At the tail end of 2009, business applications vendor SAP was at its lowest ebb. Sales were in freefall and many customers were up in arms about a new support package they felt was being forced on them by a supplier that was out of touch with their needs. Innovation, meanwhile, had stalled, analysts said at the time.

SAP’s troubles culminated in February 2010 with the ejection of then-CEO Léo Apotheker, who has since been appointed CEO of Hewlett-Packard.

Less than a year later, the story is very different. Sales rose 20% year-on-year to €2.3 billion during the company’s most recent financial quarter. This was helped in large part by the August 2010 acquisition of database vendor Sybase and by the fact that last year was so dismal, but there was organic growth too, showing that businesses are once again spending money on enterprise applications.

“I feel there’s an optimism around SAP again,” co-CEO Jim Hagemann Snabe told Information Age this week, and not just because the economy is improving.

“We had some trust issues in the past,” he said. “But I feel we are regaining the relationship we want with customers and that increases the growth opportunities.”

According to Alan Bowling, chairman of the UK and Ireland SAP User Group, the change in SAP this year has been “remarkable”. “In the past, we were spoken at,” he says. “Now, we speak and we are listened to and then actions ensue.”

Bowling adds that in recent years there has been “a sense of a lack of direction” on SAP’s part. “I think they are now getting a more compelling argument together,” he says.

SAP now articulates its technology strategy in three prongs: on premise, on demand and on device.

The strategy for the ‘on premise’ component is to leave the core of its ERP application relatively untouched while innovating at the periphery. This, says Snabe, allows it to deliver functionality without causing undue disruption for its customers.

A recent example of innovation at the periphery is the launch of HANA, an analytics appliance that uses in-memory database technology, some of which it picked up from the Sybase acquisition.

That acquisition also forms the basis of the ‘on device’ component of SAP’s strategy. Sybase’s Unwired development platform will allow customers to port SAP applications to mobile devices easily, Snabe says.

To date, SAP has struggled with the remaining prong, ‘on demand’. Snabe admits that the company launched its software-as-a-service offering Business ByDesign “prematurely” back in 2007. “We thought it was ready, but we have learned that the on demand market is very different,” he says.

One of the critical lessons was that to keep the cost of operating a SaaS offering down, the infrastructure that supports it must be simple, so that management processes can be automated. However, SAP built Business ByDesign on its own NetWeaver application infrastructure, which at the time was “designed for the complex, heterogeneous landscape of the past,” Snabe explains.

Three years since its launch, only 100 companies use Business ByDesign. That is deliberate, Snabe claims, as until now the cost of operating the service has made it uneconomical.

Now the company has developed a new version of NetWeaver designed with multitenacy and automation in mind, which Snabe claims has brought about a “factor reduction” in the cost of running Business ByDesign.

Challenges to sustainability

With its customers back on side and its technology ducks in a row, SAP appears to be in a stronger position now than it has done for some time. However, certain challenges threaten SAP’s ability to sustain its current momentum.

Pivotal to both the ‘on device’ component of its technology and to the in memory database technology strategy is the successful integration of Sybase. But on the evidence of how SAP handled the acquisition of business intelligence vendor Business Objects, that is not a foregone conclusion.

According to research by the UK user group, 38% of Business Objects customers feel their needs are not being met by SAP. Alan Bowling suggests that this finding may relate to the notorious complexity of SAP license agreements.

Another challenge is the saturation of the ERP market: in Europe and the US, most companies that need an ERP system have one already. This means that Business ByDesign, which SAP hopes it can sell into the midmarket, and the Asian market, where large companies are only now industrialising their business process, are both critical to the company’s future.

Snabe says there is still plenty of opportunity to sell more products to existing customers. “Today, we probably have a 5% share of our customers’ total IT spend,” he says. “We believe that if we go to our customers and recommend ways for them to save on their total spend with automation and software, we can grow that share.”

But that too hangs on the company’s ability to maintain innovation. “We have committed to a double-digit organic growth strategy,” explains Snabe, “and the only thing that drives organic growth is innovation.”

So while it now has a better idea of where it is going, SAP still has to prove it can get there. “Is this a sustainable plan?” remarks Bowling. “The proof is in the pudding.”