THE ECONOMIST: Artificial Intelligence triggers battle of corporate IT giants as Salesforce, SAP become rivals

Enterprise Software is an unlikely source of hubbub. Bringing up CRM or ERP in conversation has usually been a reliable way to be left alone. But not these days, especially if you are chatting to a tech investor.

Mention the acronyms — for customer-relationship management, which automates front-office tasks like dealing with clients, and enterprise resource planning, which does the same for back-office processes such as managing a firm’s finances or supply chains — and you will set pulses racing.

Between June and early December 2024 Salesforce, the 26-year-old global CRM giant, created more than $US120 billion ($184b) in shareholder value, lifting its market capitalisation to a record $US352b.

In the past 12 months SAP, a German tech titan which more or less invented ERP in the 1970s, has generated more. It is Europe’s most valuable company, worth $US380b, likewise an all-time high. Both enterprise champions rank among the world’s top ten software companies by value. Maybe not so dull, after all?

The source of the excitement is another, much sexier acronym: AI. Builders of clever artificial-intelligence models may get all the attention; this week Elon Musk’s xAI hogged the headlines when it was reported that the startup was launching a $US300m share sale that would value it at $US113b.

But if the technology is to be as revolutionary as boosters claim, it will in the first instance be because businesses use it to radically improve productivity. And as anyone who has tried — and probably failed — to replace corporate computer systems will tell you, they are likely to do so with the assistance of their current IT vendors.

Salesforce and SAP each believes it will be the one ushering its clients into the AI age. The trouble is that many of those clients use both firms’ products. Perhaps nine in ten Fortune 500 firms run Salesforce software. The same share relies on SAP.

This did not matter when the duo focused on their respective bread and butter.

A client would run Salesforce’s second-to-none CRM in the front office and SAP’s first-rate ERP in the back. Amazon and Walmart, Coca-Cola and PepsiCo, BMW and Toyota: pick a household name and the odds are it does just that.

A big reason for SAP and Salesforce to slather a thick layer of AI on top of their existing offering, though, is to give customers a way to uncurdle their data, analyse it and, with the help of semi-autonomous AI agents interacting with one another on behalf of their human managers, act on it. In this newly blended world, the lines between front and back office are fudged.

“It’s one user experience,” sums up Irfan Khan, SAP’s data-and-analytics chief.

Controlling the user interface for this “agentic” AI experience promises fat profits. It also creates a head-to-head rivalry between the two enterprise masterchefs. For their AI recipes look alike.

Step one: expand your range of products. SAP has improved its front-office chops by buying CRM firms (like CallidusCloud) and marketing platforms (such as Emarsys). Though Salesforce has not gone full-ERP, it has a 16-year-old partnership with Certinia, whose financial-management system sits exclusively atop its platform.

It has bought firms like ClickSoftware, which helps businesses manage their service workforce. On June 2nd it hired the team behind MoonHub, a recruitment-and-HR startup. Clients, spared from switching between providers for every specialist function, love it. So do SAP and Salesforce, since it amasses more client data, AI’s great leavener, in their own systems.

Step two: piggyback on the “hyperscalers”. This allows clients to choose between the cloud giants, including, in China, Alibaba and Tencent (and, in Salesforce’s case, excluding Microsoft, with which its co-founder and boss, Marc Benioff, has a long-running feud).

It saves SAP and Salesforce from splurging on what each sees as infrastructure destined for “commoditisation”. Oracle, the giant of corporate-database management which has taken the opposite approach, has seen its quarterly capital budget explode from $US400m in 2020 to nearly $US6b in its latest quarter; SAP and Salesforce spend $US300m-400m a quarter between them.

Step three: whip up the AI layer. In February SAP teamed up with Databricks, a $US60b AI startup, to help clients make sense of their information, including that stored outside SAP systems, and deploy SAP’s Joule AI agents across their operations.

On May 27 Salesforce said it would pay $US8b for Informatica, which designs tools to integrate and crunch corporate data. This will make its own Agentforce easier for clients to use beyond the front office.

Right now investors prefer what SAP is serving up. Its systems cover a wider range of functions and thus contain more data. This data is also notoriously hard for non-SAP systems to extract.

As annoying as this may be for clients, it gives them an incentive to look from inside the SAP platform out rather than the other way round. SAP’s share price has risen by 12 per cent in the past six months.

Meanwhile, Salesforce’s has collapsed like a bad soufflé. It is down by nearly 30 per cent since its peak in early December.

Although its sales passed those of SAP in 2023, growth is slowing while SAP’s accelerates.

Analysts wonder if Agentforce, the launch of which fuelled last year’s rally, can make real money. They also fear a return to profligate dealmaking that culminated with the $US28b purchase in 2021 of Slack, a corporate-messaging platform.

Too many cooks

Investors could yet sour on SAP just as they have on Salesforce. Gartner, a research firm, reckons that between 2020 and 2024 rivals like Workday cut its share of the ERP business from 21 per cent to 14 per cent.

For all its front-office efforts, its CRM sales declined around that time, even as Salesforce preserved its 20 per cent slice of a growing market.

Microsoft, which has its own cloud, its own cutting-edge AI and plenty of business clients, is elbowing its way into ERP, as well as CRM. The enterprise-AI food fight is just beginning.