The Problem with the Judge’s Ruling on the SAP Diageo Case

Executive Summary

• The judgment of the UK court for SAP vs. Diageo made little sense upon reading the summary.
• Problematic areas included how the judge interpreted how systems work and the reality of integration.

Introduction

I recently found an interesting article on indirect access from UpperEdge. 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 I still see things differently. And I believe this contrast can help illuminate interesting issues on indirect access. Here are some concerning areas that I quote from an UpperEdge article on the SAP Diageo case.

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• This is published by a research entity, not some lowbrow entity that is part of the SAP ecosystem. 
• Second, no one paid for this article to be written, and it is not pretending to inform you while being rigged to sell you software or consulting services. Unlike nearly every other article you will find from Google on this topic, it has had no input from any company's marketing or sales department. As you are reading this article, consider how rare this is. The vast majority of information on the Internet on SAP is provided by SAP, which is filled with false claims and sleazy consulting companies and SAP consultants who will tell any lie for personal benefit. Furthermore, SAP pays off all IT analysts -- who have the same concern for accuracy as SAP. Not one of these entities will disclose their pro-SAP financial bias to their readers. 

“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 customers fill out, 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 happening technically.

The Reality of Application Integration in Enterprise Software

More generally, two systems can’t be connected without leveraging each other’s intellectual property and master data. 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 contained within the definition of application integration. One can create sales orders in SD or 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 who 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 has always been part of the software industry.

How SAP Specifically Breaks US Antitrust Law

As I covered in SAP Indirect Access as a Tying Arrangement Violation. SAP will differentiate the 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 many companies have purchased SAP software right now, not because they wanted it, but to avoid 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 are 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 indirect access claims. Back in 2004 and 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 application 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 information is transmitted between the two systems. Both systems can be in the cloud; it does not make any difference. The critical fact is that data is sent between the applications, not where the applications are hosted.

Connecting Non SAP Systems to SAP Systems is a New Thing?

SAP has always been connected to other systems, and SAP has accessed other systems, and other systems have accessed SAP. SAP’s application of Type 2 IA is 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 it has in the past few years. Diageo could not have known that SAP would begin doing this. SAP probably did not think it would change its entire approach to indirect access. The indirect access in the 2004 contract was likely 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. That critical feature is that most of SAP’s non-ERP applications are neither competitive nor 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 a problem in that even when they buy 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 its ERP system, currently called ECC and S/4HANA. Since the mid-1990s, SAP’s growth strategy has always used its control over the ERP system to cut off customers’ options and direct purchases to its far less capable non-ERP applications.

The UK ruling in the SAP Diageo case was terrible; the judges 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 Type 2 IA wasn’t applied in 2004. Another would be the precedent for other vendors using Type 2 IA. A third is how SAP uses Type 2 IA as a hammer to enforce its monopoly power. If the answers were found from an independent source, this and many more questions would have resulted in a better outcome.