SAP’s acquisition of Qualtrics, a costly affair or a strategic move?

• History and evolution of SAP and ERP.
• Will experience measurement add value to SAP ERP?

On November 12, 2018 ERP software giant SAP announced an $8 billion acquisition of Qualtrics, an experience management company that tracks and collects feedback and data across vital areas of  businesses from customers, employees, products and brand and helps clients take informed business decisions. The acquisition came just two days after Qualtrics filed for IPO  with the U.S. Securities and Exchange Commission to go public with a proposed valuation of $4.8 billion. Hence, following the announcement its shares fell 5.6% the very next day and this reflected shareholders’ concerns of the premium paid by SAP for the acquisition and the dearth of pathbreaking innovation of its own for growth. The deal valued Qualtrics twenty times the revenue of $400 million, which it is expected to generate in the FY18 and almost double the prospective IPO value.

But what made SAP (engaged in the business of ERP concerned with handling, simplifying, leverage transactional and operational data) to acquire Qualtrics (engaged in measuring customer experience)? In order to understand the implications, why these two companies operating in different arenas have come together? Televisory dived into the history and evolution of SAP and ERP.

Need and history of ERP

There has been an unprecedented growth in the technology infrastructure, with computer hardware and software systems making waves of digitalisation. As companies increasingly began to adopt digital solutions to manage individual corporate functions, the business environment became increasingly complex. This necessitated a need for more and more inter-functional data flow in the decision-making regarding accounting, human resources, distribution of goods and services, timely and efficient procurement of product parts aka supply chain management, customer relationship management, etc.

A new software system known in the industry as enterprise resource planning (ERP) system surfaced in the market in late 1980s and in the beginning of 1990s, it primarily targeted large and complex business organisations. Moreover, since ERP is a multimodule application software that allows a company to manage a set of activities and transactions necessary through business processes for moving a product from the input stage by the value chain to the final customer. These systems made companies reengineer their business processes to accommodate the logic of the software modules for streamlining data flow throughout the organisation in a quest for optimisation. Therefore, a fully developed ERP system provides a company with a standardised IT platform that gives complete information about all aspects of its business processes and cost structure across functions and divisions.

Evolution of SAP

In 1972, five former IBM employees Hector, Hopp, Wellenreuther, Plattner and Tschira launched a company called SAP (Systems, Applications and Products in data processing). Their vision was to develop a standard application software for real time business data processing. A software that would allow information about cross-functional and cross-divisional financial transactions in a company’s value chain to be coordinated and processed centrally, resulting in enormous savings on time and expenses. Presently, SAP serves over 4 lakh customers in more than 180 countries.

SAP R/1: in 1973, SAP launched an accounting transaction processing program called R/1, one of the earliest examples of what is now called an ERP system. It was a 1-tier architecture in which three layers presentation, application and database are installed in one system/server. R/1 was a DOS-based single module ERP system, which focused mainly on financial transactions and accounting.  

SAP R/2: launched in 1979, was a two-layer architecture system linking database and communication systems used on mainframe computers, thus permitting greater connectivity. R/2 in contrast included most enterprise functions such as procurement, supply chain, manufacturing process, product development, inventory and order tracking. Apart from the additional components in new modules, which were compatible with each other so that these could be seamlessly integrated together, it also supported multiple languages and currencies to broaden its reach.

SAP R/3: with an overwhelming response over client/server concept, SAP launched R/3 in 1992. R/3 expanded over previous solutions and offered seamless, real time integration for over 80% of a company’s business processes. SAP designed R/3 on an open architecture (to increase its compatibility with legacy systems) to ensure that it could be configured for smaller businesses and support wide range of industries. This was a significant step in order to realise the revenue potential from smaller business customers. Furthermore, R/3 was a 3-tier architecture, which allowed organisations to run each of the layers on separate specialised hardware.

The exemplary 3-tier architecture stands behind the success of SAP R/3, which contains:

1. Client Tier
2. Business Logic Tier
3. Database Tier

1.Client Tier

This is also called as presentation layer which contains the Graphical User Interface (GUI or UI) part of the ERP system. This layer is used for the representation of data/result from the input query taken from user by interacting with business logic layer. It is the end result which shows data in an interactive graphical form for interpretation and use by a user.

2.Business Logic Tier

This layer is also called the application layer which contains the logic/application to perform calculations, data insertion and manipulation, validation, etc. Application layer executes the business logic by accessing data (when necessary) from database tier and shows the results to client tier.  This layer helps to make the communication faster because it acts as  an intermediary between database and client tier and can run multiple processes simultaneously due to its vast processing power.

3.Database Tier:  

This layer contains all the business data pertaining to transactions at each stage of enterprise value chain. database layer contains methods to connect with database and to perform update, insert, delete, get data from database based on the input data. The database layer is a database management system which provides access to the data for the application layer when the latter requires it to perform a logic.

In order to sum it up with an example; a user login logs into an SAP system (Client layer) gives command to know the revenue breakdown of a company for the past five years. This command is then routed to the application server (Business logic layer), which, in turn, fetch data from database layer and presents the result on client system. There are various benefits of a 3-tier architecture such as high performance, large scalability, high degree of flexibility, data integrity, data security, etc. As there are three layers performing separate functions, performance is the biggest boost since there are three layers performing separate functions, their alliance boosts the performance of the system exponentially. However, the level of complexity increases with each additional layer. Furthermore, it has high installation and maintenance cost.  

mySAP.com and ERP: in 1997, SAP launched mySAP.com to ward off growing competition from niche software companies targeting specific industries or a particular ERP module. As the internet was changing both the industry and the company level business processes were providing greater flexibility. SAP’s new mySAP.com offered connectivity of e-commerce with existing ERP applications using the latest web technologies. SAP adapted itself from a vendor of ERP components to a provider of e-business solutions and offered online portal (internet enabled R/3 modules) through which customers could facilitate global connectivity, where decisions could be executed in real time through the internet. Further, SAP adapted its core application from enterprise service architecture to enterprise web services allowing for a greater flexibility and openness for third party applications to suit company specific requirements.

SAP S/4 HANA: launched in 2015, it is a business suite designed to run on-premise, on cloud and hybrid deployment. SAP made several innovations in-between by launching various products by adding features and modules, however it marked a transformational shift in SAP’s history. S/4 HANA runs on a different database which was launched in 2010; namely SAP HANA. It is a fundamentally different architecture, which runs in-memory, meaning data is stored in columns instead of rows allowing for near to real-time analytics and compute capabilities in contrast to relational database used earlier. SAP S/4 HANA provides libraries for predictive analysis, machine learning, text processing, planning, spatial and business analytics making it an ideal platform for building and deploying the next-generation, real-time applications and analytics.

Qualtrics acquisition, a mistake or a masterstroke?

The customer experience market expanded rapidly with the rise of Yelp, Amazon and customer survey and feedback, which is the focus area of every company. This is a market of software and tools to conduct survey, which Qualtrics sells to its customers as a platform. This platform collects data easily, report and analyse it in real time and publish the result to managers for use of the derived insight. The experience drives a company’s sales, its workforce, brand and ultimately its’ bottomline, hence it makes a great business sense for an aspiring company to invest money in mapping customer experience. This is also a reason for the huge $44 billion Total Addressable Market (TAM) assigned to it (Qualtrics) by SAP. As SAP is a market leader in ERP systems with access to vast amount of operational data and Qualtrics is a market leader in measuring customer experience, together, they are bound to create a strong synergy for growth. 

Hence, to put things into perspective, the following are few use cases, which shows the potential of the merged entity in action:

Case 1:  ERP provides Volkswagen the operational data on the number of cars sold for a particular model, which is very high during a specific season. Qualtrics on the other hand provides with the ability to collect and distribute insights in real-time, which can map why this particular model is being sold, type of customers buying the model and the most sought-after features of the model. These insights are immediately passed on to other dealers to drive sales and improve overall customer experience.

Case 2: citing the example of their mutual client (Under Armour), SAP CEO Bill McDermott explains ‘Under Armour runs their whole business on SAP, everything from their customer relationships in every single channel on any device, including direct to consumer, wholesale, and retail. We know the prior history of the consumer, we can fulfill on a geospatial level wherever that consumer is physically… but what we don’t know is why the customer feels a certain way about Under Armour’s Hovr shoe, which is their number one shoe in the market today and the future of the company. But you know who knows that? Qualtrics knows that. They know why the customer likes the size, the fit, the colour style, the scheme, the experience they’re having. Now, having that rich dataset combined with all the operational data we have, is giving a company like Under Armour a total 360-degree experience of what’s going on with their brand.’

Henceforth, Televisory believe that the symbiosis formed by the combination of SAP’s operational data with Qualtrics’ experience data will deliver a very unique actionable insights, which will fuel the growth of every customer centric business and also provide the much-needed momentum for the growth dynamics of SAP going forward.