What is SAP? And why is it worth $ 163 billion?

Each year, companies spend $ 41 billion on software for enterprise resource planning , known by the acronym ERP . Today, almost every large business has implemented one or another ERP system. But most small companies usually do not buy ERP systems, and most developers probably did not see them in business. So for those of us who have not used ERP, the question arises ... what's the catch? How does a company like SAP manage to sell $ 25 billion ERP per year?

And how is it that 77% of world trade , including 78% of food supplies, goes through SAP programs?

ERP is the place where companies store key transaction data. We are talking about sales forecasts, purchase orders, stocks, as well as processes that work on the basis of this data (for example, payments to suppliers when placing orders). In a sense, ERP is the "brain" of the company - it stores all the important data and all actions that are initiated by this data in work processes.

But before you completely capture the modern world of business, how did this software come about? The history of ERP begins with serious work on office automation in the 1960s. Earlier, in the 40s and 50s, mainly the automation of the mechanical work of the blue-collar workers took place - remember General Motors, which created its automation department in 1947. But the automation of the “white-collar workers” (often using computers!) Began in the 60s.

60s Automation: The advent of computers

The first business processes that were automated using computers were payroll and billing. Previously, entire armies of office workers manually counted the hours of work of employees in books, multiplied by the hourly rate, then manually deducted taxes, deductions for benefits, and so on ... all this just to calculate the salary for one month! This time-consuming, repetitive process was prone to human error, and it is ideally suited for computer automation.

By the 60s, many companies used IBM computers to automate payroll and billing. Data Processing — An outdated term that only Automatic Data Processing, Inc. Instead, today we say "IT." At that time, the software development industry had not yet formed, and therefore analysts were often taken to IT departments and taught them how to program on the spot. The first Computer Science Faculty in the United States opened Purdue University in 1962, and the first graduation in the specialty took place a few years later.

Writing software for automation / data processing in the 60s was a difficult task due to memory limitations. There were neither high-level languages, nor standardized operating systems, nor personal computers - only large expensive mainframes with a small amount of memory, where programs were run on magnetic tape reels! Programmers often worked with the computer at night when it was free. For companies like General Motors, it was commonplace to write their own operating systems to get the most out of their mainframes.

Today we run application software on several standard operating systems, but this was not until the 1990s. In the medieval mainframe era90% of all software was written to order, and only 10% were sold ready-made.

This situation deeply affected how companies developed their technology. Some speculated that the future would be in standardized equipment with a fixed OS and programming language, like the SABER system for the aviation industry (which is still in use!). Most companies continued to create their own completely isolated software, often inventing a bicycle.

The birth of standard software: an extensible SAP program

In 1972, five engineers quit IBM to sign a software contract with a major chemical firm called ICI. They founded a new company called SAP (Systemanalyse und Programmentwicklung or "System Analysis and Software Development"). Like most software developers at the time, they were mainly involved in consulting. SAP employees came to customer offices and developed software on their computers, mainly for logistics management.

The business went well: SAP finished the first year with revenue of 620 thousand marks, which is slightly more than $ 1 million in today's dollars. Soon, they began selling their software to other customers, porting it to various operating systems when necessary. Over the next four years, they had more than 40 customers, income grew six times, and the number of employees increased from 9 to 25. Maybe this is far from the T2D3 growth curve , but the future of SAP looked optimistic.

SAP software was special for several reasons. At that time, most programs worked at night and printed the result on paper tapes, which you checked the next morning. Instead, SAP programs worked in real time, with the result not displayed on paper, but on monitors (which at that time cost about $ 30 thousand).

But most importantly, SAP software was originally designed to be extensible. In the initial contract with ICI, SAP did not create software from scratch, as was customary at the time, but wrote code on top of a previous project. When SAP released its financial accounting software in 1974, it originally planned in the future to write additional software modules on top of it and sell them. This extensibility has become a defining feature of SAP. At that time, the interaction between client contexts was considered a radical innovation. Programs were written from scratch for each client.

The Importance of Integration

When SAP introduced its second software module for production in addition to the first financial module, the two modules were able to easily interact with each other because they had a common database. Such integration has made the combination of modules much more valuable than just two programs separately.

Since the software automated certain business processes, its impact was largely dependent on data access. The data of the purchase order is stored in the sales module, data on stocks of products are stored in the warehouse module, etc. And since these systems do not interact, they need to be synchronized regularly, that is, the employee manually copied the data from one database to another.

Integrated software solves this problem by facilitating communication between company systems and allowing new types of automation. This kind of integration - between different business processes, as well as data sources - is a key feature of ERP systems. This became especially important as the hardware evolved, opening up new possibilities for automation - and ERP systems flourished.

The speed of access to information in integrated software allows companies to completely change their business models. Compaq, with the help of ERP, introduced a new model called “custom-made production” (that is, assembly of a computer only after an explicit receipt of the order). This model saves money by reducing inventory, relying on fast turnaround - exactly what competent ERP helps. When IBM followed the same example, it reduced the delivery time of components from 22 to three days.

What ERP really looks like

The words "enterprise software" is in no way associated with a fashionable and user-friendly interface, and SAP is no exception. The basic SAP installation contains 20,000 database tables, 3,000 of which are configuration tables. These tables contain about 8000 configuration decisions that need to be made before the program starts. That's why the SAP Configuration Specialist is a real profession!

Despite the complexity of the setup, SAP ERP software provides a key value - the wide integration between several business processes. This integration leads to thousands of use cases in the organization. SAP organizes these use cases in “transactions,” which are business activities. Some examples of transactions include “order creation” and “customer display”. These transactions are organized in a subdirectory format. Thus, to find the transaction “Create a sales order”, you go to the “Logistics” directory, then “Sales”, then “Order”, and there you will find the actual transaction.

If you call ERP "transaction browser", then this will be a surprisingly accurate description. It is very similar to the browser, there is a "Back" button, zoom buttons and a text field for the "TCodes" codes, the equivalent of the address bar in the browser. SAP supports over 16,000 transaction types , so navigating a transaction tree can be difficult without these codes.

Despite the dizzying amount of configurations and transactions available, companies still have unique use cases, they need to fine-tune their actions. SAP has a built-in programming environment to handle these unique workflows. Here's how each part works:

Data

In the SAP interface, developers can create their own database tables. These are relational tables like regular SQL databases: columns of various types, foreign keys, value restrictions, and read / write permissions.

Logics

SAP has developed a language called ABAP (Advanced Business Application Programming, originally Allgemeiner Berichts-Aufbereitungs-Prozessor, in German “General Reporting Processor”). It allows developers to run individual business logic in response to specific events or on a schedule. ABAP is a language with rich syntax, there are about three times as many keywords as in JavaScript (see the implementation of the 2048 game in ABAP) When you wrote your program (SAP has a built-in editor for programming), you publish it as your own transaction, along with an individual TCode code. You can customize your existing behavior using an extensive hook system called add-ins, where the program is configured to run when a certain transaction is executed - similar to SQL triggers.

UI

SAP also comes with a designer to create the UI. It supports drag and drop and comes with convenient features such as generated forms based on a database table. Despite this, it is quite difficult to use. My favorite part of the constructor is drawing the table columns:

Difficulties in implementing ERP

ERP is not cheap. A large multinational corporation can spend from $ 100 million to $ 500 million for implementation, including $ 30 million in license fees, $ 200 million for consulting services, the rest for hardware, training for managers and employees. Full implementation takes from four to six years. The general director of a major chemical company said: "A company that can better and cheaper to carry out work on the implementation of SAP will get a competitive advantage in the industry."

And it's not just about money. Implementing ERP is a risky business, and the results are very different. One of the successful cases is the introduction of ERP in Cisco, which took 9 months and $ 15 million. For comparison, the implementation at Dow Chemical Corporation cost $ 1 billion and took 8 years.The US Navy spent $ 1 billion on four different ERP projects, but all failed . Already 65% of managers believe that the introduction of ERP-systems carries a "moderate chance of harming the business." This is not often heard when evaluating software!

The integrated nature of ERP means that its implementation requires the efforts of the company as a whole. And since companies benefit only after widespread adoption, this is especially risky! Implementing ERP is not just a purchasing decision: it is an obligation to change your operations management methods. Installing software is easy, reconfiguring the workflow of the entire company is where the main job is.

To implement their ERP system, customers often hire a consulting firm such as Accenture and pay it millions of dollars to work with individual business units. Analysts determine how to integrate ERP into company processes. And as soon as integration begins, the company should begin training all employees how to use the system. Gartner recommends allocating 17% of the budget for training only!

Despite all the difficulties, most Fortune 500 companies introduced ERP systems by 1998: the process was accelerated by Y2K fear. The ERP market continues to grow and today exceeds $ 40 billion . This is one of the largest segments in the global software industry.

Modern ERP industry

The largest players are Oracle and SAP. Although both are market leaders, their ERP products are remarkably different. The SAP product was mainly built internally, while Oracle aggressively bought competitors such as PeopleSoft and NetSuite.

Oracle and SAP are so dominant that even Microsoft uses SAP instead of its own Microsoft Dynamics ERP product.

Since most industries have rather specific ERP needs, Oracle and SAP have ready-made configurations for many industries, such as food, automotive and chemical, as well as vertical configurations, such as sales processes. However, there is always room for niche players who, as a rule, focus on a specific vertical:

Ellucian Banner for Universities
Infor and McKesson offer ERP for healthcare organizations
QAD for production and logistics

Vertical ERPs specialize in integrations and workflows specific to the target market: for example, in ERP for healthcare they can support HIPAA protocols .

However, specialization is not the only opportunity to find a niche in the market. Some startups are trying to bring to the market more modern software platforms. An example is Zuora : it offers the possibility of integration (with different ERP!) By subscription. Startups like Anaplan and Zoho offer the same thing.

ERP on the rise?

In 2019, SAP feels great: last year, revenue was € 24.7 billion, and market capitalization now exceeded € 150 billion . But the software world is not the same as before. When SAP first appeared, the data was isolated and difficult to integrate, so storing it all in SAP seemed the obvious answer.

But now the situation is changing rapidly. Most modern enterprise programs (e.g. Salesforce, Jira, etc.) have a backend with good APIs for exporting data. Data lakes are formed: for example, Presto makes it easy to connect databases among themselves, which was impossible just a few years ago.

What is SAP?