Navigation Menu+

Is SAP Rising?

Why SAP finds itself in a Catch-22 as it changes strategy

 

After years of selling big enterprise applications in partnership with consultants, European software giant SAP finds that it needs to shoot itself in the foot before it can walk forward with confidence. Chris Middleton and Dan Stockton explain why, and hear CEO Bill McDermott set out his plans.

This is the latest in our The Decoder series, in which the Strategist unpacks strategic lessons from recent CEO announcements.

ORGANISATIONS SHORTIn 1972, five former IBM employees founded SAP, the business software company based in Walldorf, Baden-Württemberg, Germany. Over time, its enterprise resource planning (ERP) systems grew to become part of the IT backbone of thousands of large organisations worldwide. Indeed, SAP is one of the few such software firms to have brand recognition among business (rather than IT) leaders.

Through the 1990s, SAP’s growing success in America at large enterprise level was unusual for a European technology firm. It was a feat that, in no small measure, was helped by an alliance with management consultancy Accenture, which developed a lucrative business from implementing its systems.

In the 1990s, it was often joked that for every pound, dollar, or euro an organisation spent on SAP’s software, an organisation would spend another ten with Accenture to make it work for them. But there was a hard kernel of truth to the jibes: customers’ boards knew that SAP was expensive and complex, and a shoo-in for consultancy programmes. Today, SAP projects remain mighty endeavours that are scoped for deployment over years – it’s not an ‘off-the-shelf’ deployment model.

At least, it hasn’t been until recently. And therein lies SAP’s strategic problem.

Uncertain futures in the cloud

Bill McDermott

SAP CEO Bill McDermott.

Times have changed and the types of large-scale, on-premise software deployments on which SAP built its reputation are no longer in vogue. The rise of cloud computing services – where organisations subscribe to hosted business applications and platforms on demand – has fatally undermined the per-seat, upfront licensing model that many an enterprise provider grew prosperous on.

SAP still has a solid revenue stream from existing customers, but not everyone will be celebrating. Once an organisation commits to basing its business on SAP’s traditional applications, it takes a lot of nerve and capital to rip them out and start again. But some may do that sooner rather than later – if they wish to follow industry trends.

Recent research published by Computing revealed that, by 2016, well over 50 per cent of large organisations will be implementing a cloud strategy. But will SAP be in the frame?

For reasons explored by the Strategist in its own cloud report, the drift towards public, private or hybrid clouds is inescapable: so much so, that even the notoriously anti-cloud Oracle has got the message, snapped up cloud vendors, and attempted to rebrand the cloud in its own image – an about-face so extreme that only Larry Ellison could have pulled it off without blinking.

Critical production systems and data may be at the back of the queue for cloud deployment, but the direction of travel is clear. SAP (and vendors like it) must change to survive.

SAP’s progress

The signs are that SAP is only too aware that ‘home has moved away’. In recent years, the firm has made inroads into the cloud computing model. Some of these have been successful, such as its acquisition of cloud pure-plays SuccessFactors and Ariba, but others have failed, notably its efforts to build its own SME-focused cloud applications.

Most recently, the firm has made some radical structural changes. It lost its Chief Techology Officer, a major shift for a firm so dependent on technical excellence. It also announced that it was restructuring, redeploying some of its 67,600-strong workforce to new roles.

McDermott with former co-CEO Jim Hagermann Snabe.

McDermott with former co-CEO Jim Hagermann Snabe.

Until recently, SAP had presented two faces to the market, those of co-CEOs Jim Hagermann-Snabe and Bill McDermott. In a clear change of tack, McDermott (the bullish US sales guy) has taken sole command, while Hagermann Snabe (the quiet European product guy) has stepped down.

Not that this signals an end to SAP’s European identity. The ‘big beast’ of the company is still in place, in the shape of billionaire co-founder Dr. Hasso Plattner. As Chairman of the Advisory Board of SAP AG, Plattner still exerts a major influence over product strategy and is one of the prime architects of its new in-memory database technology, HANA.

But the biggest shift concerns its image. SAP wants, finally, to rid itself of its reputation for complexity. The company has, it says, stripped out layers of complexity from its core applications and is pitching them as leaner, simpler, more cost-effective offerings. Many customers will respond well to that message, but some industries may feel that complexity equals depth, and that’s what they’ve paid a premium for.

Run Simple – run deep?

SAP’s new ‘Run Simple’ branding will be one that existing and, the firm hopes, new customers will be hearing a lot of in the coming months, says CEO McDermott. “Earlier this year, we launched a new strategy to become ‘the cloud company powered by SAP HANA’, and the focus of this strategy is to make our customers ‘run simple’,” he explains.

“’Run Simple’ is an absolute movement to simplify our company. It also happens to be the new identity for the SAP brand. So, it’s a movement, it’s an identity, and there’ll be lots of things that you’ll be seeing on that in the days and weeks ahead.”

Zach Nelson

NetSuite CEO Zach Nelson.

A key part of this well-considered and timely strategy will be to fight back against the cloud upstarts, such as Salesforce.com and NetSuite, that have been encroaching on SAP’s turf for years. (Salesforce.com is opening its own data centre in Germany, parking its tanks on SAP’s lawn.)

McDermott claims 38 million users in the cloud, with more to come. “At [customer conference] Sapphire, we announced that we’re bringing our over 40 years of unrivalled expertise across 25 industries to the cloud,” he says. “We are running industry-specific, mission-critical processes in the cloud, which other cloud vendors simply can’t do.”

Catch-22

This may be so, but convincing strategic technology buyers may be a tougher challenge, even for an expert salesman such as McDermott. Every recent survey into buy-side cloud behaviour indicates that industry-specific, mission-critical processes are precisely what most large organisations have no plans to put into the cloud, at least in the medium term.

Data security fears aside, this is partly for one reason: SAP’s successful legacy of crafting industry-specific, on-premise systems (purchased by customers for big money, and deployed by expert consultants).

In other words, SAP finds itself in a classic Catch-22 situation: in order to convince its enterprise customers to put critical processes into the cloud, it must first convince them that it is a better solution than running them on their expensive, expertly deployed, on-premise SAP systems – and bear in mind, these customers have long been the foundation of SAP’s fortunes.

This challenge – already serious – can only become more acute as increasing numbers of large organisations opt for cloud solutions, and they will look at the whole cloud supplier market for answers.

For this reason, large enterprise software companies like SAP may be forced to court the SME space – which Tom Siebel once famously dismissed as “crummy” – in order to rent out their cloud wares and grow their cloud credentials. In their eyes, perhaps, a multitude of sprats to catch a passing mackerel.

“We also recognise the increasing opportunity for small and medium businesses to ‘run simple’ in the cloud,” says McDermott. “It’s clear that customers of all sizes are accelerating their moves to run simple in the SAP cloud, powered by SAP HANA.” Clearly, McDermott recognises the necessity for a CEO to not only represent his company’s marketing strategy, but also to repeat it at every opportunity.

Despite this bullish outlook, in SAP’s most recent quarter cloud revenues were still just €241 million against total revenues of €4.2 billion, so there’s a long way to go to reposition his company for the emerging cloud future, which the London School of Economics’ Professor Leslie Willcocks believes will dominate enterprise IT procurement in a five- to ten-year timescale.

Put simply, SAP’s strategic goal is to persuade both existing and new customers that it is a cloud company, and its legacy of perceived complexity and expense make that difficult. Hence the timely rebranding exercise today.

The shift towards the cloud also means a greater focus on customer experience, McDermott adds – echoing Willcocks’ words in the Strategist‘s report [see link above]. Says McDermott: “The essence of Run Simple is delivering true customer engagement that goes beyond the salesforce automation nature of traditional commodity CRM.”

“The future of customer engagement shapes the customer journey in real time, from customer insight to targeted marketing, to sales promotion, to commerce and service, all with the focus on simplifying the customer experience.”

The network effect

SAP also wants to dominate what McDermott calls the “network economy”, which he sees as the next big opportunity for enterprise business applications. “Driven by the connectivity of people, machines, and business processes, the network will drive unparalleled collaboration, both inside the company and between companies,” he says. “Companies will transact real-time, frictionless commerce and nurture new trading relationships to drive sustainable growth.

“SAP is at the core of this network economy. We have the world’s largest business network, connecting approximately 1.5 million businesses and driving an annualised transaction volume of $540 billion. That is two times the size of Amazon and eBay combined. If it were a country, the Ariba Network would be in the top 25 by measure of GDP.”

All of this is resonating with customers, he says, citing names such as Shell, General Electric, and Giorgio Armani as examples of multinationals that are moving to SAP HANA and the cloud.

Nevertheless, there is an implicit question lurking beneath the surface of SAP’s strategic renewal: What if, all along, its large-enterprise customers enjoyed buying its complex on-premise products, because they believed in owning strategic assets, rather than renting commodity services? In other words, has SAP done such a good job of emphasising the importance of its software, that its customers are wary of renting it?

McDermott concedes the point. “Our customers want to buy it, even though we’ve gone out of our way to keep reminding them that we’re only too glad to rent it,” he says. “They view SAP as a strategic asset and, for now at least, they’ve behaved in a way that indicates purchase is their preferred option. But rental’s on the table and we look forward to more and more customers renting our software.”

So this is a scenario familiar to both business leaders and technology buyers: attempting to play a long game in a fast-moving market.

Elizabeth Hedstrom Henlin, Senior Analyst at Technology Business Research, believes that, in all the confusion about the shift towards the cloud, it’s vital for SAP to get its messaging right for its customers, and that means ‘walking the walk’ and not just talking the talk. “Successful execution of Run Simple will require SAP to demonstrate simplicity, spanning from products to pricing and organisational structure,” she says.

“For SAP to continue to stay ahead of customers in their changing patterns of buying, the firm will need to rapidly realise its Run Simple vision as an attractor to installed-base customers, who are being courted by firms ranging from pure-plays such as Workday, Salesforce.com and Tableau Software, to long-term market foes such as IBM, Microsoft and Oracle.” TS

The Strategist says

The giants of the client/server world now find themselves unsure how to serve their own clients. The strong direction of the IT industry is towards cloud platforms, applications, infrastructures and services, with many buyers choosing to create hybrid solutions as a stepping stone to full public- or private-cloud adoption. For SAP, whose fortunes rest on existing on-premise deployments, its toughest challenge will be to convince its customers that they no longer need those in-depth, expertly deployed systems to be on premise. New technologies and new acquisitions offer a path ahead – one that it is clearly taking. A strategy of communicating simplicity and efficiency is the right one at the right time, even if its long-term outcome is less certain than its leadership would like.
Dan Stockton was formerly Professional Outsourcing‘s star columnist and commentator, and is now writing exclusively for the Strategist. Chris Middleton is founder and editor-in-chief of the Strategist.

 

TAKE ME HOMEHOMEPAGE

Signal, not noise.
Twitter @strategistmag