SAP hits its leadership crossroads - breaking down my interview with McDermott, Morgan, and Klein

Jon Reed Profile picture for user jreed October 16, 2019
A surprise call with outgoing SAP CEO Bill McDermott and incoming co-CEOs Jen Morgan and Christian Klein shook up my weekend. Here's what I learned, along with a user group view from ASUG CEO Geoff Scott.

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Plans change - an understatement in enterprise software. It was my turn last Thursday night in San Diego. That's when I got a call from SAP - with three notable executives on the line.

By that time, Den Howlett had already published his initial take on SAP's CEO moves, SAP - Klein and Morgan come in as co-CEOs as McDermott steps down.

But I could not turn down a chance to get an instant reaction from outgoing CEO Bill McDermott, and put new co-CEOs Jennifer Morgan and Christian Klein on the interview hot seat - chairs that will become familiar very quickly. (Den has since updated with a few highlights from my interview, along with reaction from the UK&I SAP user group).

I was not amongst those surprised by this news, but when it happens like this, the emotions are palpable. McDermott on his legacy, Klein and Morgan on a career jolt that would give anyone butterflies.

Since the news broke Thursday, we've been assured that the co-CEO model is "proven" at SAP. Yes, but as I responded to Matthias Steiner on LinkedIn, never like this:

I think they inherit the biggest set of challenges any new CEOs at SAP have ever taken on.

Why? I added:

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.

The unfinished business of Qualtrics - and cloud integration

I asked Morgan and Klein about all that, but I started with McDermott. McDermott's initial reaction was confidence in Morgan and Klein, and SAP's succession plans coming to fruition. However: I couldn't help but wonder if McDermott felt his work at SAP was somehow unfinished. As I said to him, " You're coming off the heels of Qualtrics, which is perhaps SAP's most criticized - but I would argue, most interesting acquisition. So you're missing out on the chance to prove your judgment there." McDermott responded:

I can tell you not only have the early indications in terms of business results on Qualtrics been great, but it's a fascinating re-imagination of the customer relationship, and there's no two better people in the world to take that to the next level than Jen and Christian.

Sometimes the things that are most criticized are also the most transformational. As I mentioned back then, NeXT was not necessarily a popular move when Apple made that platform decision, but it got Steve Jobs back, and reinvented the company...

McDermott cited other misunderstood acquisitions that panned out, such as EMC buying VMware (now Dell's most valuable asset), and Facebook acquiring Instagram. He continued:

I had no doubt in my mind that Qualtrics was that move for SAP, that it was a transformational one... Jen and Christian were both with me one hundred percent on the Qualtrics deal. In fact, I was in the Heidelberg house; we were in the basement. We had Ryan [of Qualtrics] come in through video. To a person on the executive board, and certainly with Jen and Christian leading the way, they all saw it. And Jen, as you know, has been leading the CBG [Cloud Business Group] and has been overseeing Qualtrics. I think that X and O is pretty much her middle name now.

When all of this was going down, a pundit on the backchannel summed up SAP's cloud dilemma:

SAP thinks it's going to market with one comprehensive solution, but customers don't see it that way.

Integration, still high on SAP user group agendas, has never been more daunting/important. You're not realizing the real value of Qualtrics without it. Morgan, who got a close look at this problem through her CBG lead role, addressed the issue:

We have this incredible engineering DNA in the company. It's part of our heritage. We've made so many wonderful acquisitions under Bill's leadership, and it's brought in a very different and new cloud DNA. Over the course of the last several months, Christian and I had already started bringing together the engineering teams to really cross-pollinate, and start to really share experiences - and get them thinking differently on the behalf of the company.

Morgan says the work of pushing through engineering silos has already begun:

So really just breaking down the silos, and bringing this engineering culture together for the next wave of innovation at SAP - I think is a really amazing opportunity.

S/4HANA adoption - technical upgrades won't cut it

Morgan and Klein had not yet defined their respective co-CEO duties - at least not in a way they were ready to share publicly. But I've talked with Klein on S/4HANA adoption before. In my view, McDermott did a compelling job - along with Chairman Hasso Plattner - of articulating a vision of the so-called "intelligent enterprise."

In that vision, ERP is not a back office system you "ring fence" as CX sales teams argue. No, in this view, there is no back office - it's all part of the same strategic, real-time asset. Everyone is a customer now. Employees, suppliers, and partners also. And you're not serving them effectively without a real-time view. That, to me, is the best S/4HANA pitch. But you have to get customers on board, guiding them to a value they've never really gotten from "classic ERP." Technical upgrades are not going to get it done this time around. Klein is well aware of it:

That's exactly right. We definitely have to help our customers to make the business case, to really talk about the value of moving to S/4, to lead on supporting new business models. This actually happens in all of these industries.

Customers move more and more into pay-to-go subscription-based business models, which we are in support of. We need to be better in articulating that. Also using new technologies like AI, ML, and robotics to really automate productivity within the intelligent enterprise.

My take

A funny thing happened to all the software vendors scrambling to deliver on customer experience (CX software). Customers decided to hold CX vendors to their promises - in all aspects of the vendor relationship. Sales, support, license negotiations, user experience. SAP's CX play, aka C/4HANA, is dependent on that same shift.

I think Morgan and Klein understand that SAP's market goals will fall flat, unless they can see that internal culture change through. As Morgan said to me:

In the cloud world, customer success is really important. I know that that's a statement of the obvious, but how you support customers in the cloud takes on a different meaning than maybe the way we supported customers in the core software years ago.. It just requires a different level of attention, speed, and support. And I think that that's an area Christian and I are very, very focused on,

I've had skeptics tell me Klein and Morgan aren't ready for the job, that the depth of experience isn't there. But I'm not a fan of passing verdicts on moves before they play out. "Too young" and "too old" are stereotypes in need of thorough dismantling. McDermott's complicated legacy is something that will be debated for years, until more dust settles (he was always exceptionally fair and candid during our on-the-record talks; Den has covered that off). Klein and Morgan won't have that luxury. Their opportunity is huge, but it won't take years to see what's what.

I told them I think SAP's greatest strength remains its diverse/global workplace culture. Perhaps that culture is a bit shaken by last spring's controversial "restructuring" in particular, but it's still a workplace that smart and creative people are drawn to. Morgan and Klein both have a reputation for listening well; I've have solid discussions with both in the past.

I see them both as welcoming external views, rather than operating in that dangerous corporate tunnel vision. I've also heard good things about Klein's work with user groups around difficult issues like indirect access. That should serve them well with tough judgment calls ahead, not the least of which is the handling of the 2025 ECC end of life deadline.

Yes, I've heard the rumor-mongering that activist investor Elliott Management had something to do with either this leadership change, or the timing of it. I have no proof of it, and frankly, this is the type of leadership hand-off I was expecting SAP to do at any rate.

One thing we do know on the investor side: SAP's Special Capital Markets Day on November 12, 2019,  looms even larger on the calendar. How do you balance operating margin priorities for investors with the need to invest in customers to help them make the S/4HANA moves? Isn't there an inherent tension between these two goals? When I posed this question to McDermott at Sapphire Now, he expressed, in his typical unwavering confidence, that SAP could indeed pull off both, by funding all customer innovations through growth. Now it's up to Klein and Morgan to prove that out.

ASUG's message for SAP's new CEOs

Finally, I put several questions on these moves to ASUG CEO Geoff Scott, who was on a plane back from Walldorf himself. I'll share his full reactions in a subsequent piece, but for now, Scott writes, on behalf of ASUG, Americas' SAP User Group:

Our reaction was a bit of a surprise from a timing perspective. ASUG was aware that Bill's contract was coming up for renewal, and we felt the odds were slightly in favor of it being renewed. As ASUG does its long-range strategic planning, we had scenarios in place that included a change in SAP CEO leadership.

We wish Bill all the best in his future endeavors and thank him for what he has accomplished for SAP's customers over these past 17 years. We are excited to welcome both Christian and Jen to their new roles. We know them both well and very much appreciate their focus on the needs of the customer base. We see a great road ahead for them both.

ASUG doesn't see the co-CEO arrangement as an issue, given SAP's history here. But the S/4HANA business case is cited as a core challenge. When I asked what ASUG would say to the new CEOs on their goals, he wrote, in part:

Remember that the SAP customer base is loyal and invested in the success of SAP. We need SAP to not only create but now operate world-class software that supports a new frontier of customer experience and expectations. Show us that together you can bring an even better SAP product set to market that customers can understand, implement and get value from. Be the software partner that your customers so desperately need in these complex and fast-changing times.

More on ASUG's views soon, but that's a good note to end on this time.

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