Jennifer Morgan out as SAP fleshes out Q1 FY2020 and the immediate future

Profile picture for user gonzodaddy By Den Howlett April 21, 2020
Summary:
Jennifer Morgan loses her position as Co-CEO SAP as the company enters a period of uncertainty.

Jen Morgan
Jennifer Morgan (via YouTube)

In an unusually blunt and direct form of wording, SAP announced yesterday that:

More than ever, the current environment requires companies to take swift, determined action which is best supported by a very clear leadership structure. Therefore, the decision to transfer from Co-CEO to sole CEO model was taken earlier than planned to ensure strong, unambiguous steering in times of an unprecedented crisis.

And with that Jennifer Morgan, co-CEO for just on six months is gone - although officially on payroll until the end of April. Christian Klein now steps up to the sole CEO role.

The language SAP chose is interesting, suggesting there was some kind of Game of Thrones thing going on internally to see who of Morgan and Klein would emerge the eventual winner. We now know the result.

The financial results, released this morning, fleshed out what was pre-announced earlier in the month with very little by way of adjustment. One important measure - free cashflow for the year - has been adjusted. Per the release:

In light of the COVID-19 impact and the revised operating profit outlook, SAP reassessed its cash flow expectations for 2020 and now expects an operating cash flow of approximately €5 billion (previously approximately €6 billion) and a free cash flow of approximately €3.5 billion (previously approximately €4.5 billion). The revised outlook assumes the current COVID-19 induced challenging demand environment deteriorates through the second quarter before gradually improving in the third and fourth quarter as economies reopen and population lockdowns end.

Conundrums

Based on what is said now compared to what was said less than three weeks ago, it is hard to fully understand what motivated SAP to remove Morgan from the board in the context of COVID-19. As might be imagined, there is plenty of speculation in back channels and I expect this to be the focus of questions during the analyst call later today. Depending on what is said, we may update this report or author a fresh story.

Right now, SAP's stated plan appears optimistic. But what's clear is that SAP has, once again, found that the co-CEO leadership model doesn't work well for them. My concern is that if anything, the concentration of power within SAP back to Walldorf will embolden those who believe 'SAP knows best' at exactly the time when it needs to learn from others. Klein has demonstrated to myself and others that he is willing to reach out and listen to many points of view. But it is the L2-3 execution people who worry me. Have they learned the lessons of the past?

On March 30th, Morgan pledged no significant layoffs for 90 days. That's surely off the table. Klein must now reshape SAP for the long haul, assisted by Luka Mucic, CFO, whose contract, due for renewal in 2021 was recently extended through 2026. While I didn't write up that latter story, Mucic is a safe pair of hands who has done an excellent job for SAP and the CEOs he's served. Extending his contract is a clear sign of confidence in a person who is central to SAP's (and now Klein's) long-term success. If that means additional layoffs, we have to hope that SAP learned from the 2019 debacle and is laser focused in its approach to any fresh layoffs. Acting fast is good. Acting rashly is another thing altogether. 

At this point it is worth reflecting on what Jon Reed said back in October, 2019 when Klein and Morgan took over from Bill McDermott:

I think they inherit the biggest set of challenges any new CEOs at SAP have ever taken on. That might seem odd to some, given the overall growth of the company under McDermott - and good earnings news of late - but between the cloud apps integration challenges, S/4HANA adoption urgency, and an overall need to change the customer experience (which all vendors are facing as we move to an "earn my trust every year" type of business model), that's a lot. And that's not even the full list.

Those same challenges remain albeit in a market that has changed dramatically in the last few weeks, which continues to evolve and which serves to amplify business model weaknesses. What are we seeing?

Just about every firm I speak with, along with colleagues, are of the view that getting any sensible steer on what happens in the coming months is nigh on impossible. While the company talked positively about a return to normalcy in its earnings pre-announcement we see a different picture emerging. My view and that of many others I look to is that hopes of a V-shaped return to normalcy is off the table. SAP appears to be hoping for a U-shaped return. But what if it is a Z-shaped return as some are predicting and which looks likely based on emerging tech spend patterns?

Add in the potential for a fundamental reshaping of economies around the world and it is easy to understand that we are all looking at a movable feast, the pace of which is unprecedented in living memory. SAP knows this only too well. 

What are consultants and analysts telling us?

One global consultancy told me that projects close to completion are getting over the line but customers are making choices about whether to can or pause projects that are earlier in the delivery cycle. One problem as it relates ot S/4HANA projects is that they are hard to deliver in full using virtual methods. Data can be modeled remotely, some processes can be shaped but getting agreement on the execution of critical milestones is a serious challenge, especially when operational heads that would be part of any mjor project steering group are understandably tied up with COVID-19 related pressures. Layoffs among consultants is almost inevitable. 

Another consultant said that RFPs are still going out, arguing that now is a very good time to negotiate deals. But deal making is one thing, projects still have to be delivered or all you're doing is putting out money that's lying idle. Right now, that's the last thing any CFO wants to see as businesses of all kinds strive for the most efficient cash management models they can muster. 

One analyst told me that things are moving so quickly that they have to update their data every week just to make sure they can see where, in the cycle we are heading and that even then, it is difficult to predict. I'm aware that analyst firms are actively considering layoffs especially among events staff. 

What's the point? We've canned all in-person events through the end of the year. We don't want rooms with people having to sit two meters away from each other, policing how they enter and exit like they are at supermarkets. 

Event horizons

Talking of events, we regularly field inquiries about virtual events, many of which are characterized by concerns over how to present in situations where the likelihood of deal-making is minimal. To what extent can software vendors expend energy on fresh marketing ideas when those events may not support the sales pipeline? Our advice is that vendors need to show they are good citizens first, providing customers with both support and relief. That's a challenge in its own right because it is antithetical to what tech marketers 'do' most of the time.

SAP has virtual events coming up in May and June. Let's see what happens but in one conversation I recently had, it was put to me that by the time events re-open, people who would normally attend will have become accustomed to virtual events and be far less willing to travel as has been the custom in the past. How might SAP respond to that challenge?

Opening up

Then there is the question of what happens as economies re-open. No-one knows for sure what that timeline looks like, nor how it will unfold. Again, the current consensus is that secondary effects from COVID-19 will last well into the year and possibly into 2021. Would you want to make a significant software buying decision in those circumstances? Even if you do then what kinds of software are you going to bet on? 

Industries in which SAP has a strong presence have been hard hit. In recent years it made much of its retail industry chops but many segments are in jeopardy and with many bankruptcies likely to follow. Only last weekend, Niemen Marcus was rumored to be readying a bankruptcy filing just weeks after furloughing staff. That gives you a measure of how quickly businesses can collase in the current lockdown. Yesterday evening, the WTI oil price went into negative territory for the first time in hostory. SAP is a dominant player in oil and gas. According to oilprice.com

The price crash could lead to companies deferring as much as $131 billion worth of oil and gas projects slated for approval in 2020, Rystad Energy said in March.

Earlier this month, Rystad Energy said in an impact analysis that offshore drillers would see up to 10 percent of their contract volumes canceled this year and next, representing a combined loss of revenue of about $3 billion. According to the independent energy research firm, even the big offshore drillers could face financial challenges and may need restructuring.

On the flip side, pharmaceuticals, another industry where SAP is strong, is, unsuprisingly, doing well. High tech will likely fare well overall but consulting operations look like they will come under significant pressure. 

Price and terms

Finally, there is price and terms pressure being exerted on vendors across the board. Brian Sommer has talked about the kinds of action that CIOs must consider. Over at Upper Edge, Adam Mansfield talks persuasively about The Two Things Customers Want from Cloud Vendors.

I am getting calls asking that SAP use this opportunity to (finally) simplify pricing and become transparent. The company is famous for having a price book that is difficult to understand and with which some AEs struggle. For Klein to be serious about delivering on customer success, clearing down this element will play a critical and central role. 

Next steps

What is SAP's next step? Let's be clear. SAP has a strong balance sheet and enough by way of cash flow to weather the pandemic. Yes, it is loaded up with debt accumulated for acquisitions but at last year's Special Capital Markets Day, Mucic clearly laid out the plan and playbook by which SAP expects to execute and nothing in today's release runs counter to the forecast.

We have heard rumors the company plans to divest its mobile operations although nothing was said about any potential divestitures in the earnings release. I'll believe it when it happens.

There are numerous areas of overlap that Klein identified and which were discussed in broad terms the last time we met. Following that meeting, I provided Klein with a list of people that I thought might assist in some of the endeavors he has in mind. I am aware that at least some of those people have been contacted but what, if any, action arises has yet to be seen. We also know there has been a quiet re-organization among some key senior executives in the US away from what would have been Morgan's organization and, effectively, back to Klein. 

In the release, SAP reiterated the steps it has taken to help customers etc: 

  • SAP is offering free access to Remote Work Pulse by Qualtrics so organizations can understand how their employees are doing and what support they need as they adapt to new work environments.
  • To address massive disruptions impacting global supply chains, SAP opened up free access to SAP Ariba Discovery so that any buyer can post immediate sourcing needs and any supplier can respond. SAP has seen a more than 50% increase in buyer postings since the offering went live. One critical example was sourcing hospital beds for a temporary hospital.
  • SAP is leveraging its vast ecosystem by inviting all its partners to post their free and open offerings on the SAP Community to help support businesses and address the global challenges related to the fight against COVID-19.
  • SAP is a partner and sponsor of the HPI FutureSOC Labs which is donating server power to a research initiative by Stanford University. This initiative simulates movement and folding of proteins which could be relevant for the development of vaccines.

Interestingly, it added:

Due to the current uncertainty regarding the duration and severity of the COVID-19 pandemic, SAP cannot predict whether our response to date or actions that we may take in the future will be effective in mitigating the impact of COVID-19 on our business and results of operations.

That suggests to me SAP has a variety of scenarios planned but does not yet know which one it should pick. Again, we may learn more on today's analyst call. 

One open question that is on colleagues minds - who is the new global sales lead? Subject to any fresh announcements, Adaire Fox-Martin appears to be in the box seat.