Tuesday, October 21, 2008

SAP Remains the Hot Spot in the German Project Services Market

Despite a worsening economic climate, we expect German organizations to increase their project services investment during the next few years, with business around SAP applications as a major growth driver due to the change to the new SAP ERP release as well as to the increasing significance of Enterprise SOA.

We recently scaled down our growth forecast for the overall project services market in Germany, due to the increasingly harsh economic environment. Taking into account the banking sector crisis, rising energy costs and the impact of the strong Euro on export-oriented German manufacturers, so we expect the project services market in Germany to grow at a CAGR of 5.2% between 2008-2012 (based on mid-September 2008 estimates (1)).

However, we believe that it is unlikely to see the sort of slowdown that occurred following the last IT industry crisis at the start of the decade due to fundamental changes in the market. The crash of 2001 dealt a particularly hard blow to the IT world, as end users had previously shown an almost blind, uncoordinated propensity to invest within a heterogeneous IT landscape, supported by successive one-time situations (Euro introduction, millennium change and finally the dreams of the e-business hype). Following the market decline, IT budgets were cut substantially and as a consequence, the companies’ investment behavior was curbed. Since 2004, numerous projects have been launched again. However, these are much more constructive, pragmatic and well-coordinated projects. At the same time, the process of awarding contracts to external service providers has developed away from a time and material basis towards a fixed-price basis. Users can therefore shift risk to the provider; IT service providers prefer this type of project due to the long-term contracts, which reduces market volatility.

The SAP environment in Germany has benefited in the last two years from the exceptional demand arising from SAP ERP upgrade projects. According to our estimation, more than 60% of SAP customers in Germany have already undertaken an upgrade. However, most of the SAP user companies have so far only implemented a purely technical upgrade to the new SAP release. Only in a second step do these companies focus on the far more complex and more cost-intensive functional and/or strategic upgrade projects. We believe that this dynamism in the market cannot be maintained at the current pace due to the lackluster economy. I expect that a part of the planned large-volume strategic SAP projects will only be implemented to a reduced scope or be further deferred.

A further major growth driver in the SAP environment is the rising importance of Enterprise SOA. As the current SOA projects are often merely running as prototypes or test projects, they still have a relatively low project volume in Germany. We are confident that in the near future the need for SOA projects also on the basis of NetWeaver will further increase and that the present low-volume projects will give way to large projects with the corresponding project volumes.

Besides upgrade and SOA projects, I expect horizontal topics like portals, financials and HCM as well as verticals such as the health care sector, retail or discrete manufacturing to be able to realize very attractive growth rates in the SAP consulting market.

According to PAC, SAP services will remain among the most important growth drivers for the German project services market. It is therefore still worthwhile for service companies to invest in the market. However, the companies will focus their investments on certain segments, among others, or on the extension of expertise and on the general qualification of the SAP consultants.

(1) During the past four weeks, the economic situation has strongly worsened, which will have a considerable impact on the IT market. However, the current situation is so instable and volatile that we prefer to wait to set up a new, serious scenario. But it is becoming apparent that some sub-segments will plummet in the coming year.