Last week SAP held a special Capital Markets Day (CMD). Prior to the event, we called on SAP to put the voice of the customer first. How well did that come across, and what are the unanswered questions?
Unusually for diginomica, we've not immediately commented on SAP's CMD. There's a reason for that. We wanted to sense test with customer representatives and put what the company said into a context that reflects what we see as the Fall 2019 events season hits its zenith.
To that end, we have attended a variety of vendor-led events in the last few weeks, have spoken or emailed customer groups, spoken extensively with ASUG on their thoughts, and held conversations with other industry analysts. Here's what we've synthesized from those interactions.
Most of the analyst questions we heard on the day were little better than softballs and borderline lame. Capital Markets Day is primarily for financial analysts; we expected them to understand the impact of activist investors and pursue that inquiry. We were wrong.
We find this extraordinary given the fact that Elliott Management is lurking in the background. We sense that analysts are waiting to see what the new executive board is going to do before expressing strong opinions in any direction. That's probably a good thing, and the market reaction seemed to be one of indifference. But then co-CEO's Christian Klein and Jennifer Morgan made a few huge promises, some of which we think are impossible to deliver and others, that we think miss the point. Let's start with the positives.
Right out of the gates, Klein and Morgan emphasized the importance of 'customer first.' We have heard this many times and in various guises in the past from SAP, but on this occasion, we felt there was a degree of authenticity to the message delivery, which rang true. The question comes about delivery but more on that later.
The Q/A had a greater emphasis on the strategic role of S/4HANA cloud (the multi-tenant SaaS solution), as well as SAP's contention that moving customers to HEC on S/4, be it private or public cloud in the hyper-scalers, is an essential win for SAP that moves customers towards intelligent enterprise and also results in an average of 1-2 additional cloud products purchased.
To its credit, SAP's team did refer to the controversial restructuring on several occasions without being prompted, providing context on why it was done, and the need for SAP itself to reskill with new talent and consolidate/streamline team and product overlaps. Several comments addressed SAP's contention that providing customer choice when it comes to S/4HANA hosted on the public cloud has been an advantage, and that will remain - despite the closer partnership announced with Microsoft Azure.
SAP also explained that one reason S/4HANA projects can move slowly (as in those customers not pushing towards go-live yet) is that customers often view S/4 in the context of a more significant industry disruption/transformation opportunity which takes time to develop. If so, that may be good news for SAP in the long run, that companies are viewing S/4 as a strategic transformation driver, but we'll have to see how that bears out in adoption and successful projects. "Transformation" can also become a multi-year bog pit. Adoption is the crucial metric here, as that is the only real defense for SAP against losing chunks of accounts to SaaS offerings from competitors and best-of-breed players.
There was the talk of verticalizing S/4HANA with the help of partners - a welcome topic as SAP's progress on adding industry functionality to the S/4HANA cloud has been far too slow. If SAP's platform is worthy of its name, partners should be able to help with this effort. A reference to Accenture's plans to build out utility functionality on S/4 is one such example. However, there then remains the question of who owns the IP, how it is marketed, and how it is implemented given that customers have their own preferred SIs.
Generally speaking, there was a lack of detail or vagueness. The S/4 adoption, as in go-live/in-progress projects was skated over. This may be because SAP doesn't know the numbers given that most S/4 implementations to date are on-premises, and therefore, SAP doesn't have visibility into the numbers in the same way that individual SIs have.
The numbers problem
SAP said that there are 12K customer deals and that 60% are effectively on the S/4 journey. These numbers are meaningless.
Breaking the 12K sales and 60% numbers down further - we think SAP's understanding of the real uptake is woefully lacking. Various numbers regarding addressable SAP customers have been bandied around the last few years. The consensus among those we spoke with is that SAP has around 35-36K ERP customers who would qualify as upgrade candidates. If we take the 12K sales number then allow for 40% net-new (however that's defined), then the 'real' existing sales uptake is more likely 15-20%. We have polled SAP customers and UGs to get their take, and at best, 50-60% are considering S/4 with in anger projects at around 15%. In short, if SAP has 3,000 customers live on S/4 across all segments, then that would be about right.
Adoption numbers are market sensitive - we get that - but they're also customer sensitive. A surprising number of SAP customers remain unaware of what S/4 is meant to deliver - assuming they've heard of it at all. The UGs do their best, but they only reach a proportion of SAP customers. For its part, SAP has the customer lists (because they 're all paying maintenance) and a €6bn marketing machine it can deploy. Why can we never seem to get clarity except to the extent that ASUG, DSAG, and UKISUG provide numbers that more or less tally but which are at odds with what SAP says.
A partnership or...?
One answer might be that SAP customers cannot see a simple and cost-effective pathway to S/4. This from Geoff Scott, CEO of ASUG, Americas' SAP Users Group:
While we welcome the new management and its focus on customer success, the number one issue our members talk about is understanding how they get to S/4 without it costing millions and millions of dollars. And also, tell me how I rationalize all of this while my customers are changing at a rapid pace.
Reading between the lines, it seems that SAP has done enough to get the base S/4 business case argument off the table. That has been an ongoing issue. But then what? We see SIs actively trying to persuade customers that 'greenfield' is the way to go. But then we also know that's a long, winding and potentially costly road. There will be candidates for that approach for sure, but what is SAP doing to support SIs whose customers recognize the 'brownfield' route as equally relevant - and one that can be achieved at a reasonable cost? We didn't hear anything on that topic during CMD - and we didn't hear analysts asking that question.
Integration/unified data model
Klein talked about a unified data model (UDM) as a priority for development. OK - it's a way to go as part of the road to eliminating the MDM nightmare, but we can't find anyone who sees that as vaguely do-able in the time period Klein and Thomas Saueressig head of product engineering have set for themselves.
SAP argues that the continuity of data models between S/4HANA on-prem hosted cloud and SaaS has significant advantages for customers - as well as the continuity between S/4HANA and the other cloud products in terms of a single view of customers/suppliers, etc. To the best of our knowledge this supposed "continuity" between cloud products and S/4 is at best a work in progress, with Klein earlier in the day acknowledging as much with his bold commitment to getting all products on the same data model by the end of 2020 (a plan which needs public specifics before it can have real credibility).
UDM is a technical architectural approach to development that has to sit at the core of any vendor's offering. Look at the two major interlinking problems. S/4 was not initially designed for cloud deployment while SuccessFactors, the other big piece of the SAP ERP puzzle, has taken two-plus years to shift to HANA and is still not fully integrated to S/4. Klein talks a great story around UDM, but do the devs get what this means? Can they deliver?
More broadly, back in the day when we first discovered the company, SAP was envisioned as a fully integrated business processing suite and certainly had that as part of the R/3 schtick. But 20 plus years and a bunch of disparate acquisitions later, and what do we have? We understand (but have not confirmed) there are some 214 roadmaps for the major products. So - please tell us - how will SAP deliver UDM in such a way that customers can then benefit from X-O in a seamless and cost-effective manner? And how will that translate into the kind of focus that Klein espoused?
The other point that needed further inquiry was Thomas' assertion that SAP is guiding customers who move to HEC to get rid of their custom code and standardize. If SAP is succeeding here, this will go a long way towards reinforcing that data model/integration advantage SAP is claiming between different versions of S/4, S/4, and SAP cloud products, etc..
The more custom builds are moved to the cloud, and the more work SAP has to do with custom integrations going forward. We also needed to hear from SAP on how they are getting their cloud implementation/hosting partners on that same page towards customer instance standardization on HEC and reduction/elimination of custom code. Yes, those are pretty technical questions for a financial analyst day, but without that probing, SAP's progress towards a unified data model is tough to asses.
For now, that gets an "incomplete" but SAP did do an excellent job in this Q/A of explaining how all versions of S/4 can be an edge working together, helping customers with quick rollouts of acquisitions on S/4HANA cloud, while running S/4HANA on-prem at headquarters, etc. That's a point SAP would do well to emphasize with customer examples. Adaire's New Zealand customer example of a 500 employee company with multi-country presence doing a 28 day S/4HANA cloud rollout is the kind of pattern that shifts perceptions on SAP.
SAP is trying its best to say that with its portfolio of solutions, it has the best set of capabilities to deploy among customers that will safeguard their future or allow them to make the kind of business transformation that will keep them competitive. That may be the high-level slideware, but as ASUG's Scott said - in the sales cycle, it's not the same thing.
Time and time again, members are asking for solutions to problems - they want to understand how SAP can help with business outcomes, and yet the company still talks about technology. When we think about the supply chain, don't throw 15 different product variations at me.
We hear this a LOT and believe that a significant part of SAP's messaging problem is the sheer scale of what they're trying to heft while at the same time being the provider of choice for all enterprise needs. It ain't working, in part because the different piece parts play differently depending on the customer audience the sales folk are addressing.
SAP used Capital Markets Day, typically a shareholder-oriented day, to emphasize their customer focus. That was a surprising and encouraging twist, with Mucic on hand to get into the nitty-gritty of numbers when needed. The question is: how well does SAP's sense of customer priorities match up with customers?
When we asked Scott of ASUG for his off-the-cuff view on his members' priorities, he said:
- Help me get to S/4HANA in a reasonable way that doesn't cost me millions and millions of dollars. (By far, the top concern)
- As I look to deploy these other cloud products, how do I do that in a reasonable way that enables me to drive business outcomes. This requires both an integration and business storyline.
- SAP - help me innovate in a world that is changing quickly, with disruptions across industries.
SAP's CMD talking points lined up well with these concerns, though we'd argue a thorough discussion on the accountability of partners to achieve these outcomes in a cloud era is overdue. That said, what Scott felt was missing - and we agree - were the details necessary to achieve these three goals. We'll be looking to Klein and Morgan to flesh this out as we head towards Sapphire Now 2020 in the spring.
It's important to mention Qualtrics, as SAP positioned Qualtrics, and experience management (XM), as a key differentiator that makes them relevant in buying conversations they might have been excluded from otherwise. We've noticed that SAP customers, including user groups, don't yet bring up Qualtrics as such a differentiator. Instead, they are focused on the hard lifting of S/4HANA use cases, product integrations, and indirect access clarity.
However, Scott said that with Qualtrics, the value proposition of integrating "XM" into SuccessFactors has been relayed effectively. He's waiting to see SAP relate use cases with Qualtrics across core operational areas with the same clarity - we are too.
We have deliberately avoided the financially oriented questions because they are a discussion of their own that may impact customers but not right now. We will make a few comments.
We were surprised that SAP was not more stockholder-focused in the sense that CFO Luka Mucic showed a slide where, in 2020, there is the potential for the discretionary additional cash flow of €1.3bn beyond the €1.5bn it has committed to paying back to shareholders. We were equally surprised to hear him say that cash flow is unpredictable in a range of +/-10% when, on the sales side, Mucic has made much of the increase in predictable revenue for which SAP strives. We are not sure how that computes.
The good news is that R&D holds the line at 14% of revenues and so if €1.3bn extra is realized then there's a discussion to be had about how much goes back into the company for development and how much is shelled out to stockholders.
As at the date of this report, we have not heard a peep from Elliott Management. That has to be good news given that company's penchant for shaking things up. We remain concerned about the topics raised above and hope that the executive board continues not only to communicate but also emphasize the primacy of the customer. Because at the end of the day, shareholders get nothing if customers are dis-satisfied and tempted to walk away.