In my initial SAP Q3 FY2020 report I raised a variety of questions based upon what was said in the company's earnings release. In this follow up story, I outline the four areas I believe the executive team has to address as part of the company's self declared transition.
For clarity, this story is based upon numerous calls I have fielded both over the years and, more recently on frequent calls with the company's executives, colleagues, partners, user group representatives, developers, and customers.
Those issues are cloud, talent, pricing, and geographies. Each represents a facet of self-inflicted wounds that have accumulated over time. They do not represent technical debt but institutionalized debt.
In a call with journalists this morning, Christian Klein, CEO SAP talked aobut being all-in with the cloud and is quoted as saying:
We are at an inflection point. I am not willing to trade value to our customers for short-term margin optimisation.
SAP doesn't have a choice. While it has convinced itself that customers want to remain on-premises for its core S/4HANA solution, the tide of architectural design says otherwise. It is no longer the case that customers cannot get off their on-premises software, it's a case that they must. In SAP's case, this means it has to architect for the cloud rather than simply handing over the infrastructure component to the hyperscalers and assuming that lift and shift will save the day.
Klein and his fellow executive board members are only too painfully aware of this problem, hence the note that margin expansion is off the table for the time being. You simply can't get margin expansion while building out fresh capability. And that's before thinking about the need to integrate the numerous offerings SAP has in its product portfolio.
Thinking about this in the context of its immediate competition, I am hearing Oracle customers repeatedly telling me that they see Oracle as a true partner. For its part, Oracle had its own transitional problems with a long haul development of the Fusion Suite that at one time left colleagues wondering if Fusion would ever get out the door. Those investments, combined with a change in style are making a difference with which SAP struggles to compete. (Note: I have another such Oracle case study in the wings.)
I've said this before but SAP is not perceived as that cool place everyone wants to join. It's a conversation I've had with SAP several times in the last few months. They point to a revamped SAP Community, efforts to encourage startups, a variety of programs designed to attract the 'cool kids on the block.' The fact remains that all of these initiatives are largely invisible to the mainstream.
Most recently I was asked to speak with the folk at SAP.io but demured. Why? The number of firms SAP is helping through this venture is impressive. 200 plus. But how many of them are on the SAP price list? Where are the showcased examples in the main SAP presentations? What is the joint go-to-market strategy? Where is the next hundred million or billion-dollar business in that portfolio?
As regards the community, there are a handful of long-time SAP rock stars working tirelessly to promote the best of SAP but they are few and far between. On a recent podcast, SAP developer veterans Matthias Steiner and Jelena Perfiljeva talked extensively about issues developers face on an ongoing basis. For its part, SAP says that those problems, and especially developer licensing, are in the process of being fixed but the hurdles for getting there are not immaterial.
Earlier in the month, Bob Stutz, President of Engineering and Operations for SAP Customer Experience threw a rock into the enterprise applications software pool with an exhortation that the industry needs to rethink its approach to pricing, arguing that it's a conversation he has 'constantly' with customers looking for a consumption model.
This is a tough question and one which analyst Josh Greenbaum and I discussed late last week. There will be a podcast on this in the coming days but suffice to say that there are more questions than answers.
Coincidentally, I note that Workday is promoting a fresh approach to monetization off the back of an IDC report. That report says:
For the companies selling cloud-delivered software, there is high interest to incorporate the consumption pricing model, but the challenging part is modeling the variables because neither the buyer nor the seller wants unpredictable bills or revenue. The best practice is a "subscription with overage" pricing model to allow for some consumption to be built into the subscription tiers with a price for overage. Therefore, the main challenge is determining the right amount of consumption to include and how much to charge for overage. The goal is to match customer value with economic fairness to the vendor.
A consumption model as understood elsewhere is anything but baseline plus. There needs to be flexibility to go up and down.
For its part, SAP has attempted to come to an accommodation with customers following its Digital Access strategy. The broad idea is that companies pay based upon document creation. That's a net good except there are numerous and important problems. For a succinct summary of the current state of play, check out UpperEdge's SAP and Digital Access - it's still a mess. The short version: SAP can't guarantee to provide an accurate document count.
The overarching problem for SAP and its peers is that it still has to satisfy financial analysts and tinkering with pricing models brings its own challenges. Witness the pre-opening market reaction to SAP's revised outlook. As of the time of writing, its stock price has been hammered as much as 21%, the largest drop since 1999.
The last six months, SAP has worked hard to restore its standing with DSAG, the German-speaking user group comprising Germany, Austria and Switzerland. Germany remains SAP's most important territory and it enjoys a special status among customers as the de facto back office solution of choice in that region.
None of that prevents the company from getting its share of criticism. Late last year, DSAG took the opportunity to tear into Klein as then newly minted co-CEO. It was a painful experience.
In January 2020, DSAG described SAP customers as 'in a bind,' hardly the message you want to hear as a vendor.
Fast forward to October 2020 and DSAG is a lot happier. That's reflected in improved confidence with SAP and a generally warm welcome at the most recent DSAG Live. Executive board member Thomas Sauerressig was clearly delighted:
Looking back to the DSAG LIVE keynote with Ralf Peters, Stefan Pietsch, and Juergen Mueller, I’ve taken away a lot of impressions and food for thought. It has been a pleasure to discuss our joint way forward openly, and I look forward to continuing the exchange.
But what about the Americas, SAP's second-largest territory? The Q3 FY2020 result points to a problem, perhaps implied in Stutz pricing argument but there can be no avoiding the fact that revenue fell (see image below) overall with only a smidgen of cloud growth in a region where you'd think they'd be gagging for solutions. After all, Salesforce managed to defy pandemic gravity reporting revenue up 29% in Q2 FY2020 albeit with a muted outlook. More recently, IFS reported recurring revenue for Q3 FY2020 up a whopping 49% with total revenue up 12%.
The rumblings I hear is that SAP is in sore need of fresh US specific sales leadership but equally, SAP needs to divide its top leadership time to actively include the Americas. Having reorganized so as to consolidate power back to Germany following Jen Morgan's ousting, SAP cannot afford to ignore this vital territory and its importance as the location of all its major acquisitions the last 10 years.
While all ears and eyes will be on the analyst call, my view is that SAP should ignore the analysts. It has no shortage of capital, is promising a partial divestment of Qualitrics that will release more money and has a long tail of maintenance customers that can shore up development costs for a long time to come. The pandemic is a once in a generation opportunity for SAP to clear out any lurking problems in its financial estimates, even if that means a short term share price bloodbath.
Given the sheer scale of SAP's operations, solving any one of these challenges would be hard but taken together, they represent the underpinnings for building the future. SAP will likely point to the numerous initiatives it has under the guise of sustainabilty and resilience, IoT and Industrie 4.0 but they're having little if any impact.
Now comes the true test of SAP's leadership. The good news is that, as I've said before, the board leadership triumvirate of Klein, Saueressig, and Mueller are all singing from the same hymn sheet. Whether they've got the right dance tunes is another matter.