It's become a two-horse race between SAP and Oracle as the two dominant enterprise application vendors vie for greater share of customers' IT budgets. SAP holds a commanding lead over Oracle in terms of market share, but the latter is increasing its efforts to narrow the gap.

This week at its annual North American user conference in Boston, SAP is expected to further detail its progress migrating its technology to a service-oriented architecture -- what it has dubbed Enterprise Services Architecture (ESA).

SAP laid out its ESA blueprint in 2003 and a year later shipped the cornerstone, NetWeaver. The NetWeaver integration platform provides a means to compose and orchestrate business processes that cross traditional application silos. Its availability signaled SAP's effort to compete in the traditional business applications market and in the infrastructure realm.

SAP CEO Henning Kagermann will focus his keynote address on SAP's progress in delivering on its ESA vision, says Bill Wohl, vice president of product and solutions public relations at SAP. That progress includes migrating the majority of SAP's applications to the NetWeaver stack, as well as providing a demo-services repository so independent software vendors can start building their own products on top of 500 common SAP services, Wohl says.

In the service-oriented world, SAP's biggest asset is its process expertise culled from years of building business applications, says Joshua Greenbaum, principal with Enterprise Applications Consulting. "But the processes are less interesting, less remunerative to SAP, if they're accessed through someone else's infrastructure," he says. "If they're accessed through NetWeaver, then SAP is selling the razors and the razor blades."

SAP also is expected to use its Sapphire event to play up its recent deals with IBM and Microsoft as the company works to strengthen its partner network. Last month SAP announced an agreement with IBM to optimize Big Blue's DB2 database for SAP applications. Days later, SAP and Microsoft announced their first jointly developed product, code-named Mendocino, designed to connect SAP's mySAP business applications with Microsoft Office.

The Mendocino announcement is a good example of how ESA would provide the flexibility to build composite applications that combine disparate resources, Wohl says. "It's about fast, rapid fixes to business requirements -- whether they come from partners, SAP or customers -- in a fashion that allows a quick response without a lot of heavy integration work and expense associated with it," he says.

A strong partner network is critical to SAP gaining credibility as a platform vendor, analysts say. "SAP's ecosystem strategy is probably the No. 1 thing, at this point, that SAP has to define, articulate and show results for," Greenbaum says. "NetWeaver won't realize its potential if SAP can't build these partnerships."

But at the same time, SAP has to make sure it clearly articulates what the gaps in its product strategy are, where partners are going to be able to thrive and SAP isn't going to try to compete. "That's a tricky question," Greenbaum says.

As the Sapphire user show approaches, industry watchers also are tuned to the escalating SAP vs. Oracle rivalry. The two are the last remaining independent vendors from among the so-called JBOPS -- J.D. Edwards, Baan, Oracle, PeopleSoft and SAP -- that reigned supreme in the ERP industry in the late 1990s.

Enterprise IT buyers are showing greater inclination to standardize on fewer software providers, and SAP and Oracle are prime candidates for wresting greater account control at the expense of smaller, more specialized vendors, according to AMR Research. The research firm estimates SAP will capture 43 percent of ERP market share in 2005, compared with Oracle's 19 percent.

SAP has a comfortable market share lead over Oracle and likely isn't worrying much about losing that lead, says Jim Shepherd, senior vice president at AMR.

Oracle has a lot of ground to make up with its enterprise applications business, agrees Greenbaum. Its strategy for the last two years has been to buy PeopleSoft. And even before that, Oracle didn't devote a lot of development or marketing resources to its applications business, he says. "Oracle is coming off three years of lackluster attention and performance. Now it's really trying to rev up its engine, but it's missed out on a lot of leadership opportunities already," Greenbaum says.

One of Oracle's longstanding flaws has been its inability to unite its applications and infrastructure products in a coherent way. "If Oracle can do that, it can mount a serious challenge," he says. "Oracle has a lot under the hood. It has strong technology, but it's been handicapped by its merger and acquisition activity."

Most recently, SAP missed an opportunity to widen the gap with Oracle when it lost a bidding war for retail software maker Retek. A battle for Retek ignited after Oracle bested SAP's initial US$8.50 per-share (US$496 million) offer. After some back and forth, Oracle eventually prevailed with a US$11.25 per share offer.

While there's little long-term damage, losing Retek to Oracle was disappointing to SAP, which now will have to look elsewhere for ready-made retail industry expertise, Greenbaum says.

Retek could have been a market accelerator for SAP, Wohl acknowledges. But even without it, SAP remains the leading software provider in the retail industry, he says. "In the wake of Oracle overpaying for Retek, we've talked once a week about a major win for SAP in retail." At this week's Sapphire show, SAP is expected to announce the addition of another major retailer to its customer list, he says.

With respect to Oracle, Wohl downplays any mounting concerns at SAP. "Oracle is always worth keeping a close eye on, but they are very distant in our rearview mirror," he says. Oracle will have a lot of work to do to assimilate PeopleSoft, J.D. Edwards, and Retek, he says. "All of this bulking up has not translated into a significant catching up on SAP."

Nonetheless, given Oracle's potential, SAP needs to keep up its guard.

"As a market leader, SAP has to keep reinventing itself," Shepherd says. So far it has - successfully adapting over the years to shifting mainframe, client-server, Web-based, and now services-oriented requirements, he says. "SAP has shown a remarkable amount of agility for a US$9 billion company."

Looking ahead, SAP can expand on its vertical industry expertise, which is one of the things the company does better than anyone else, Shepherd says. By emphasizing vertical application features, SAP can raise the bar for all the other application vendors, he says.

SAP continues to enhance its industry-specific offerings, particularly related to four key industries -- retail, public sector, banking and insurance -- SAP identified at the beginning of the year, Wohl says. At Sapphire, SAP plans to announce customer wins in each of these industries. SAP also will unveil upgrades to its industry-specific CRM products, he says.