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Concerning Parts of the Judge’s Ruling on the SAP Diageo Case

What This Article Covers

  • Concerning Parts of Judge’s Ruling on SAP Diageo
  • How Sales Orders Were Entered into SAP ECC
  • The Reality of Application Integration in Enterprise Software
  • How the Judicial Outcome Could Have Been Improved

Introduction

I recently found an interesting article from UpperEdge on the topic of indirect access. I consider UpperEdge to produce some of the best articles on indirect access, and like me, they can tell the truth on indirect access in the way that an entity that accepts money or is an SAP partner can’t. I agree with UpperEdge on the facts of indirect access, but still see things a bit differently. And I believe this contrast can help illuminate interesting issues on indirect access. Here are some of the concerning areas that I quote from an UpperEdge article on the SAP Diageo case.

“The court rejected the scenario was similar to how Diageo was previously entering customer orders through call center agents and customers would not be required to be named users under that scenario. The court ruled it was different in the Connect scenario because Diego’s customers were indirectly accessing the SAP ERP system via Connect and therefore those customer should be considered a Named User, just like the prior call center agents were considered named users.”

If sales orders are sent to a central pool from slips of paper that are filled out by customers, and then those sales orders are manually entered into the SD module in ECC, how is this different in terms of access than if Salesforce sends sales orders to SAP SD that then create sales orders in SAP? In both scenarios, one is leveraging master data in SD (customer information, product information, etc..) Now SAP may see the manual entry of sales orders from slips of paper to be less threatening than if their customer uses Salesforce. They may see it as less of an encroachment on their turf. They will likely see it as not eating up the IT budget, and therefore freeing up more budget for their applications, but none of those things has anything to do with what is actually happening technically.

The Reality of Application Integration in Enterprise Software

More generally, It is literally impossible for two systems to be connected to each other without leveraging each other’s intellectual property and their master data. In the SAP Diageo case, as well as generally, SAP seems to present this idea of leveraging the intellectual property and master data of their systems as if they have invented something. That is in fact contained within the definition of application integration. One can create sales orders in SD or in Salesforce. The customer should be able to choose where they create a sales order. And the vendor who has the software where the person is creating the sales order deserves the license. If that user needs to log into the SAP system, then they need to be a licensed user of SAP. SAP is trying to obtain licenses from customers for users that don’t use its system but happen to send data to one of their systems. They call this indirect access, but it isn’t. It is application integration and it has always been a part of the software industry. Secondly, as I covered in Tying Agreements: Legal Framework for Fighting SAP’s Indirect Access, SAP will differentiate its pricing of its ERP license if you purchase their CRM system, versus buying Salesforce. SAP routinely uses this anti-competitive action to push more sales of its applications when the other vendor was preferred and won the software selection. This means that right now, many companies have purchased SAP software, not because they wanted it, but to stay away from indirect access charges and liabilities.

In the SAP Diageo case, the court invested significant effort in interpreting Diageo’s commercial agreement with SAP, specifically Named User based pricing, concluding the agreement did not contain an appropriate user type related to customer use. The court appeared to be sympathetic to SAP indicating that “in 2004, the effective date of the agreement, such usage through cloud-based portals was not generally available and therefore unsurprisingly, it is not explicitly called out in the schedule.”

The courts is mistaken here and did not understand the history of enterprise software well enough to make this call. Cloud-based portals, SaaS, etc have nothing to do with SAP’s claims of indirect access. Back in 2004 and in fact all the way back to the origins of enterprise software, applications connected to other applications. Cloud or SaaS or hosted applications have to do with the delivery model used. They don’t have anything to do with the subject of applications integration. The fact that data is sent between two systems that are not on premises (one may be on premises and one in the cloud for instance) does not change what data is sent between the two systems. Both systems can be in the cloud, it just does not make any difference. The important fact is that data is sent between the applications, not where the applications are hosted.

SAP has always been connected to other systems and SAP has accessed other systems and other systems have accessed SAP. Yet SAP’s application of Type 2 IA is really only a few years old? Why?

“The court also rejected Diageo’s argument that the agreement did not explicitly state that users of third party software interfacing with the SAP software are required to be Named Users and therefore not subject to additional fees.”

It seems misleading that SAP did not do this. The undeniable fact is that SAP did not enforce indirect access back in 2004 the way that it has the past few years. Diageo could not have known that SAP would begin doing this. In fact, SAP most probably did not know they were going to change their entire approach to indirect access. The indirect access in the 2004 contract most likely was meant to apply to Type 1 IA (I cover the difference in the article The Difference Between Type 1 and Type 2 Indirect Access.).

SAP Has Clearly Gone All In… Why?

Look no further than SAP’s Full Year 2016 Preliminary Results Release on January 24, 2017. SAP’s presentation includes a view of the SAP Digital Business Framework. You will notice the SAP view of the Digital Core is S/4HANA supporting Business Transactions and Intelligent Insights.

On the periphery, the Digital Core supports the Customer Experience, Workforce Engagement, IoT & Supply Chain and Spend Management. Within the framework, SAP also positions its complementary cloud solutions, such as Ariba, Concur, Fieldglass, Hybris, Leonardo and SuccessFactors.

The bottom line… SAP has gone all in on the Diageo case, and has been all in on this concept for years because SAP’s future revenue and share of the cloud market is on the line. SAP has clearly developed and is executing on its strategy to incent adoption of SAP cloud solutions. SAP has also positioned itself to capture incremental revenue even if a customer elects to choose an alternative best-of-breed solution.”

This is true. But actually, something is not discussed in this quote. And that important feature is that most of SAP’s non-ERP applications are either not competitive or not differentiated. I cover this in the article, How SAP is Now Strip Mining is Customers. Probably the best applications are the acquired applications. However, SAP has the problem in that even when the acquire a decent product, it withers within a few years and is far less prominent after its acquisition. This is the same problem with acquisitions faced by IBM. Secondly, products like Ariba, Concur, SuccessFactors, etc.. never had the profit margins of SAP’s core applications. SAP cannot acquire its way into equally monopolistic products because SAP already has the most monopolistic-ally priced application in all of the enterprise software with their ERP system, currently called ECC and S/4HANA. Since the mid-1990s, SAP’s growth strategy has always been to use its control over the ERP system to cut off options for customers and to direct purchases to its far less capable non-ERP applications.

Conclusion

I have said for a while that the UK ruling in the SAP Diageo case was a bad one and the judge’s need more understanding of the history of enterprise software before accepting SAP’s proposal on Type 2 indirect access.

There are so many questions that the judge could have asked in the SAP Diageo case but chose not to ask. One obvious one is why wasn’t Type 2 IA applied back in 2004? Another would be what is the precedent for other vendors using Type 2 IA? A third is how does SAP use Type 2 IA as a hammer to enforce its monopoly power? This and many more questions, if the answers were found from an independent source would have resulted in a better outcome.

SAP Indirect Access Services

References

SAP Indirect Access: What the Diageo Case Means to SAP Customers