This much is clear. The guidance given at the last quarter, combined with inquiries in the field and cross referencing to institutional research suggests that 2014 is a done deal. Unless something cataclysmic happens, the year is done and in line with expectations. I'm sure everyone will breathe a sigh of relief. What matters now is the guidance going forward.
During 2013, Jim Snabe, outgoing co-CEO used a number of analyst and public events to float the idea that SAP IS moving its whole portfolio to the cloud and subscription based models. The only question is - how quickly - and which parts move more quickly than others. The general - and obvious consensus - has been that CRM and HCM related products would move first with supply chain in the wings. The last part has always been financials. Again, the consensus has been that CFOs would be reluctant to move those apps to the cloud anytime soon.
I have disagreed with the assessment around financials both publicly and privately based upon a series of measures, checks and balances plus what we see happening in other parts of the market. For example, I've watched over the last seven years as the SME market has led the way toward cloud financials. The last 18 months in particular has seen a hockey stick acceleration for all the new cloud vendors at the expense of incumbents. This is not a regional phenomenon but a global trend.
Elsewhere, NetSuite continues to show rapid growth while FinancialForce.com is now clearly an integral part of UNIT4's long term growth plans. Acumatica recently reported a bumper year - again, financials is at the fore, while Plex may be manufacturing oriented but financials remains a key part of its portfolio.
At SAP, BusinessOne has an 'ondemand' option while Business ByDesign is going through its own gyrations. That leaves All-in-One (which we've barely heard about this last year) and the Business Suite behemoth.
While the concentration of engineering effort inside SAP has been on HANA; HANA Enterprise Cloud and HANA Cloud Platform have also been getting plenty of effort and attention. So - given all of the above, what do I think will happen?
I firmly believe that the 'platform wins' not the suite any longer. As we watch the market cycle turn, best in class is back in view. In the context of the current environment, that means SAP must concentrate on building out the HANA/HANA cloud Platform(s) while also readying its big ticket solutions for genuine cloud delivery and not some sort of halfway house hosted subscription model, even though that will likely figure in the short term sales cycle, provided they can get pricing right. Not a done deal.
In short, I believe HANA Enterprise Cloud will wither as HANA Cloud Platform becomes the focus of attention. Does that mean SAP will move more or less slowly to the cloud as its delivery and business model? This has been a topic of quiet speculation for some months. Whichever way SAP chooses to go, it will take a market cap hit in the short term. Get it right and the market will forgive for the long term. Mess up the messaging and it will be an incredibly painful experience.
Here's what Morgan Stanley thinks. Remember that they are 'sell' side on SAP:Morgans are presuming that SAP will make a slow but steady transition with subscriptions more or less catching up with license growth by 2017. Their view is predicated on a modest slow down or flat lining of on premise license sales, with maintenance fees continuing in high single digit growth. Others will model according to their beliefs but my view is that Morgans are a tad optimistic for several reasons:
- Workday is not slowing down and is now emphasising its well integrated financials and HR solutions tied to a much more expansive story around operational analytics. While it is not fully baked, the Workday story has a 'smooth' transition feel to it that delivers early customer value in a way that its more heavyweight rivals struggle to articulate.
- NetSuite is now biting the ankles of the larger players and is consistently messaging about higher contract values, reflecting its push to larger accounts.
- SAP still has to figure out quite which way to message its whole HCM story such that existing customers feel that they fully understand the cloud roadmap.
- Cloud CRM for SAP is a lost cause at the moment. Salesforce.com has won that mindshare battle for the time being though SAP remains in strong account control where it matters and is introducing interesting add on applications that play nicely to mobile and social storylines.
These factors all kinda play into where Morgans is going in the sense that the combined activity of competitors pales against SAP's sheer bulk. It also assumes that SAP can keep its core customers on side during the transition phase. That requires a lot of hand holding and customer attention - an expensive exercise in maintenance terms. What none of us really know is the full impact that the competitive landscape is having upon SAP. My gut feeling is that paranoia has been winning over reality but that could very easily change and especially so if Brian Sommer's predictions work out.
But then this spanner got thrown into the works by Bernd Leukert, member of the Global Managing Board at SAP during an interview with The Hindu. Here's the full text of a Q/A:
In enterprise software, you see the cloud coming and disrupting the general order of things. Where do you see the balance between an on-premises delivery model and delivery through the cloud? Will these two deployment models co-exist, the way Wal-Mart and Amazon do?
At the moment, it is not yet 50-50, with the percentage of on-premises deployment and cloud deployment being equal. But you are right.
Personally, I forecast that it will hit 50-50 very soon. From a business perspective, this would mean that our revenue and our business model will change from an up-front licence model to a subscription-based business.
I fully confirm that, in the near-future, it will go up to 50-50.
The trend will shift past 50 per cent in favour of cloud deployment in the areas of non-differentiating commodity processes. For instance, if you talk about the area of recruiting or even sales… it isn’t an area that is a competitive advantage for a company. It doesn’t matter what industry you are in… the sales and HR part of it remain the same in most industries. Therefore, in these areas, the penetration of the cloud delivery model will go as high as 80 per cent.
There are other differentiating processes, where companies do see a competitive advantage. In those processes, at least today, they want to keep it in-house. They want to keep it inside their own data centres. For example, I was in France and was talking to a perfume maker. He has a highly complicated product process. His company’s core competence is the secret behind the product process. He doesn’t want to give that up to the outside world. While with Hana we could accelerate his product process, he doesn’t want the cloud-delivery model… as it could kill his intellectual property. So, there are core competencies which, for another three to five years, will still see an on-premises approach.
[My emphasis added.]
This is startling and will likely cause much discussion at the next earnings call. Leukert does not name financials as part of that equation but I believe it will absolutely be on the agenda by 2015.
Do I think this is the right approach? Yes. While the financial market might want a (generally) slower transition so as not to spook investors, the software buying market cares less and it is that which SAP must first satisfy before worrying about the financial analysts. Put another way - how many more defections of the kind represented by HP can SAP withstand before the wheels fall off?
Assuming you agree with my position, this has another knock on effect that has yet to hash out.
A transition to cloud is much more than a technology shift. It is a cultural shift for SAP. It requires a different type of sale. It requires a different type of engineering approach with attendant skills. It is something that I believe informs a great deal of SAP's engineering leadership thinking and strategy. It is like undergoing open heart surgery while on a marathon run. It's downright bloody painful and there may well be some nasty bumps along the way. There will be casualties.
Yet I would argue that sharp pain now and perhaps for the next year is better than an agonizing period in critical care for years on end. Agree?
Disclosure: all vendors mentioned above with the exception of NetSuite and Plex are current partners at the time of writing.