Thursday, October 30, 2008

The Credit Crisis: a Threat or an Opportunity?

SAP has been performing well this year having made some significant in-roads (e.g. UK core banking business). However, like many other firms, the German vendor has begun to feel the effects of the financial turmoil in Q3 2008. Earlier this week, SAP reported its third-quarter results, posting a 5% decline in earnings and withholding its revenue forecast for the year due to the uncertainty of the economic climate.

The collapse and bailout of banks have snapped businesses out of the denial and the optimistic views they held on the UK economy earlier this year. This has resulted in frozen IT budgets in Q4 2008 in a state of panic, and many expect this not to change until the new year when we expect a clearer picture of where the economy is heading.

This will inevitably impact SAP's pursuit in winning new business in the short-term, particularly as software products tend to be one of the first areas to be effected by tightened IT budgets in certain parts of the business where organisations feel they can "make do" with existing solutions for a little while longer. In addition, SAP's pursuit in reaching out beyond its traditional customer base, namely the financial services sector and the SMB segment, will see slower progress. Nevertheless, PAC holds its expectation that the SAP project services market will continue to see good growth rates, primarily stemming from its existing customer base in the enterprise segment, as initiatives such as ERP upgrades continue, and as large customers look to optimize IT systems and gain more value from existing investments.

As mentioned in my earlier post, SAP has made some good progress in the banking sector prior to the events surrounding the bail out / nationalisation of some major banks. With more regulatory changes expected in this industry, and with SAP's increasing vertical expertise, there will no doubt be some opportunities that will arise from this ordeal. Although, competition will be intense as this is an obvious market opportunity identified by a number of software and IT services players, including both the Indian offshore vendors and the "Western Incs". SAP's strong ecosystem will play a crucial role in this area.

On the other hand, the current state of the market will be most challenging for SMBs that will face financial difficulties as they do not usually have access to a large pool of resources as do the larger enterprises. Hence, sharp cuts in IT budgets will hinder SAP's growth strategy in this market for at least the next 12 months. The challenges being encountered by SMBs do not limit themselves to end-user organisations, but will also include the smaller specialist and niche IT vendors, that are at risk of being squeezed out the the marketplace during the economic downturn.

SAP and its ecosystem have the choice to actively take advantage of the downturn to grab new opportunities, in financial services for instance, or to simply focus on riding out the wave and focus on core competencies in the large enterprise segment, or both! While the core competency route is a safe bet, some cannot help but think that the financial services route would be hard to miss - although being a more risky path!