SAP's master plan: A look at the challenges ahead

SAP plans to be a cloud juggernaut with a great customer experience, a user interface that borders on beautiful, and a growth company---all by 2017.
Written by Larry Dignan, Contributor

SAP's fourth quarter results brought out skeptics, worries about profit margins in the future and a few quotes from executives that made it sound like the software company is the only one on the planet that has transitioned to cloud computing.

But in between those nuggets appears to be SAP's roadmap to 2017, big ambitions and what is likely to be a few challenges ahead. SAP is projecting EUR22 billion in revenue in 2017 with EUR3.5 billion in cloud revenue in the same time frame. SAP won't hit its 2015 35 percent profit margin goal and pushed it out until 2017.

Some of these big SAP goals could look like cloud washing with a dash of HANA analytics for seasoning. From 2010 to today, SAP talked mostly non-stop about the cloud---and backed that chatter up with the acquisitions of Ariba and SuccessFactors---and HANA, which has largely masked a slowdown in the company's core software sales.



SAP has a good bit of chest thumping fodder. Outgoing CFO Werner Brandt said:

SAP demonstrates in 2013 that we are, I would argue, the only technology company who successfully managed the transformation into the cloud, outperforming the market and at the same time expanding its operating margin.

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I'm sure Adobe, Microsoft and Oracle may beg to differ. IBM would probably disagree too. Of course, time frames matter, but it's hard to overlook that SAP hasn't quite shed the on-premise software and maintenance gravy train for software as a service just yet.

Nevertheless, SAP plans to be a cloud juggernaut.

Here's a look at SAP co-CEO Bill McDermott's big plans outlined on SAP's conference call and my take on the challenges ahead.

Everything cloud. McDermott said:

SAP is also a leader and we are here today to let you know that we are leading the transition to the cloud, that management has a firm handle on the steering wheel of our highly profitable, secure core while at the same time we move the Company to be the cloud leader. And Q4 as Werner said underscores the boldness in the cloud. When you increase your billings 50% on a year-over-year basis in Q4, it's a leading indicator of even better things to come in 2014 and beyond.

My take: SAP's cloud growth is impressive. But it's via acquisitions, which may not be maintained once year over year comparisons fall away. Oracle also bought its way into the cloud so there's no need to throw stones. The problem I have is looking at past performance (juiced by acquisitions) and projecting future results. The other challenge here is that customers may think cloud over on-premise faster than SAP management would like. It remains to be seen if SAP can manage the transition as well as Adobe has.

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SAP is a growth company. McDermott said:

We intend to be the leader in users, revenues, and bookings in the cloud. We are already the leader in users. We are number two in revenue and we will accelerate the pace. We will simplify everything for the customer through the SAP cloud and as a result, we will be the growth story in the IT industry and software in the cloud. We want to elevate SAP to trusted innovator status of business outcomes. One of the things you may or may not realize is that 90% of every dollar that goes into the IT spend of most companies is tied up in hardware and services and only 10% goes to the innovation layer, which changes processes, innovates business models, and drives outcomes. That is why by going to the cloud and collapsing the IT stack on HANA, we are able to radically simplify the landscape for our customers, lower their cost and free up capital to invest in software, thereby driving more efficiency and more growth for our customers.

My take: There's a perception vs. reality gap today. Aspiring to be easy to consume is one thing. Is SAP there today? Hardly. For SAP's easy to consume vision to unfold, its customers need to go all cloud. That transition will take much longer than a 2017 time frame. The other risk for McDermott is that SAP wants to be viewed as a growth company, but there's a law of large numbers working against him.



Industry focused. McDermott said:

We are renewing our focus on industry. As you all know from covering SAP, we have been a market leader in 25 different industries. We are redoubling our focus on industries like retail, like banking, like healthcare, like public sector because we see a huge opportunity particularly on the backbone of HANA and we want HANA to be the business platform standard in the world, so we are very open to the ecosystem of partners that want to run their clouds on HANA.

My take: Focusing on industries may be SAP's easiest target to hit. SAP will need its industry focus to not only preserve revenue but pitch HANA. SAP should excel with its industry specific pitches.

SAP will be all about user experience. McDermott said:

We believe strongly in the user experience and making that intuitive and beautiful in every engagement with the customer. Many of you have heard about Fiori (SAP's new UI concept), which is the reinvention of the user experience, and we put that user experience to the mobile because we believe mobile is the new desktop and it is ubiquitous and that's what we are driving the user focus.

My take: SAP isn't known for its user interface. Most enterprise software companies aren't known for user experience and beautiful designs. McDermott knows mobile is the new desktop, but it's unclear SAP has the DNA to create a soup-to-nuts UI overhaul. Another issue: Every tech company is talking user experience today and in some respects it's just table stakes.

Customer service. McDermott said:

Think about a customer having one account executive to serve their interests with specialization from every area, whether it's industry or cloud, but easy to do business with. Think about one customer support model, where the customer gets the very best support and the customer has no confusion in dealing with SAP. Think about the idea of the digital prospect coming into SAP on the web and instead of dealing with 1,000 different experiences, dealing with one. These are just some of the examples aside from the massive simplification of the suite on HANA, where we are going to make it easier for the customer. And we're going to have tremendous humility for the customer and I think by redoubling our focus on making beautiful products, revamping the business model to the cloud, and absolutely caring more and doing more for the customer than any other business software maker, we will be the long-term leader.

My take: Being customer focused is a great goal to have and if SAP can nail support perhaps enterprise customers won't be grumpy about maintenance revenue.

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