In my initial assessment of the SAP Qualtrics deal, I focused on what I see as fairly obvious cultural differences between the two companies coupled with a (relatively) jaundiced view of business management. Since penning that story and per Jon Reed's notes in last week's Hits & Misses, I've had the opportunity to hear from SAP about the rationale behind the acquisition and spent a good few hours poring over Qualtrics collateral, it's S1 and case study material. I've also read extensively about how the deal was put together.
Context - SAP needs this deal
I want to set the context for what follows. I'm far less interested in the price that SAP paid, eye-watering though it is - than I am in the strategic direction it implies. SAP has a relevance issue and this acquisition seeks to address that. Here's how.
There can be no doubt that SAP CEO Bill McDermott believes this is a defining moment in the company's history. Check his words:
We continually seek out transformational opportunities – today’s announcement is exactly that. Together, SAP and Qualtrics represent a new paradigm, similar to market-making shifts in personal operating systems, smart devices and social networks. SAP already touches 77 percent of the world’s transactions. When you combine our operational data with Qualtrics’ experience data, we will accelerate the XM category with an end-to-end solution with immediate global scale. For Qualtrics, this introduces a dynamic new partner with the belief, passion and scale to bring experience management to millions of customers around the world.
The combination of Qualtrics and SAP reaffirms experience management as the groundbreaking new frontier for the technology industry. SAP and Qualtrics are seizing this opportunity as like-minded innovators, united in mission, strategy and culture. We share the belief that every human voice holds value, every experience matters and that the best-run businesses can make the world run better. We can’t wait to stand beside Ryan and his amazing colleagues for the next chapters in the experience management story. The best for Qualtrics and SAP is yet to come!
I've added emphasis so that you can better see what this means directionally for SAP. As the packaged software vendor of choice for back office and manufacturing businesses, SAP has a solid grip on the global 2000 businesses and beyond. But it faces challenges that are not going away. ERP is largely done and provided SAP's not inconsiderable on-premises moat holds, then it will continue to throw off large amounts of maintenance related cash even while it endeavors to persuade customers to make the shift over to S/4 HANA.
By its own admission, (subscription required) SAP has bought its way into the at scale subscription economy. Regardless of the rhetoric, SAP trails Salesforce in CRM-related topics and is being heavily challenged in HCM by Workday at the mid-upper end of the enterprise and Oracle in the pure-play mid-market. Microsoft is also a significant competitor.
But these ERP, HCM and CRM categories represent legacy applications that are largely based on a theory of automated administrative tasks that goes back to the R/3 days of the 1990s. One view to which I occasionally hold is that what we've seen in the rise of Workday and Salesforce in particular, is a reframing of the way those legacy processes are delivered but with significant tweaks. That leaves SAP with a specific problem because despite its bulk - €20bn plus revenue is not to be sneezed at - it has a relevance issue.
The world has, as McDermott correctly points out, moved on. While there is considerable scope for process automation in the core ERP, (see SAP's acquisition of RPA vendor Contextor for IoT) CRM, and HCM capabilities that's only a step towards preparing for a different world, one in which information guides people's decision-making across multiple dimensions. In Qualtrics, SAP sees the opportunity to change the company's narrative around its relevance in value delivery with experience management or XM at the core of that messaging. Here's why.
What does Qualtrics offer?
Most of the initial analysis around the deal focused on Qualtrics' survey capabilities. As such, most commenters missed the fact that Qualtrics is much more than a survey outfit and is currently positioned as an XM platform rather than a single product. It certainly has the product and service range, even if there must be question marks around the depth of those offerings.
The key to understanding how Qualtrics is able to provide deep understanding across customer, employee, brand and product experiences comes from examining its background as a (largely) survey provider to academia. In a 2013 interview with Fortune, Ryan Smith, CEO Qualtrics made some revealing remarks about the struggles the company had in getting enterprise customers to take its offering seriously. Instead, he says, they made the unusual move of going after academia, one of the hardest markets from which to make money, albeit with the opportunity to learn a great deal about large-scale and detailed survey requirements, plus the algorithms behind them that allow decision-makers to understand how reliable surveys are constructed and interpreted.
Here's the key comment (slightly massaged for this text purpose):
We found that university grads were interning at enterprises and asking for Qualtrics. The interns moved on but Qualtrics remained.
In other words, academia has served as both the proving ground and seedbed from which Qualtrics could start to make successful plays into the enterprise.
In recent times, Qualtrics has purposefully fleshed out a set of sub-categories within XM so as to create a platform play which customers like. For instance, in an instructive webinar that starts with customer Kantar TNS, a WPP business focused on market research, (see below) Jon O'Loughlin, executive director, customer experience at Kantar TNS says that when they were looking at CX issues, they realized that employee experience is a key factor in determining good CX. This is a topic to which I will return but in this context, it meant that Kantar TNS needed a platform from which to understand the inter-relationships between CX and EX. That's the start of the platform play.
In another webinar, Gunnar Schrah, principal consultant Qualtrics says (see transcript) that when thinking about EX, there is a brand context:
Another thing that we're seeing a trend is an actual branding effort around the employee survey program. So, creating an actual tagline or a brand around the survey program helps build awareness and understanding and buy-in on the part of different stakeholders within the organization. In terms of participation, obviously, that's a critical aspect of this type of culture, but we're talking about a certain type of participation where it's more internally motivated.
There goes another piece of the puzzle albeit 'brand' matters in both the CX and EX contexts.
Finally, Qualtrics talks about product experience (PX) encompassing topics as wide-ranging as pricing models, product testing and buyer personas.
Stitch it all together and with an emphasis on both continuous feedback loops and in-the-moment information and in theory at least, you have the basis for a much more agile, responsive and effective business. Something must be working because Qualtrics is on a healthy run-rate of over $400 million pa, counts 9,000 customers globally with 576 spending more than $100,000 p.a. and a credible 'land and expand' strategy that's seeded by plenty of free trials and demo opportunities.
What's in it for SAP?
SAP is of the view that combining Qualtrics XM data with its operational data makes for more powerful insights that assist in making the journey to SAP's mantra of the intelligent enterprise. So far we have seen precious little by way of detail on this topic from SAP. A simplified past history suggests that SAP's version of operational data comes out of a transactional mindset that proliferates BI solutions and dashboards. There is a focus on real-time and there can be no question that SAP has the ability to capture vast amounts of granular information that can inform decisions and predictions.
As we understand it today, SAP believes that Qualtrics opens the door to understanding the 'why' behind customer and employee behavior that in turn influence results surfaced in SAP dashboards.
On its face, this sounds like a compelling argument but will this combination work?
I'm going to leave aside the numerous integration questions. Others will plenty to say on tyhat topic.
In many of its presentations, Qualtrics rightly brings up core issues impacting CX and EX. In our view, it makes the right argument for saying that too few organizations understand that a good employee experience leads to a good customer experience. Equally, Qualtrics looks deeply into the topic of culture. In one presentation the company references the organizational culture theorist Edgar H. Schein, Professor Emeritus at the MIT Sloan School of Management.
The short version of Schein's theories goes like this; an organization's culture starts with shared beliefs that form a mindset over a long period of time. These beliefs are difficult to study in part because they are ingrained into the core values by which the company 'lives' and as such are almost immutable. As such, they represent a coping and defense mechanism which, in turn, explains why they are highly resistant to change except under conditions of company-wide threat or stress. I agree with this theory since the evidence suggests firms only institute widescale change when there is a threat of imminent annihilation. Check our series on Walmart to see that in action.
As I said on the call with SAP, you can have as much by way of feedback mechanisms as you want among employees and with the best of intentions, but the problems exposed are essentially human in nature, of which the default response is almost always 'no.' This presents special challenges for SAP because of the business-wide, strategic spin that SAP is currently putting on the value that Qualtrics plus SAP represents.
As I asked in my last story on this topic, SAP's current rhetoric is questionable. Quoting McDermott:
There are millions of complaints every day about disappointing customer experiences. This is called the experience gap. Businesses used to have time to sort this out, but in today’s unforgiving world, the damage is immediate, disruption is imminent. This has shifted the challenge from a running a business to guaranteeing great experiences for every single person.
Present that to a board and you're going to be shown the door in short order. It's just not true for many businesses. That is despite the fact there is growing evidence that brand loyalty is diminishing or, at the very least, diversifying, especially among the millennial generation.
Qualtrics, on the other hand, prefers the "land and expand" approach based on a departmental approach of finding pain points and then dropping in an appropriate solution. That easily allows Qualtrics to tick over on deal sizes that SAP would normally regard as chump change. Even with those reported 576 deals at over $100,000, the average run rate deal value is only $45,000 (or thereabouts) which must mean that Qualtrics is doing numerous small deals. SAP is not geared up for that level of deal closing, even if it is correct in believing that its universe of customers is large enough for it to crank the Qaultrics sales flywheel into high gear.
Similarly, Qualtrics does a decent job of presenting its customers with the highly nuanced nature of melding survey methods and results back to actionable insights. But at the end of the day, it knows that culture change as a pre-requisite to any of the actions around EX sentiment requires culture change consultants. Run a Google search on that term and see what it doesn't deliver. No Accenture, Deloitte, PWC, EY or any of the usual SI suspects. SAP isn't in the consulting business so even if it successfully scales Qualtrics from the sales perspective, how will execution follow such that SAP is the beneficiary of process change/innovation?
Underlying all of this, I argued to SAP that while the notion of coupling CX and EX is laudable, the fact remains that large parts of the 21st-century economy run on the idea of labor as a cost to be controlled and not a valuable asset to be nurtured and grown. That's the underlying reason why wage inequality has grown so markedly in the last 30 plus years. That in itself is a cultural issue. The Qualtrics story challenges that assumption at multiple levels and it certainly fits well with McDermott's mantra around customer empathy. But it remains an open question whether that is a sustainable proposition in a period of rapid roboticization. That is despite the fact that people like Oleg Vishnepolsky, global CTO at Daily Mail Online, has a massive following on LinkedIn with his passion for treating employees the best you can. The disconnect or credibility gap is just too wide at this time.
SAP's gamble on Qualtrics is part of a much bigger play. Once you strip away the marketing rhetoric, it is easy to understand the path McDermott has chosen. Price paid aside, I can see how the platform portfolio approach and growth trajectory is attractive to SAP. At that level, it works for me. But where past acquisitions largely made sense in the context of SAP's existing footprint and portfolio, this one is much harder to position.
You have for example to assume that the challenges McDermott sees are readily understood and accepted by global 2000 businesses. While there are plenty of examples where companies are claiming some form of transformation to reflect the needs of a digital/omnichannel world, there is far less evidence of companies taking the root and branch work required in the EX to CX world that Qualtrics proposes and which, by the way, we applaud. What's more, the XM approach on its own is not enough and to that point, I doubt SAP has enough of a technology footprint in the accompanying cloud customer-facing space to deliver solutions that play to a new world. For instance, no-one is going to out-Amazon Amazon anytime soon. The technology doesn't exist in product form.
Then there is the question of survey burnout. In the two days after the deal was announced I received no less than eight requests for survey responses. Guess how many got done? It's becoming an increasing annoyance.
Finally, McDermott has put SAP on a path that inevitably brings its own cultural challenges. At its heart, SAP is a German engineering company with all the values you'd expect of an established Mittlestand type organization that has a strong works council and remarkably successful track record. That isn't going away. But if, as in the past, SAP leadership can persuade its people to eat (on this occasion) the Qualtrics dogfood then my current skepticism changes to one of rabid optimism.
I have talked about the cultural fit between the two firms in my earlier piece. There's no more to add at this time.
To be continued