The SAP Acquisition of Crossgate Has the Potential to Rock B2B Markets

B2B users and vendors should monitor how SAP will execute in B2B, in terms of marketing messages and sales effectiveness, and re-evaluate their strategies accordingly.

Key Findings

• The active role that megavendors and software as a service (SaaS) application providers are taking in B2B is changing the stand-alone B2B integration markets. The way organizations consume B2B integration will change sharply in the near future.
• SAP has the potential to be a B2B integration leader if it leverages Crossgate's assets effectively and builds a critical mass of users for its solution, within and outside its installed base.
• SAP's acquisition of Crossgate addresses important B2B integration requirements for many of its customers, but the acquisition alone does not represent a comprehensive multienterprise application strategy as yet.

Recommendations

• SAP users: Examine the new B2B strategy that SAP is constructing, monitor SAP's commitment to it, and factor that into your B2B plans. If you are running a B2B solution already, estimate its value, and compare it with the value a fully SAP-Crossgate solution would have for you.
• Oracle and ERP users: Demand clarity on how Oracle (or your ERP vendor) will address B2B requirements (on-premises and in the cloud), or look elsewhere to address your B2B requirements.
• SAP: Develop and communicate a credible and comprehensive long-term multienterprise application strategy.
• B2B infrastructure (software, integration platform as a service [iPaaS], cloud service brokerages [CSBs] and integration brokerages) vendors: Monitor your SAP prospects' buying patterns, and develop contingent B2B go-to-market strategies, depending on if and how those buying patterns change.

The potential results from SAP's acquisition of Crossgate are wide, largely depending on how SAP leverages the acquisition. Integration managers, B2B application managers, vendors' strategists and others involved in B2B multienterprise processes and applications should be aware of the potential outcomes, and must ask SAP for a statement of its B2B strategy and look for signs (facts and data) of effective execution of that strategy.

Event Facts

On 20 September 2011, SAP announced its intention to acquire Crossgate, an integration brokerage providing managed services for generalized B2B and e-invoicing projects. The deal closed on 30 October 2011.

Analysis

This deal likely has been under way for quite some time. SAP's initial investment in Crossgate was in October 2007 (see "Crossgate Challenges B2B Market With Tight Alliance With SAP" — Note: This document has been archived; some of its content may not reflect current conditions). SAP has been selling Crossgate's basic electronic data interchange (EDI) and e-invoicing solution (SAP Information Interchange by Crossgate) for about two years, reportedly with success in Europe. In South America, where e-invoicing is heavily regulated and mandatory for a few countries, Crossgate's e-invoicing solutions sold well, too. Crossgate started about 10 years ago, with the purpose of changing the status quo for B2B integration. Integrating a variety of customers' application infrastructures was never going to be simple for a nascent company, so Crossgate focused, from the beginning, on economies of scale and reusable components. This brought Crossgate a long way in the market during the past few years (see Note 1) and proved the value-proposition of an ERP-extension approach to delivering B2B integration services. But clearly, starting to address a worldwide, massive client base like SAP's required nonlinear growth, hence the company was acquired by SAP.

What This Acquisition Is About

After years of partnering to address multienterprise scenarios, SAP is stepping strongly into B2B. Interestingly, a software giant like SAP does not extend into B2B software, but into managed services, iPaaS and cloud. For clients that need a software solution to implement multienterprise e-transactions, SAP will shortly (2Q12) offer a set of NetWeaver Process Integration (PI) B2B adapters and continue its established partnership with Seeburger. Many other B2B software providers and integration brokerages (e.g., IBM, GXS and Software AG) also have traction in SAP accounts.

Following its SuccessFactors acquisition (see "SAP to Buy Into Software as a Service With SuccessFactors Deal"), it is clear that cloud and on-demand have become more of a priority in SAP's strategic thinking. Crossgate's B2B integration expertise — primarily focused on traditional supply chain and e-invoicing projects — can evolve. It will become useful for integrating SAP with SuccessFactors and other SaaS applications. Integrating with SAP's Business ByDesign has been a priority in Crossgate's strategy for a few years. SAP is not going public yet with a more aggressive cloud strategy, but Gartner believes SAP is heading in that direction due to its recent acquisitions.

SAP's endgame for B2B is clearly to have all SAP installations in different companies being able to automatically carry out B2B transactions with minimal need for integration work. Because Crossgate's integration brokerage offering could also address integration with non-SAP users, SAP's creation of its B2B network and community ecosystem could quickly capture a large portion of the current B2B infrastructure market, or even change its rules completely. If a critical mass of SAP clients subscribe to Crossgate B2B services (through their standard and not-so-standard IDoc files), simple B2B processes that today require a lot of integration work could become as easy to integrate as picking the name of a company from a list and buying the capability (generally delivered as menu-driven managed services). There's still a lot of complexity in that plan of action, and not all companies that need to transact electronically run SAP, but this vision is very powerful. In theory, if a critical mass can be reached, this vision is possible. In practice, there are many challenges (see section "Vision Faces Some Key Challenges").

This deal has little impact on SAP NetWeaver PI. Crossgate can work with the current NetWeaver PI, and will work with whatever NetWeaver PI will become. Part of Crossgate's value proposition is that you don't need to worry about NetWeaver PI and its future, because Crossgate will deal with that complexity for you, at least in the B2B integration domain. (Crossgate is not a proven managed service solution provider for internal integration projects, an area that providers such as Hubspan and Liaison have begun to address.)

SAP's acquisition of Crossgate has the potential to enhance the value of other major SAP strategic initiatives, like Hana. Crossgate could provide data on B2B events for Hana across the supply chain that would be of high value for bulk payments, savings on logistics and much more. That would certainly sell well with a lot of SAP's manufacturing and retail clients. However, it remains to be seen whether SAP can identify and leverage cross-divisional value. Historically, SAP frequently didn't do this.

Vision Faces Some Key Challenges

SAP faces several nontrivial challenges in realizing the full potential of the Crossgate acquisition:

• Clarify and push the vision: SAP needs to clarify its overarching vision and strategy for multienterprise processes and applications — and the role and importance of the Crossgate acquisition within it. Will SAP recognize that B2B integration services:
  • Fit well with important emerging macro IT trends (e.g., outsourcing of noncore competencies)?
  • Can frequently save clients money?
  • Is a profitable stand-alone business to be in? (Crossgate has proven this to SAP in the past years.)
• Execute the vision fully: The key is to build a critical mass of SAP users who will drag everybody else trading with them onto the Crossgate network. The majority of SAP clients that need to address B2B requirements, along with their trading partners, already have at least one B2B solution in place. They will need a very attractive deal to switch to what SAP is pushing. The costs of changing B2B solution are far from trivial (see Note 2). For example, when ERP customers are planning an upgrade, they are likely to revisit their B2B strategies, because their ERP upgrade will force an upgrade to their older B2B platforms. SAP could offer a good deal to its customers to migrate to Crossgate by applying the knowledge that SAP and Crossgate accumulated during the past two years of selling together.
• How well the Crossgate business model and the supporting technology will scale: Providing the chance to scale its business model and supporting technology was likely one of the main reasons behind SAP's acquisition of Crossgate. Serving hundreds of clients is one thing, but serving tens of thousands is another.

If SAP can address these issues, it has the potential to shake up the B2B markets in terms of integration and multienterprise applications. If it does not succeed, then its approach will be just another embedded integration type of B2B solution, an add-on for SAP applications, competing with tens of others in the already massively overcrowded world of B2B standards.

Customers Could Benefit From E-Invoicing Offerings

The deal removes concerns about vendor viability for Crossgate customers, and offers the potential of much bigger trading communities. Most Crossgate customers (especially the larger ones) were already SAP clients. Both companies are based in Germany, and have a lot of manufacturing and engineering clients in common. These clients now have one vendor relationship, instead of two. Companies that were only Crossgate clients are now also SAP clients and will enjoy similar benefits. We expect SAP to look after them and make an extended SAP proposition attractive.

New, large trading communities (likely including high numbers of non-SAP clients, who could then be attracted to the SAP ecosystem) will determine if the critical mass of users on the Crossgate network can be reached, multiplying the value for SAP. In its years as an integration brokerage, Crossgate has learned to integrate business partners, regardless of the nature (SAP or not) of their systems, which will be extremely useful in building a critical mass. For example, SAP already has a powerful weapon — "international e-invoicing" — to attack the non SAP B2B solutions of SAP clients.

It is well-proven that B2B transactions save money, compared with traditional, paper-based transactions. The savings are even more significant for e-invoices (see "Cost Savings Finally Make the (European) E-Invoicing Steamroller Pick Up Speed" — Note: This document has been archived; some of its content may not reflect current conditions). But there is a downside: Different countries have drafted different variants of regulations that define what types, formats and security arrangements make e-invoices legal. Therefore, sending or receiving legal e-invoices between countries requires complex interoperability work. Regulations are still changing in several countries, including countries such as Mexico or Brazil where e-invoicing is mandatory by law.

Partial B2B software solutions to the e-invoicing "red tape" problem exist, but very few companies want to allocate the necessary IT resources (full-time equivalents and software) to follow a set of nationally changing moving targets. Thus, the majority of companies that do e-invoicing push the problem out of their IT departments, sign up to a managed services solution, and still make considerable savings on running their accounting processes. Crossgate was one of a handful of companies offering legally valid international e-invoicing as a managed service; it did this for about 35 countries. SAP might be using this capability to penetrate accounts that have a (frequently software) B2B solution, which falls short of addressing international e-invoicing requirements. Besides helping its clients address the thorny issue of e-invoicing, SAP has the potential to leverage Crossgate's role in e-invoicing to challenge relationships that its customers have with third-party B2B providers, such as GXS and IBM-Sterling Commerce for multienterprise wider B2B projects (e.g., customer and supplier supply chain integration).

Should You Migrate to SAP-Crossgate?

If you are an SAP client and have a B2B solution in place, should you migrate off that and get on the SAP-Crossgate network?

It is difficult to give one answer, because the costs involved in migrating off a B2B solution are significant, unless you transact electronically with fewer than 20 trading partners. The cost of migration is generally proportional to the number of trading partners.

There are several questions you should ask yourself. The five most important ones are:

• Is our current B2B solution delivering good value and likely to meet reasonable demands for the future? If yes, will that still be the case at our next ERP upgrade?
• If we run a mixture of diverse B2B infrastructures (e.g., different approaches in different countries), how much economies of scale would we get from a unified solution?
• Is legally valid international e-invoicing a major requirement for our company? Is our current B2B solution addressing (and will continue to address) this requirement in full?
• Do we want to reduce the number of vendors with whom we are dealing (e.g., to get better deals on our contracts or to reduce the effort required to manage them)? Are we reasonably satisfied with our relationship with SAP at the moment?
• If we are running B2B software, could we potentially find value (such as cost savings or faster time to deployment) in a cloud-based, pay-per-use, outsourced solution?

Those are difficult questions to answer, and it is even more difficult to associate a number (in terms of value) to each question. Ultimately, you will have to compare the additional value (frequently converted into a monetary figure) that a migration would bring with the cost of actually carrying it out. That balance could swing widely either way, depending on your situation and the answers to the questions above. We recommend that you at least give it some thought, and estimate on which side your organization will stand — migrate or don't migrate.

Other Vendors Cannot Afford to Ignore This Deal

SAP's acquisition of Crossgate is fundamentally different from IBM's recent acquisition of Sterling Commerce (see Note 3). However, we believe that Oracle is most affected by this acquisition. With IBM moving heavily into B2B, and SAP acquiring Crossgate and starting to build momentum for B2B, Oracle's absence from the B2B market is evident. Oracle does offer a few software B2B connectors and the B2B integration component of the Oracle SOA Suite to its clients (see "Who's Who in B2B Gateway Software Products: The Megavendors"), and a healthy B2B managed services relationship with E2open; however, neither of these B2B offerings covers a wide spectrum of B2B projects or appears to be part of a comprehensive B2B strategy. Given other B2B network acquisitions (such as Ariba acquiring Quadrem and b-process), Oracle's limited presence in this area is now conspicuous. Gartner strongly believes Oracle will make a decisive move in the B2B market in 2012.

The deal also affects GXS (which historically sold big B2B projects into SAP accounts), IBM-Sterling and all the main players in the B2B infrastructure (software and services) markets. Liaison, Hubspan, SPS Commerce, E2open, Tieto, Comarch, Edicom and other providers also serve the integration brokerage market. The concept of embedded or bundling integration in applications, including integration functionality, is becoming more popular, especially in SaaS. This is not a threat, but it's an opportunity for many vendors. All the pure B2B players will have to recognize that, and adjust their strategies accordingly.

SAP has had Seeburger as a partner for B2B software for years. In November 2011, SAP announced the availability of a rack of B2B adapters (for SAP NetWeaver PI) owned by SAP, for companies that want to run their B2B operations on-premises, to be available 1Q12 or early 2Q12. The Crossgate acquisition is not meant to affect the relationship between SAP and Seeburger. Seeburger will still be resold by SAP and applicable as a software solution. Note that Seeburger offers managed services, too. However, it is easy to see that competing with a full SAP solution (even if you ignore international e-invoicing) will be increasingly difficult for Seeburger and any other B2B infrastructure provider. Four or five years ago this would have been a major blow to the old Seeburger business. However, since then, Seeburger expanded and grew the managed services business as mentioned above, adding a new managed file transfer (MFT) solution and a functional iPaaS that will push its viability forward.

SAP also has partners for e-procurement (Hubwoo and Capgemini IBX). Crossgate never addressed e-procurement processes in-depth (with the notable exception of e-invoicing), so we do not expect that those relationships will be affected, although some changes for e-invoicing might occur. If SAP integrates Crossgate tightly with supplier resource management (SRM), Supplier Self-Services (SUS), sourcing and contract life cycle management (CLM), it could build a compelling offering in e-procurement, and then compete with Hubwoo, Capgemini IBX and Ariba. We don't expect this to be a priority for SAP in the short term.