Yesterday the Interwebs were ablaze with the news that SAP announced a sidecar that will allow HCM on-premise customers to continue receiving support for that solution provided it is migrated to an as yet to be developed on-premise HCM S/4 HANA. My initial take veered towards the negative, and after a (broken) night's sleep, that view has not changed.
In an investment note, William Blair reiterated some of the points I made, adding ones I didn't surface:
SAP’s road map just became more confusing with yesterday’s announcement, and now involves three different HCM options. The company signaled in its press release that the bulk of its investment will remain with its SuccessFactors cloud offering, but the decision to develop a new, on-premises solution will almost certainly dilute the focus around its cloud HR agenda, and at the very least create confusion in the market. It is also likely to create conflict within the sales organization, as well as the channel, which over time will likely push the on-premises product over SuccessFactors given the higher implementation fees that on-premises deals typically entail. These conflicts are likely down the road, as this product is not scheduled to be released until 2023, and the more near-term issue is that customers are forced to juggle myriad HCM road maps within SAP, and are being asked to trust that SAP can deliver a product in five years' time. The announcement is likely to create an incremental opportunity for Workday, who has long differentiated against SAP and Oracle (ORCL$49.06; Market Perform) with its well-understood and delivered-on product road map that is 100% focused on the cloud.
I am more confused but at a different level.
Look back to look forward
My main point of concern is that I cannot fully understand how SAP has, apparently, failed to convince its customer base that SuccessFactors represents the road ahead. Looking out 12-13 years seems a long timeline to me and one that I would be very nervous about committing what will be significant development resource to a project that amounts to a technical crossgrade. Think about it. Let's rewind the clock 13 years.
- Facebook had just turned up in Silicon Valley, had no real revenue.
- Workday wasn't even a twinkle in Dave Duffield and Aneel Bhusri's eye.
- Slack, WorkMarket, Uber and many other vendors tied to the emerging and complex workforce landscape didn't exist.
- SuccessFactors had been around four years but was two years away from going public.
- Salesforce had revenue of $176 million.
- The iPhone was two years away.
- Netflix was still flogging DVDs
- Google's revenue was a measly $6 billion.
- SAP and Oracle were merrily duking it out in the enterprise apps market, and those of us in enterprise land were all enjoying the show.
- Quite a few of us saw the enterprise landscape as represented by GISMO (Google, IBM, SAP, Microsoft, Oracle.)
I don't need to document what has changed since then except to say - everything.
In FY 2005, SAP reported that 21% of its revenue came from Germany. That was €1.8bn. As of the latest reported annual figures (2016), Germany contributed €3bn or 13.7% of total revenue but 31% of EMEA revenue. Why does this matter?
DSAG was quick to cautiously applaud this HCM announcement, suggesting there has been significant pushback/pressure from German customers about adopting cloud solutions. That fits with an article in Computerworld (Switzerland) that said:
At the pressure of the German-speaking SAP user group (DSAG), SAP plans to offer an on-premise solution for human resources longer than originally planned
This view also fits with the general perception of Germany as a country that is cautious. Check what Lee Atchison of New Relic recently said:
Interest in ways organizations can leverage the cloud is a seemingly universal truth across industries and the world. We do know that company culture plays a great role in how the cloud is adopted within a given technology organization. For instance, a smaller, nimble startup or mid-size company is more willing to listen to the cloud adoption argument and be early adopters of newer technologies and techniques. Larger companies are more risk averse so typically are slower to adopt and are more conservative on the types of technologies they take advantage of.
The same divergence occurs geographically. I observed that companies based in Australia and New Zealand tend to be faster adopters of cloud technologies. They hunger for information about what they can do to leverage the cloud to make their businesses better. These aren’t ‘early adopters’, but rather ‘eager adopters’. They proactively look at early technology and want to learn how it might impact and help grow their business.
In Germany, however, it is the exact opposite. They are safety conscious and want to fully understand the impact of a technology before moving forward. When confronted with a piece of technology, their response is frequently, “How is this better than what I already have and what problems might it cause?”
[My emphasis added.]
Also, certain of SAP's Lighthouse customers have made clear that while they are willing to move over to S/4 HANA, they have no plans to move applications to the cloud - including SuccessFactors. Taken together, the German contingent plus Lighthouse at-risk customers must account for a significant amount of maintenance revenue. How much is anyone's guess, but I'd be surprised if it was south of 50% and could be as high as 75%. Thought of in those terms, then this latest announcement makes perfect sense, as does the thought that SAP doesn't plan to make much money via enhanced licensing.
Having said that, this is not the whole of the story.
A complex landscape
In common with other US-based vendors, Workday has worked hard to establish a beachhead in SAP's backyard. This is tough as Germany could be characterized as a country where the border sign often says: "Not Invented Here? Not Welcome." Yet Workday can count Siemens and Deutsch Bank as logos. There will be more.
When I last visited SAP HQ in Waldorf, one of my fundamental questions surrounded the issue of IoT adoption, which, by its nature, implies the need for cloud-based solutions. I held the perception this would be very hard for SAP to sell among its mostly conservative customer base and especially in Germany.
I was surprised to learn that contrary to popular conception, Germany's heartland of Mittelstand businesses, while many are very well established, they are also keenly aware of the need to modernize across business models and technology. That means change and, in some cases, radical change.
Therefore, painting Germany as an 'on-premises only' nation is fundamentally wrong, despite the fact a DSAG user survey says that 97% of customers use SAP on-premises HCM. (see image below)
But then also check the preferred operating models:
This fits closely with the German view of data sovereignty and aligns with German law concerning data location.
None of this makes life any easier for SAP or its customers.
My take (2)
13 years from now is still a very long time horizon in both economic and technology terms. If what we've seen in the previous 13 years is an indicator, planning out that far is aspirational at best.
I still think SAP has failed to grasp the cloud nettle in a manner that is convincing to customers. My best guess is that those customers who want to stay on-premises are buying time while they figure out what they must do next while keeping an eye out for how data sovereignty issues play out.
You will hear all sorts of stories about the amount of Z-programs (customizations) that have been applied to SAP HCM systems but here, SAP could have touted a 'best practices, cloud-enabled' story that acknowledges caution and which allows companies to recognize that the way you administer and pay people is not a business differentiator. It is one of the few situations where 'best practices' is a useful expression. But then does keeping this 'stuff' on-premises improve a business's chances to be more agile, more flexible? Does it encourage a forward view of the workforce?
Yes, I get that despite all the hoopla, generally, only about 20% of companies have, so far, made the switch to cloud applications and that the move will be much slower among very large organizations. But then 13 years ago, Salesforce was a minor annoyance to SAP. Today? It has pretty much swamped SAP's CRM base. Could anyone have thought, even five years back, that Workday would pick off Bank of America as a customer? But it has.
Yes, I get the industry verticals argument, but here SAP could do a better job. I also get the unique flavor of Germany's workforce makeup and its influence on SAP's thinking. But if you agree that even in Germany, things are changing and there is a continuing need to evolve, then SAP must consider itself as taking a diminished role over time.
Finally - expect questions on the upcoming financial analyst call for CEO Bill McDermott to explain what this means for his much quoted 'We are the cloud company' mantra.