Earlier today, SAP firmed up on its pre-announced results for 2011, producing a comparatively bullish forecast for 2012. This should not surprise. SAP did a lot of the right things it needed to in 2011. In turn, that allows it to make bold statements at a time when economic forecasts are far from rosy.
What follows represents my interpretation of a conversation I had today with Jim Snabe, co-CEO SAP, a brief discussion with Hasso Plattner, co-founder and VIshal Sikka, executive board member plus assorted snippets of conversation with senior SAP policy makers over the last couple of days.
What's not to like?
SAP's concentration on aggregated top line growth masks fundamental problems with keeping sales of the core apps moving along. Everyone knows that outside of the odd opportunistic deal or possible Oracle refugee, those deals are done. However, SAP also knows that if it is to have a credible future it needs to radically rethink business applications. That inevitably means cloud but how does it transition without giving the Street one heck of a fright? Here are two scenarios:
The problem is - how do you get the work done? There is really only one answer which SAP has alluded to in the recent past: China. It has made a commitment to invest $2 billion in that country. That is a huge amount of money but the potential rewards are equally huge. It is not so much a question of labor arbitrage but one of development resource. SAP needs thousands of developers. They are not going to find those as readily in other parts of the world. In short, they will have to learn from Apple's playbook. But this will only work if SAP can successfully leverage its very deep pool of engineering process experience to provide leadership and direction to tiger teams. The good news is that they've been here before when they transitioned from R/2 to R/3 in the 1991-3 timeframe. To date they are the only software company to have successfully made that transition. They can still lean on Hasso Plattner, one of the founders, to remind them what it takes to make that kind of change. Which leaves one more problem.
How will SAP compensate a future cloud salesforce? Every cloud vendor has the problem of not being super profitable and always appearing to live on the edge of profitability. A big part of that is the problem of compensating against revenue recognition rules that do not allow any cloud vendor to take full credit up front for what they sell while still having to set compensation based upon total bookings. There are no simple answers to this problem and in that regard SAP is not unique. In SAP's case it represents a horribly complicated puzzle because of the big ticket adjacencies. We will have to wait and see how SAP works its way around this issue.
Conclusion
Everyone I speak with is feeling good about SAP but not in an arrogant way. The company and its top partners are keenly aware of the many challenges ahead. Most important is that customers see a way forward with the company which was hazy at best a year ago.
The co-CEOs have done everything they promised and my sense is they are sufficiently confident to deliver again. The real interest lies in the hands of Vishal Sikka's development organisation. What they achieve in 2012 will provide more clues about how well SAP is preparing for a cloud/mobile transition. The ultimate test will be in the company's ability to persuade its best sales people that cloud sales will reward them as handsomely as they have been in the past. Time to change the brand of champagne?