How SAP stopped worrying and learned to love the cloud

sapbillmcdermott800
SAP CEO Bill McDermott

As the German software company continues to sprint towards the cloud it is having to shift its culture, can it succeed?

Share

SAP is becoming more open, embracing software-as-a-service (SaaS) business models and the public cloud, but can the 45 year old German software maker change the way it works, and the way customers see it, enough to thrive in the new market?

SAP has been shifting its business towards more SaaS applications for a while now, both through acquisitions of line-of-business vendors like SuccessFactors (HR), Concur (travel and expenses) and Hybris (ecommerce), and by re-architecting its own line of business applications to be consumed “as-a-service.”

SAP’s lifeblood is enterprise resource planning (ERP), so when it announced its next generation ERP, S/4HANA, which is built on top of its in-memory HANA database, cloud seemed the natural place to host it.

That didn’t stop customers deploying S/4HANA on-premise, or in a private cloud instance with SAP’s Enterprise Cloud though. Now, SAP offers its core S/4HANA product on the big three public cloud vendors: Google Cloud, Microsoft Azure and Amazon Web Services.

Public cloud ERP

Last week, during its annual Sapphire conference in Orlando, Florida, at least four top level SAP executives told me that public cloud is the future for the company.

Franck Cohen, SAP president for Europe, Middle East and Africa told Computerworld UK: “I am a firm believer that the future is public cloud. It is not public cloud for some companies, it is public cloud for everybody, and it is a matter of time.”

When it comes to ERP specifically, Cohen says that the “move to public cloud is already happening” through competitors like Netsuite, Microsoft Dynamics and British vendor Sage. However, he admits that SAP is “maybe a bit behind, but I think there are some advantages to come a bit behind, because you come with the very latest technology.

“For instance, the first product at SAP which will benefit from all of our machine learning and AI capabilities is going to be our public cloud ERP,” he said.

Cohen is an advocate for SAP’s cloud momentum, saying: “I have no doubt that the cloud will surpass the on-prem revenue very soon. If you look at the growth rate and the curve for the cloud revenue vs the on-prem you can already predict when it is going to happen, it is very simple. It is clear for me that the cloud will surpass the on-prem in the next few years.”

The numbers bear this out. Although its classic on-premise software licences still account for the lion’s share of its sizeable revenues - classic software licenses accounted for €15.4 billion, to cloud’s €2.9 billion, in 2016 - moving customers to the cloud is where the market is going.

This momentum was on show again in SAP’s Q1 2017 results, where total cloud subscriptions and support revenue grew 34 percent year-over-year to €905 million (£769 million).

Criticism

This is all despite criticism from arch-rival vendor Oracle, whose co-CEO Mark Hurd sneered back in December that “their cloud strategy, which is most often referred to by the term S4/HANA, is fundamentally a hosting strategy. It’s really taking their core ERP on-prem app and hosting it in a data centre. It’s really the physical movement of a computer from here to there.

“That’s not cloud. That’s not SaaS. So I’m not sure that we really think of them as a core SaaS competitor,” Hurd said, as reported by Diginomica.

Read next: SAP cofounder Hasso Plattner defends S/4HANA cloud strategy

SAP’s cofounder and chairman of the supervisory board Dr Hasso Plattner responded in typically bullish terms last week, reiterating that “in the cloud is the version to aim for” when it comes to S/4HANA.

He also recognised that the company was changing from the days when he was in charge. “For 45 years the customer has operated the system, large systems,” he said. “We do it now together with the customers and SAP is learning how to operate and we are getting better and better and we are getting profitable now,” he said.

In other words: SAP is learning how to be a SaaS vendor.

Changing the sales culture

This shift towards public cloud deployments and more subscription-based software can be seen across the business at SAP. From how it has acquired SaaS businesses like Hybris, Fieldglass and Concur, to how it aggressively markets its cloud-based products, pushes its cloud momentum to the top of financial filings and most importantly, how it sells its software.

Moving customers to the cloud requires not only a change in mindset from the clients themselves, who may be wary of data security or ownership issues, but also an internal shift from a company that has always operated in a world where customers conduct lengthy RFP processes and lock themselves into long-term agreements. The sort of customer that wants one hand to shake.

When asked if he considers the S/4HANA division within SAP to be a SaaS division, Sven Denecken, head of product management for S/4HANA, was adamant: “Absolutely, we have grown tremendously in that division and acquired a significant amount of external talent.”

This talent includes the chief revenue officer for S/4HANA Cloud, Melissa Di Donato, who previously was an area vice president for Salesforce’s Wave Analytics.

Denecken says that under Di Donato the sales organisation has been reorganised to become a “go-to-market” team, because “it is not about selling only but how you help customers to understand, to transform and plan.” Secondly, he says that SAP is now incentivising “our entire workforce in respective to cloud”.

“We have made sure the people are 100 percent focused on the public cloud, on SaaS and that comes from technology, how you service the customer, from contact to contract, from contract to renewal, so yes, everything has been done to ensure that this is a SaaS division,” Denecken said.

Openness

Under CEO Bill McDermott SAP is moving to become a more “open” company, something that would have been unheard of during its heyday. This can be seen through the raft of new partnerships the company has been making, including the big three public cloud vendors.

SAP’s platform-as-a-service (PaaS) Cloud Platform is also an essentially open platform, meaning customers can plug in any software they want, SAP or not.

This strategy, which underpins the work Satya Nadella has been doing at a resurgent Microsoft, essentially boils down to betting on yourself. By being open, vendors are recognising what the market wants, but it is also hoping that its solutions in each market: ERP, CRM, database; are the ones that customers opt for.

Denecken admits that “the embracing of that openness has been a shift”, but that SAP’s ability to collect and utilise that all-important business data to power these applications and embrace cutting edge capabilities like machine learning is where it can stand out from the crowd.

Pricing

This week at Sapphire, SAP made its first unsteady steps towards a more transparent pricing strategy, something which it’s safe to say is not synonymous with a company famed for its opaque and secretive pricing. In a world where customers increasingly want to pay as they go, spearheaded by SaaS vendors like Salesforce and Workday, SAP has some serious catching up to do.

Senior vice president of SAP portfolio strategy Hala Zeine wrote in a press release last week: “We recognise that traditional approaches to business are being replaced by newer, more transparent, modern ways of thinking and acting.”

“Our objective was to make pricing predictable, linked to unit of value, transparent, and consistently applied.” SAP has traditionally charged per “named user”, in lengthy and inflexible licence agreements. SaaS can be bought online, installed quickly and licenses can be distributed and re-distributed with a web login.

Read next: SAP responds to Diageo indirect licensing case with “modern pricing” approach

Without being able to see the new pricing terms themselves, for which SAP won’t give a release date, it is difficult to know how genuine the company is being when it says it is committing to “modernising our pricing approach”.

The problem is that SAP is saying the right things but isn’t actually putting its pricing upfront where prospective customers can see, and crucially, benchmark it. Then there is the fact that SAP has been suing customers like UK alcoholic beverage giant Diageo for using its data in third-party SaaS applications, which isn’t very modern, or open of them.

SAP’s latest product Leonardo is another fine example. The product is essentially a bundling of software and services and is bespoke by nature. However, despite SAP saying “everything will come at a predefined price”, there is nowhere for customers to easily find that price. In short: you still have to contact a sales agent.

Conclusion

So SAP is certainly saying the right things to the market. It is more open, it has best-of-breed SaaS solutions in a number of business areas, and it is building a sales team for which cloud deployments and renewals are as important as shaking hands.

The last hurdle will be in truly transforming its pricing if it is to convince customers that it is as open and transparent as it says it is, but sometimes the oldest habits die the hardest.

Find your next job with computerworld UK jobs