What a Large Enterprise CIO Would Think of the SAP Cloud Position

SAP's Cloud Strategy has taken some big turns. But, will it be a boon for all businesses?
Written by Brian Sommer, Contributor

I'm well into the second day of the SAP Analyst Summit.  SAP executives have been pounding the following talking points:

-          We've caught up on the cloud!

-          We have a lot of on-demand apps!

-          We can't wait to cross-sell these to our client base!

-          We will continue to build more on-demand apps on the periphery because we believe that most large enterprises do not want to change out their ‘book of record' systems.

The implication is that SAP is building and promoting cloud, HANA and mobile apps that connect to pre-existing application suites (e.g., BusinessOne, Business ByDesign and Enterprise Suite). They are not planning on materially re-working the Enterprise Suite code anytime soon .

If I were an executive from a large enterprise, I'd be a bit chagrined.  What SAP is doing via this strategy is:

-          SAP is creating mechanisms to sell more products and generate more fees from large enterprises. These new apps are additive and are not replacing existing modules. They will cost you more money, more money, more money....

-          They won't be bringing all of the new cloud economics and technologies to change out the old transaction processing solutions. As a short-term strategy from SAP, I'm sort of okay with this. But, the real strategic challenge that SAP customers must demand of SAP is a focused program to reduce the significant TCO of continued operation of the ‘book of record' software.  If SAP is serious about increasing market share, it must get serious about materially reducing the cost of ownership of these on-premise products, too.

-          Yes, SAP plans to someday find a way to change the ‘book of record' systems in an ‘non-disruptive' manner. But, I'm not holding my breath on this. For example, SAP has one way to store organization structures in its Enterprise Suite software. SuccessFactors, a company SAP is attempting to acquire, has another. How can one create a third platform that reconciles different data models from within the various SAP product lines and from acquired product lines without some measure of disruption? Moreover, I would expect customers would want the new solutions to be disruptive as only a radically new product design could more effectively allow them to compete in a modern, interconnected, global, volatile business world. The new solutions must be disruptive to make the new products competitive with the likes of Workday (and its REA underpinnings) and other products. The speed with which they can make these non-disruptive changes to the Enterprise Suite products will bear massively on their ability to retain customers over time. Their key advantage today (SAP's not customer's) is that few competitive offerings exist to be viable substitute products for the book of record applications.  Customer defections should be low for the time being.

-          SAP will use its HANA services (an in-memory database/analytics toolset) to re-work some of the computationally intensive aspects of the ‘book of record' applications. For example, algorithmic functionality (e.g., to optimally determine production schedules, to better forecast financials, to make better pricing decisions, etc.) would be enhanced by making these continuous processes and not just periodic (i.e., daily) calculations.  That said, these would be surgical enhancements and not necessarily wholesale replacements for existing Enterprise Suite applications.

While it's good to see that SAP has really gotten focused on the cloud, it is 2011. Salesforce.com was founded in 1999. NetSuite (nee NetLedger) was founded in 1998. While SAP has the capital and people to catch up, it still is in catch up mode. The PaaS story they have is improved but the PaaS ecosystem is not primetime ready yet. The Business ByDesign product line (nee A1S) was announced in 2007 but only really started to get released in 2010.  The Sybase acquisition brought a lot of mobile capability to SAP but this is the first time SAP has been able to announce a pile of new developments in its mobile story.  Data points from SAP suggest that the ship has turned but it may not be as far out of the harbor as buyers might want. Maybe, if the company gets its cloud engines to full steam, it will be a more formidable and relevant competitor to Workday and Salesforce.com.

If I were a mid-market executive, I might like the current SAP cloud story. SAP is planning to ramp up the Business ByDesign (BBD) push into this space. They intend to cross-sell SuccessFactors here. Their BBD channel partners are building out vertical extensions with the BBD SDK.  One BBD channel partner reported that their 2011 plan for BBD was blown out. They have sold more than twice their projected numbers. SAP is still planning on having 1000 customers for this product line by end of year. Product sales reflect sales to mid-market firms and to subsidiaries of large enterprises. The latter is a recent sales focus of SAP for the BBD product line.  BBD was and is a clear focus of the new SAP On-Demand offerings. Its profile within SAP should continue  to improve for the next few years.

In several meetings with SAP executives, fellow analysts Dennis Howlett, Jon Reed and others brought home point after point with SAP about the need to get a robust PaaS (platform as a service) and developer ecosystem elevated to a major part of their future success strategy. I think the executives heard this but whether it comes to fruition in any sort of timely manner remains to be seen.

Bottom line: SAP cloud progress has been notable. BUT, the benefits will be uneven with mid-market buyers getting a better value experience in the short term.

Longer term, SAP may be on the right track. Their focus and execution against their strategy will be critical to long-term market success. Speed, in my opinion, is the new strategic challenge they must address and make a core competency of the firm. Speed can be used to lower the cost of solutions dramatically for all users. It is these lower cost solutions that will drive not just customer retention but new customer acquisitions. Good luck SAP.

Full disclosure: SAP picked up my travel expenses for this event.

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