider two other issues—its technological relationship with Microsoft and its relationship with the external business environment.
Integrating R/3 and Windows before they reach the client is a sound decision. However, SAP must resist any attempts to make R/3 more compatible with the Windows O/S that make it less compatible with other software. Microsoft has not been beyond introducing products and calling them innovations when they have more nefarious purposes. The US antitrust suit argued that Windows 98 was introduced primarily because it would not operate if Internet Explorer were removed while Windows 95 would. In similar fashion SAP must face the reality that Microsoft might try to influence technological development in a direction portrayed as benign or beneficial but that is actually directed towards other goals (tying R/3 to Windows or making it less compatible with other products). Any exclusionary tendencies in technological development must be resisted.
There is also a significant corollary to this situation. In evaluating the relationship with Microsoft SAP must monitor its relationships with its other partners. Specifically, it must be careful that they are cultivated and maintained. If they begin to decrease, the relationship with Microsoft is failing because it is undermining these essential relationships: Relationships that also counterbalance the weight of Microsoft. Overall, SAP must evaluate three broad-ranging aspects of its relationship with Microsoft: actual sales, the technological relationship with Microsoft, and its relationship with its other alliance partners.
Looking to the future, ironically, the most important aspect of its relationship with Microsoft that must be monitored in the future has little to do with Microsoft itself. SAP must maintain its relationships with its other partners. Therefore, it must monitor their attitudes towards Microsoft and SAP’s alliance with Microsoft. It must consciously cultivate and maintain existing partnerships. It must maintain its open door and continue to form new partnerships and alliances. If the Microsoft partnership is one of a constellation of relationships it has the potential to be beneficial to SAP. However, if it is allowed to dominate at the expense of SAP’s relationships with its other partners SAP will have to be very concerned about its future autonomy.
The alliance between SAP and Microsoft has been beneficial to both companies and to clients. Also, the recent anti-trust conviction of Microsoft does not present a threat to the alliance as the relationship is unlike that between Internet Explorer and Netscape. However, the partnership, particularly from SAP’s perspective, does present a series of hazards and potential threats. Ultimately they arise from the fact that Microsoft dominates the relationship both financially and technologically. Therefore, SAP must be aware of this fundamental imbalance and address it by vigorously maintaining its open door and its alliances with other partners.
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