Christian Klein, CEO SAP - "We have to own the application layer"

Den Howlett Profile picture for user gonzodaddy May 8, 2020
In a quickly organized phone conversation with Christian Klein, I learned more about why leadership changed and some of the questions that weigh on SAP's leadership at this time.

Christian Klein
Christian Klein, CEO SAP (via the author)

Christian Klein, CEO SAP has inherited the mother of all problems. He freely admits that the turbulence presents unique problems for the company, its staff and customers.

As expected, he reiterated the broken nature of the co-CEO model but provided more color on the reasons behind the recently announced change. As I thought at the time, the co-CEO model was difficult to operate when both he and Morgan needed to be on the same page while sometimes having to take decisions on an hour by hour basis. But it went deeper:

There were disagreements, as you'd expect, but there were some of a fundamental nature where we could not delay the decisions. I'm fully convinced that the hyperscalers will also go up the stack. In the partnerships, we are closing, we have to own the business platform, we have to own the application layer. I want to be more prescriptive on that because when you are losing more and more of the control of the customer transformation when you're not sitting on the table anymore, when they're making the decision how to transform the business model, then it gets difficult. I just want to make sure that now in these partnerships, we try our best to make sure that we are in the lead when it comes to business model transformation, when it comes to talks about how to move the system landscape, the application layer in the cloud. And it's also important that we position our platform there, as we cannot afford to lose the platform game either, as this is the platform which keeps our applications together, makes the integration work. And it's of course also very important for the extension of our solution. So, this is something where I would like to to draw a much clearer line going forward, because in the past, I feel we were not clear enough in some of these partnerships.

That's quite the admission. However, as I pointed out to Klein, partners and customers tell me that Microsoft and Google in particular have used those partnerships to good effect, creating strong market and sales propositions. In some cases, I have seen long-standing SAP partners prefer the lead from the hyperscalers rather than relying on SAP. Why? Because outwith SAPPHIRE - which of course is dead for this year as an in-person event - SAP's support for its partners is rated poor at best. Klein agrees, pointing out that:

We overcomplicate things, and we are not offering good enough holistic solutions for the customer. When you are coming only with pieces and fragments, then it's hard for the customer to figure out, how do we solve my business challenge? 

This is not a new problem. The SAP price book is infamous for its length and convulution. But then I also wonder whether SAP has the right portfolio of products.

Klein mentioned supply chain, an obvious problem for many of its customers but then I'm also thinking cash management because for all the talk of unlocking supply chains, the immediate need is for certainty around paying the bills and pulling in the cash. For example, according to Sidetrade, the volume of bills remaining unpaid 10 days or more past the due date in Germany has rocketed by 50% and rising by a third when compared to the averages pre-COVID-19. 

Automotive is a key sector for SAP and, as is the case in the UK where April saw a 97% fall in new car registrations, German car makers are at a standstill in a year which was already showing signs of significant weakness. Here, as in other sectors, SAP is having to find ways of helping customers:

It goes both ways, so we are optimizing our cash management but we offer more flexible commercial models too. But I want to see what we can do in software and we are currently working on how to make our software more intelligent in predicting cash management. We also offer more flexible financing options.

On the supply chain, we are getting a huge amount of requests from customers to say, how can you help me with more intelligent software to overcome shortages and disruptions in my supply chain, and how can you better help me to find suppliers who can still deliver the goods I need? How can you help me to more flexibly adjust the supply chain to the demand as the demand is heavily changing these days? Demand plans are changing almost on a day by day basis. And these are exactly the points, which we have to focus on.

At this point we turned to the licensing model.

SAP recently announced an extension of the DAAP program through to the end of 2021. DAAP was already an ongoing work in progress but extending another 20 months gives you a flavor of how SAP believes the ongoing COVID-19 impacts will ripple through the whole of its customer community. At the same time, we expect to see price and terms pressure. While Klein would not (understandably) be drawn on pricing, he said that SAP is considering how it can move as much as possible of its licensing over to forms of subscriiption including PAYG. 

Making that price transition, with all the potential cash flow impacts that go with it will not be easy and to that extent, SAP reported a provision for a one billion euro reduction in free cashflow. What is not so clear is how much more the company might have to set aside in order to both thrive while helping customers. We will know more as Q2 closes out at the end of June. 

My take

So much of our short conversation was taken up with the pandemic that there wasn't the opportunity to get into a couple of topics I would have liked to get clarity on but they can wait. 

As we closed out our conversation, it was refreshing to hear Klein talk about lessons he's picked up from recent virtual events elsewhere and how he wants to showcase customer success in their application of SAP solutions during the current crisis. 

I want to go a level deeper than we normally do - our customers have to see what we can achieve together.

But equally, I'm aware that these events are comparatively risky and especially for firms that are inexperienced in this style of presentation. Let's see what the next phase holds. 

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