If SAP's 2019 ended with big changes, then 2020 saw seismic shifts. Once again, my editorial year was dominated by SAP stories. That should not surprise you.
As the year progressed, SAP put me on an increasing number of top-level executive calls, discussing areas of importance we see among customers. I was not alone, often joined by Jon Reed but in many sessions, SAP corralled groups of independent analysts with whom I am familiar and who rarely play the fawning game we so often here on financial analyst calls. Were all our questions or concerns answered? No. But to its credit, we heard SAP executives actively listening and asking questions in ways that signal a refreshing change in the firm's approach to outsiders. My sense is that started when CEO Christian Klein was mauled at a November 2019 DSAG conference. He was left in no doubt that the German-speaking customer group had heard enough from SAP and wanted action. So what happened in 2020?
A pre-padnemic lull
In January, we reported on a DSAG 2020 investment report where DSAG concluded that:
Many companies appear to be in a bind at the moment. While the future clearly lies in digitalization, the current economic environment does not seem to be ready for it in many areas. The wheels are in motion, with S/4HANA finally stepping out of the shadow of Business Suite. However, too many companies don't yet have a firm S/4HANA strategy, or there is no clear guidance on which approach they should take for the transition. All this means that SAP and DSAG must step up their work to explain the benefits to users this year. The same goes for cloud projects and for support around SAP projects related to digitalization.
At that stage were pre-pandemic and DSAG's comments represented a mood that had been building up for some time. That all changed the moment the pandemic hit but a few days before the UK lockdown came into force, I met with Klein, then in his role as co-CEO. During that meeting, I gave him a laundry list of long-standing items I knew were in the minds of customers, analysts, and customer groups like DSAG, ASUG and UK&ISUG. To his credit, I found a person willing to both listen and take action. At the time, I concluded:
There's a lot to do and not a lot of time in which to get things done if SAP is to be competitive in the cloud marketplace. But then you don't turn an ocean-going cruise liner so quickly while at the same time steaming full speed ahead. On reflection, I see a lot of sense in what Klein is trying to achieve. SAP will need the help of subject matter experts, some of whom I know SAP already has, but who are not necessarily in the parts of the organization where they can have the greatest impact.
Customers need to be brought forward, but the evidence to date is that will happen at the customers' pace, not one dictated to by SAP. That is a double-edged sword because customers will struggle to take advantage of SAP innovations unless they modernize. On the other hand, there are plenty of customers who believe that they have yet to get all the value out of their existing SAP estate. Others want to hold the line at ECC and innovate around the edge with more modern technologies that are already in the market. Some partners offer all three perspectives.
One question we did not touch upon as it is too early - will the novel Coronavirus outbreak impact the sales cycle? We don't know the answer, but anticipate some customers will use this as a reason for holding back on investment.
Many of those sentiments still hold true but world events overtook everyone.
A changing of the C-suite guard at SAP late in 2019 saw yet another change early on in 2020 leading me to quip with colleagues that each time I meet with current CEO Christian Klein it's not long before he's put into another position. Overarching those changes is a company coming to terms with the 21st century and its place in the world. Looking back, SAP had little choice but to opt for a sole CEO model. As the pandemic took hold, it was clear to anyone with experience of SAP that it was fractured and at risk of running out of control. The US operational agenda was at odds with corporate dictates and that couldn't continue.
The big question was always going to be - how will customers respond and how will SAP fare as a result?
As we close out 2020, the answers remain unclear. According to a recent analyst Q&A, SAP has sold S/4HANA to some 15,000 customers with 8,100 live. BUt of those live customers, many are net new so the 'real' adoption rate among existing SAP customers is hardly spectacular. For its part and largely supported by customer inquiries, projects that were in the decision-making process were put on hold. However, some of the early year messages are being actioned. In April, I said for example that SAP needs its partner network like never before. Progress there has been patchy.
Cloudy developments, partners, and developers
Most recently, SAP announced a new cloud-centric partner program but as we said, it isn't cloud, at least not as we understand the term and is far removed from what SAP needs to do. Those partners who are on SAP's Solution Exchange are well set to provide tools and products that SAP customers can consume both in their S/4HANA migrations and beyond.
But the thousands of equally worthy partners who are not on SolEx are largely left out in the cold. We continue to think this is a disservice to customers since we know of great solutions that could materially assist SAP customers in their S/4HANA projects. Some partners have more or less abandoned SAP as a direct partner, choosing instead to work with the Google, AWS and Microsoft hyperscalers. Why? The hyperscalers are putting skin in the game where SAP is not.
On the developer front, we were particularly critical of SAP's efforts to nurture its developer community. In a story I knew was scathingly entitled Why SAP developers can't have nice things, I said:
During my time as an SAP Mentor, (somewhere in the 2008-11 timeframe) developer licensing was always close to top of mind and a frequent topic of conversation with SAP's executives. At that time there was a way to effectively extend the then ABAP developer account pretty much indefinitely but even so, it represented a barrier that stuck in the craw of the developer community. I recall a TechEd meeting with then CTO Vishal Sikka and other Mentors where the topic came up. Sikka asked me to meet with his legal team. He understood the frustration but didn't know how to resolve it.
That meeting was a waste of all our time. Legal were very polite, listened intently and said they'd look into it, which is SAPanese for 'go away, we're not touching this.' It's the slightly more polite version of 'we'll take this under advisement.' The argument was that SAP needed to protect its IP and therefore having an open ended developer license could be abused, leading to production uses that would go unlicensed. I saw that as an insult to developers and still do. SAP conducts regular customer audits for licensing purposes so there is no need to worry on that score. Even if there are concerns I argued they could be resolved in software but no, that wasn't a good enough answer. The fact that the license could be extended more or less indefinitely didn't fit into the legal logic...at least in my eyes.
Plenty of SAP watchers understood this argument but expanded it to reflect modern cloud architectures and the developer communities around them.
Again, to its credit, SAP got a part of the problem out of the way but we all await the much-vaunted free tier that developers crave. No date has been offered and right now it's anyone's guess when that will be. My abiding concern is that SAP doesn't leave this until SAPPHIRE 2021. There are so many problems to fix yet I am consistently told that 'all roads lead to SAPPHIRE.' If that's the case then here's hoping it's not the train wreck that SAPPHIRENow 2020 embodied.
The SAPPHIRENow train wreck
Those of us who advised SAP in the run-up to SAPPHIRENow 2020 could only stare at our screens in horror as the opening keynote crashed, burned and then blew up. The marketing choice of showcasing Porsche as a way of demonstrating great CX could not have been less appropriate for a world gripped by a pandemic where food and other essential delivery shortages were uppermost in consumer minds. For all the good intentions, SAP marketing came off as out of touch and firmly rooted in its Not Invented Here tone-deaf approach. Klein was suitably apologetic in the SAPPHIRENow Q&A, and SAP learned. SAPTechEd was a far better event although on this occasion, the analyst Q&A was a lost opportunity.
The future of...?
As 2020 dragged on, we saw indications of just how much SAP has to change in order to thrive into the future. CEO Klein may want us all to heed the call for sustainability and he is arguably right. But SAP customers are faced with genuine dilemmas about how they move forward and at what pace. Those monolithic SAP applications, built as they were for a technology constrained world may still dominate the global landscape but they no longer reflect customer realities.
Swathes of workers and especially knowledge and creative workers are now in extended 'work from home' environments yet on the other hand factories still require people to operate and maintain machines. Digitizing the factory floor is a long way from reality yet SAP is making intriguing and, as yet, under-reported moves. I am particularly fascinated by the partnership with Siemens, a company that successfully kept some plants open with no personnel needed. Where that partnership leads, along with others has yet to be fleshed out. As of this writing, I don't have enough insight to be other than 'intrigued' by the fact SAP has developers embedded inside Siemens.
On the worker side, I have to ask whether SAP has the right tools and technology to keep home workers happy. We saw the rise of Zoom as a wholesale replacement for in-person meetings and the recent acquisition of Slack by Salesforce as firm indicators of where the future of work lays. Where is SAP in this context? My view is that Slack holds up the promise of bringing the frictionless enterprise much closer to reality than has been possible in the past, but SAP has to find its place in that continuum.
Commenting on SAP's Q3 FY2020 earnings announcement and the broader market environment, I said:
Competitors who are on a different earnings release cycle will paint a fuller picture but the fact remains that SAP isn't cloud competitive in its core S/4HANA offering. I am genuinely surprised that its only real cloud offering, Busines ByDesign doesn't warrant a mention. SuccessFactors, SAP's HR offering is now pitched as HXM - Human Experience Management - but again, there was a lack of any substantive detail around numbers. Why?
An abrupt wake up call
By that time, SAP had finally woken up to the extent of its problems, providing its executive board with the opportunity to put its cards on the proverbial investor table, delivering the news that it needs to time to get its house in order and that it has pushed out its medium term ambitions by several years. Whether this is long enough for its development teams to make the changes necessary for SAP to declare its digital transformation in both organization and product as complete is open to question. I put it this way:
I'd like to see analysts press SAP upon the 2025 projection. For me, that is so far into an uncertain future that includes extreme volatility until at least the middle of 2021. While I welcome a pushing back of numbers from 2023, I'd like to know more about the assumptions upon which the €22 billion fall out. I'd also like to know what 2021 Q1 looks like. This is the quarter when maintenance contracts are due for settlement. It's also the time when we expect something of a cash crunch among smaller and mid-sized firms as government pandemic support runs out in certain territories. There are two elements to my question. What is the renewal rate and what is the cash deferral rate? As an aside, it's perhaps worth noting the company upped its free cashflow for 2020 by a healthy €1bn.
Sales cycles have been disrupted. Unless SAP has come up with a factory approach to implementation we don't know about that could justify the forecast, coupled with a genuine fast-tracking of getting S/4HANA genuinely cloud-capable as opposed to lift and shift, then it is hard to understand the robustness of the current forecast. That last point might be explained by the backtracking on margin expansion. Oh - and SAP was silent on my current pet topic - pricing.
Those questions remain unanswered but you could perhaps take a cue from Juergen Mueller's declaration during TechEd 2020 that its integration work, long promised for delivery by the end of 2020 is 80 to 90 percent complete. In short, the last mile of what normally constitutes the most difficult part of a transformation journey has not run its course.
Skills what skills?
One apparent paradox lies in an emerging SAP skills shortage. Despite continued uncertainty about the speed with which SAP customers will move from aspiring to S/4HANA to starting projects, analysts and customer groups are now expressing concern that even if projects progress, the chances of finding the right skills is diminishing. How did that happen?
On the one hand, SAP is not going away. On the other hand, it has a mountain to climb in bringing new talent onboard that can successfully execute S/4HANA projects. SAP has to overcome its perpetual image of being a legacy, lumbering, slow-moving giant where skills are largely irrelevant to the modern world. That's simply untrue. If you look at the vast portfolio of SKUs in SAP's price book, you'll find an answer to every question, including the sexier topics of ML, RPA, IIoT, and many others. But in the meantime, customers have to get across the S/4HANA finish line before they can take advantage of these solutions in an integrated fashion.
The question for CIOs thus becomes: do I really need to do that S/4 project when there are cloud-native solutions out there I can simply consume today?
2020 has been a year of drama at SAP. The good news is that the 'Three Wise Men' on the SAP executive board of CEO Klein, CTO Mueller and head of product engineering Saueressig are singing from the same hymn sheet.But as I've said to SAP directly, they have all the right notes, whether they have the right tune is another matter. Whatever that tune sounds like, it will need to play first and foremost to the internal operational teams that have to execute the board's strategy. Then it needs to be clearly communicated to customers and the the market. If Klein is to be taken seriously about his commitment to sustainable business, then that's where it starts. 2021 will reveal the extent to which this board is successful. Of particular interest to me is whether SAP will rethink its pricing strategy, recognizing the difference between commodity and value add. In that context, I'll leave readers with the words of Bob Stutz President of Engineering and Operations for SAP Customer Experience who, in October, said:
I think the biggest question that I constantly get, and it's not directed towards the current company I work for, but more around the industry is when is the software industry going to change its pricing model?...I mean, subscription models are hard. And, constantly I get asked the question, when will this industry move to a pay as you consume model? And it's a valid question at the end of the day. Why should in this day and age, when you look at how things are built, if I use the hyperscaler, I get billed for what I consume, and it's pretty darn accurate down to the second, usually? But if I use an SFA app, I'm getting charged a subscription. And depending on which company it is, it could be anywhere from $150 to $800 a month. And the question really is a valid one. When will the industry change?
Why can't I just pay for what I use at the end of the day? I think in the pandemic, this is even more critical because companies do struggle. Subscriptions are killing because customers can't afford to keep paying the subscriptions, especially when their business is faltering. Why does the industry make me pay from the time I sign the contract? Why is it not that I'm paying from the time I go live? These are valid questions that I think the software industry really has to do some soul searching on.