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People, Process & TechnologyTangential Musings about Enterprise IT…

SAP HANA: disrupting 3 markets, but does SAPhave the stones to disrupt itself?I’ve been immersed in SAP HANA ever since I �rst heard about it, when Hasso Plattner talked about it

in May of 2010. SAP HANA is an in-memory database that computes thousands of times faster than

traditional database products.

There are two business lessons that I learnt in this time: �rst, amazing products are products that

disrupt markets and create new markets. Think of the Dyson vacuum cleaner or the iPhone, for

example. Second, as Steve Jobs said, “If you don’t cannibalize yourself, someone else will.”

What’s fascinating about SAP HANA is that it has the capability to disrupt four market categories.

Even SAP themselves don’t see the full potential of HANA – and that’s �ne, because the most

disruptive technologies don’t always know their purpose in advance. Let’s get into the detail of these

categories and what it means.

1) Database Market

This is the most obvious – SAP HANA is a database much like Oracle, but it runs entirely in-memory.

This means it is 1000x faster for many operations and scales linearly. As SAP CTO Vishal Sikka told

me this week – “If it runs in 100 seconds with 1 core, it can run in 1 second with 100 cores. That is the

beauty of HANA”.

This matters because there are things you can’t do with Oracle that HANA can do. Cancer genome

sequencing in seconds. Real-time monitoring of oil drills. Providing o�ers to customers at a till based

on their basket and historic purchases.

In addition, SAP HANA can now be used as the database for all of SAP’s existing Business Suite

install-base – 89,000 customers, and it’s a lift-and-shift simple process to move o� Oracle. Once

you’re on HANA, you can start to take advantage of things you couldn’t do before.

As of now, SAP is the fastest growing database vendor in the world, and overtook Teradata as #4 in

June 2012. They booked $800m of database revenue in 2012 (see slide 37). SAP HANA is disrupting

the database market.

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2) Enterprise Hardware Market

Most Enterprise Software customers run software on expensive mainframe-style hardware.

Individual boxes can run into the millions. So SAP built their HANA database on high-end commodity

Intel x86 hardware. HANA will run on your laptop (if you have enough memory) and it’s supported by

a number of the usual hardware vendors.

SAP expected to disrupt the hardware market, as well as the expensive enterprise storage market,

which is based around selling outdated spinning chunks of metal. The market already moved onto

solid-state storage and it’s known to be reliable (how many iPhones, iPads and Samsung Galaxies do

you see?).

Unfortunately, the hardware vendors like IBM and HP saw SAP HANA as a means to sell yet more

spinning disks, and so created hardware con�gurations with even more of them. SAP got annoyed

and invested $50m in Violin Memory, a start-up that has a solution to this. No vendor has yet

produced a SAP HANA con�guration based on Violin, though I hear SAP bought a ton of them.

[update, a colleague tells me that Fujitsu went live with a customer on a Violin appliance, but it’s not

o�cially certi�ed hardware]

So this year I expect further disruption to the hardware market, perhaps with a new entry into the

x64 Server market that knows how to do premium commodity. Lenovo, perhaps?

3) Services Market

One thing is for sure: SAP wouldn’t be where they are today without Accenture and IBM Services.

Those guys pimped SAP R/3 in the 90s and made SAP the success that it is. In the process of this,

they created an even bigger market for themselves – 6-8x larger than the Enterprise Software

market.

This really annoys SAP co-founder Hasso Plattner and to quote SAP CTO Vishal Sikka: “we have this

strong strategic need to not have the partners come in to implement HANA. If that happens, then we

have failed, and Hasso told me that.”

I talked to Hasso about this last week and he was unrepentant: SAP have to solve the services

market problem. I told him he had got it wrong and SAP as an SI was just the same as Accenture and

IBM and the ratio is not decreasing for HANA projects. If SAP wants to disrupt the consulting market

then it needs to do so by facilitation – like the Violin model.

Services disruption is of particular interest for me and I’m always pushing my consulting teams to

innovate. I noticed that on a recent deal, the ratio was inverted: 10% Services, 30% Hardware and

60% Software. Of course, we will do more services work once the software is installed, but it gives

you a �avor of how the services market might be disrupted, if we can scale our models.

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Interestingly, SAP Global Head of Sales Rob Enslin just got put in charge of SAP Services, and he’s an

ex SAP Basis consultant. I talked to him last week and he is changing the organization in ways that I

believe will support this disruption.

Can SAP disrupt itself?

If you know anything about the Enterprise Software market, you are probably wondering why I

missed the elephant in the room: The Cloud. I didn’t, I just left it until last. Here is SAP’s biggest

challenge for 2013.

SAP HANA is sold in one of 3 ways. One, you can buy a runtime license for your Business Suite for

15% of your Software Application Value (total of what you paid SAP) per annum. Two, you can buy

Enterprise licenses which are bought by the 64GB chunk of memory (minimum 128GB). Third, you

can buy 60GB of HANA One on the AWS marketplace for $1 an hour (plus $2.50 an hour for hosting).

Now, Amazon are a very impressive company and they are creating bigger machines – 244GB

systems were released last week. As of now, SAP haven’t announced if they will be supporting them

and if so, what the cost will be.

However the problem is simple: HANA One doesn’t cannibalize on-premise sales, because you can’t

buy 60GB of HANA from SAP on-premise. 120 and 240GB Amazon instances do, however,

cannibalize the low-end of SAP HANA on-premise sales and this will have a negative impact on

revenue perpetual license revenue.

But the fact is: the world is going cloud. As William Gibson said: “The future is already here — it’s just

not very evenly distributed.” – and whilst there are many companies who will run on-premise

software for a very long time, companies as big as Pepsi are implementing cloud solutions (they just

bought 300k Employee Central licenses from Success Factors).

My view is that in any case, providing a cloud subscription model for HANA can only be a good thing.

It dramatically simpli�es adoption and – at least for the medium term – there won’t be an option to

do cloud HANA for large installations so customers will have to move on-premise at some later

stage, and will probably then buy even more HANA. Moreover, Wall Street and thereby the

shareholders put a higher value on recurring revenue (Workday is valued at P/S of 41x, whilst SAP is

valued at 6x), which should help.

So as for me, there are two crucial questions here:

1) Does the SAP board have the stones to accept a short-term hit in revenue and move to the

recurring revenue subscription model for HANA?

2) When will SAP enter the in-memory cloud market? For every $1 they take for HANA One, they are

giving away $2.50 to Amazon for hosting. This is money left on the table.

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2013 is shaping up to be a very interesting year.

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This entry was posted in HANA on January 25, 2013 [http://www.peopleprocesstech.com/sap-hana-

disrupting-3-markets-but-does-sap-have-the-stones-to-disrupt-itself/] by John Appleby.

15 thoughts on “SAP HANA: disrupting 3 markets, but does SAP have the stones todisrupt itself?”

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Excellent blog John and I especially found some of the back conversation around #3 interesting as I

also think the current SI model is ripe for disruption. One could say the whole cloud division vs

OnPrem has a similar story and so far SAP has dove in “slowly” pushing the hybrid model for existing

customers.

I noticed for the �rst time on the last Q’s investor call that Bill started to try to educate Wall Street on

how SAP’s business model was changing and I think this will play a keep role in this discussion as

well. SAP is currently judged/valued by Pro�t while the pure SaaS vendors using a subscription

model like Workday/SFDC are valued by revenue growth. This will put additional pressure on SAP to

try to monetize these new product/revenue streams and it will be a delicate balancing act to do so,

stay competitive and providing value to their customers.

Jarret PazahanickJanuary 25, 2013 at 6:42 pm

AlanBowlingJanuary 25, 2013 at 8:58 pm

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John

Great article !

And I also think the disruption that this will bring in all manner of business markets and processes is

far from understood yet.

Great perspective, John. Re: Services, I think there are services opportunies everywhere…take your

oil well monitoring example. There potentially dozens of source systems that produce data on

everything from pressure readings to production volume to vibration, etc. To really leverage to

power of HANA one wants to take advantage of its speed not just to access & monitor this data, but

to perform Analytics against it that stand to impace operational performance and this will require

bringing all that data together in a purposeful way with the right content and the right context for a

number of di�ernt end users. Service opportunities abound in bringing all I that together on a large

scale.

Brad GillespieJanuary 26, 2013 at 12:05 am

John, your comments here are highly misinformed:

“Unfortunately, the hardware vendors like IBM…saw SAP HANA as a means to sell yet more spinning

disks, and so created hardware con�gurations with even more of them.”

Wrong.

Q. Which IBM HANA Con�guration uses “yet more spinning disks”?

A. NONE. THEY ALL USE FLASH.

The only spinning disks used in the IBM con�gs are the (very small) internal arrays that are used for

the data volumes. The reason for this? The data volumes see no random IO, ever. Instead they see a

100% sequential IO workload.

Clock$peedyJanuary 26, 2013 at 12:24 am

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Flash brings absolutely zero to the table in sequential I/O. Spinning disks deliver 10x more

MB’s/second/dollar than Flash at a given capacity. Using Flash for the data volumes would be a

totally pointless waste and would dramatically increase the solution cost with zero performance

improvement.

Moreover (check your HANA PAM list), IBM has the only scale-out solutions that use Flash in any

form, thanks to the magic of GPFS. All of the other scale-out solutions use dozens or hundreds of

spinning disks.

You do like to disagree with everything I write

Here’s the SAP HANA Hardware FAQ I wrote (I consolidated the information from PAM and the

hardware vendors): http://www.blue�nsolutions.com/insights/blog/the_sap_hana_hardware_faq/

IBM has 32 spinning disks for a 2TB system. It’s true that Cisco have a whopping 75 for the same

con�guration.

The di�erence in scale-out between IBM and the other vendors is that IBM uses �ash storage as part

of the very complex GPFS setup, whilst the other vendors all use a SAN unit to achieve the same

goal. You can argue that one is better than the other (complex GPFS vs big SAN units), but they all

use spinning disks.

All of the vendors use �ash storage alongside the spinning disks in single-node systems. As of the

PAM updated this week, there are �nally IBM �ash-only con�gurations available, but they are limited

to 256GB nodes in scale-out, which is a very niche market.

It would probably have been more accurate for me to say “Vendors like IBM and HP saw it as an

opportunity to sell more spinning disks and expensive software like GPFS”. If there’s one thing IBM

got right, it was to use the might of its software group, because their HANA appliance pro�t margin

is far higher than the other vendors. Would that make you happier?

John ApplebyJanuary 26, 2013 at 4:45 pm

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Carsten NitschkeJanuary 29, 2013 at 7:47 am

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Just out of curiosity do you have any benchmarks in which we could see a performance increase or

any other sort of value by using �ash disks ??? Surprises me especially since SAP Executives not

seldomly message to the market that “no disks needed”… Which is already not true. From the tests

that I have seen the spinning disks were not the bottleneck on reloading data into memory, but of

course I might be missing information.

@John good piece except the observation re: Workday market markup. First up, co-CEO Aneel Bhusri

is on the record as saying he believes the market is over optimistic and would prefer to see the price

pegged back. That’s unusual. Second, the market is pricing for growth. My own projections suggest

WDAY will reach $1bn in running revs by 2015. That’s 3x where they are today. SAP on the other

hand has no such aspirations. Instead, its Y-o-Y projections are much lower in %% terms but the

absolute numbers are much larger than WDAY.

Maybe I wasn’t clear enough – yes, the 41x is ridiculous and both over-priced and priced for growth.

Still, SFDC is 11x and my point was that I believe the market would reward a SAP which was growing

cloud subscriptions over on-premise sales.

In turn, this might mean that an overall lower revenue with a larger cloud split, would still mean a

higher share price and market cap (and consequently P/S). Even if they are cannibalizing on-prem to

do the cloud sales – it’s the software model of the future.

Hmmm…there are quite a few out there that believe $CRM is over priced as well! Fortunately I am

not a market maker so cannot say whether one or other stock is over priced but as you know,

�nancial analysts like to think they know how to follow fashion.

Dennis HowlettJanuary 26, 2013 at 9:16 pm

John ApplebyJanuary 26, 2013 at 9:31 pm

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Dennis HowlettJanuary 26, 2013 at 10:01 pm

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But your point about subs rev is well made. Attention is now being focused on the bottom line with

future growth already priced in. I’m happy for that to be the case because if SAP is to successfully

reboot/transform as it did from R/2 to R/3, then the market cannot expect to see the same margins

as it has in the past. That was a point I made here: http://www.zdnet.com/saps-2012-earnings-mask-

challenges-7000010204/

But as we both know, SAP faces many challenges: data centre? pricing? service organisation?

portfolio assembly? just to name four…

It’s an interesting point you make. Looking at the numbers, the gross pro�t is lower than on-premise,

and the sales/marketing cost is proportionally much higher. Even if we believe that the

sales/marketing cost will decrease over time, the margin is a problem.

So yes you’re right, this is a tough move for them all around. I’m not envious!

John ApplebyJanuary 26, 2013 at 10:43 pm

Post author

Hi John

Not sure if you added the Workday piece after my original comment (or I read through it to fast the

�rst time) but I think the Wall Street and stock price is an important topic as SAP tries (or if they try in

some areas) to reshape their business model. I believe it will be a ALOT more di�cult for them to

convince �nancial analysts that they are “worthy” of the cloud/growth premium given that they are

not a pure play like a SFDC or Workday so it will be more complex to �gure out….perfect example as

there were #’s like 1849% growth, 100% growth and then the numbers that Dennis computed all

which were reported on Q4 (and all accurate in their own way). On a side note for all we know by

time SAP’s get there, there might not even be a premium anymore for this model either.

Dennis – Given your “market cannot expect to see the same margins as it has in the past” you must

have found it interesting that McDermott reiterated multiple times the 35% margin in 2015. What

are the odds that he is still at SAP on the Q4 2015 call

http://seekingalpha.com/article/1129571-sap-ag-management-discusses-q4-2012-results-earnings-

Jarret PazahanickJanuary 26, 2013 at 10:59 pm

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call-transcript?part=single

John

good article but I think that your hit on the HW is a but rough for not saying unfair.

– The specs that HW vendors have to comply to in order to be on the PAM have been written by SAP

no by the HW vendors!

– SAP put very strong focus on CPU / RAM ratio as well on I/O as well as Throughout (funny enough

that some technology by design does not match it and still is on the PAM….)

– All HW partners get bashed on the pricing for their appliances, including spinning disk. Imagine

now the same with Flash which has a very di�erent price point…

– Why only Violin Memory ??? What about Texas Memory or others ? Would you buy today HW for a

strategic piece of your Infrastructure from a vendor who does not have a support infrastructure in

country?

I second the points of Dennis with the known open challenges: challenges: data centre? pricing?

service organisation? portfolio assembly….

SAP needs to make sure that they get much more aligned, spread knowledge and deliver speed in all

senses.

Still fun to be part of it !

Carsten NitschkeJanuary 28, 2013 at 9:03 am

great post

oliver marksFebruary 7, 2013 at 9:32 pm

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