SAP - Klein and Morgan come in as co-CEOs as McDermott steps down

SAP used a pre-announcement of strong Q3 FY2019 results to announce that CEO Bill McDermott is not renewing his contract and that Christian Klein (COO) and Jennifer Morgan (leader of SAP's cloud business) will succeed McDermott as co-CEOs. This is the fourth time that SAP has used the co-CEO mechanism for managing the company in the time I have followed SAP.

From 1998 to 2003, Henning Kagermann and co-founder Hasso Plattner shared the top job until Plattner took on the Supervisory Board role at which point Kagermann served as sole CEO until 2008 when Leo Apotheker joined Kagermann until Kagermann's retirement in 2009. McDermott shared the top job with Jim Hagemann Snabe from 2010 to 2014, taking on the sole CEO role after Snabe moved on. In the press release, Plattner said:

As they have already demonstrated, Jennifer and Christian complement each other perfectly and will be strong co-CEOs, a leadership model that is time-tested at SAP with multiple prior instances of success.

The appointments are effective immediately, although the roles each will take has not been outlined. 

Under McDermott's leadership, the company made a number of acquisitions, including that of Qualtrics in 2018, a move that many in the market found confusing but which we thought interesting and with potential. Under McDermott's sole leadership, the firm's market value grew from around $100bn to a current value of $142bn. 

I have not met Morgan but at the beginning of the week, I spent an hour with Klein before the main SAP TechEd keynote. It was an unusual and wide ranging discussion. Rather than my kicking off the session with questions, Klein wanted to know my current perception of SAP. There are many answers to that question but I said words to this effect:

SAP has a sprawling portfolio of products - I think it adds up to something like 350 line items but in the big-ticket items, it faces multiple and serious threats. In CRM, Salesforce dominates, Workday is eating its lunch in HR while the market remains confused about Qualtrics. That leaves ECC-S4/HANA, a jewel in the crown that has many years ahead of it but for which clarity over the transition from ECC to S/4 is sorely lacking. I suggested to Klein that its customers need a simple, single page that sets out the broad circumstances under which a customer should choose greenfield or a brownfield deployment.

Right now, I see a serious risk of customers making a  'do nothing' choice. Apart from the S/4 clarity question and functional parity issues, customers are deeply concerned about SAP's announced 2025 end of life support date for ECC. This is seen as a forcing move by SAP in relation to core ERP but a near impossibility with HR to Employee Central because of uncertainty over a cloud switch for SAP's payroll. Everyone I have spoken to on this topic believes that SAP will drop 2025 as a hard EOL date. The only one not saying it is SAP although I have had strong hints that an announcement will come in the next few months.   

Moving on, I turned to the integration question, one that caught my attention at SAPPHIRE and which resurfaced this week. At a recent DSAG meeting, Klein was given a hard time. According to e3zine:

Only 25% of DSAG members feel well-informed by SAP. Forty-five percent partly trust their product strategy, while 30% of users have no confidence in it. This is a strong signal to SAP that it must provide its customers with forward-looking, reliable information. “We know that SAP is aware of these numbers and is working to chance them,” Marco Lenck says.” However, it has to keep pace with the rapid digital transformation of user companies. Customers can’t just wait around for SAP to finally get it right while the new digital world passes them by.

Integration is top of mind for the powerful DSAG group and it doesn't go un-noticed that during Juergen Mueller's keynote, integration across key processes got plenty of attention but focused on the data element. While I am sure that customers welcome the focus on data, I firmly believe that process integration is the key to making the intelligent enterprise a reality because otherwise, what you have is a kind of best-of-breed-suite. In the short term, RPA will be the proverbial lipstick on a pig that automates repetitive manual processes. Here, SAP has a compelling story that avoids a lot of the UI problems associated with stand-alone solutions. 

In our conversation, Klein acknowledged that DSAG made important and valid points, a theme I expect to see expanded in future ASUG announcements and at the upcoming UK&ISUG conference slated for early December. The good news is that Klein is confident that previously announced integrations will be completed in the timeframes he has set. 

Over and above, I got the distinct impression that Klein is in the kind of listening mode that was demonstrated at SAPPHIRE when he said: 

If Klein can deliver on his early promises, it will set a good tone for improving the relationships with customers and users, which many consider at best, 'difficult.' 

As a side note, Klein's elevation will go some way towards pacifying Elliott Management, which took a $1.3bn stake in the company at the beginning of this year. They will look at Klein's experience as CFO of SuccessFactors and, presumably, believe that Klein's internal partnership with Luka Mucic as continuing CFO will ensure that the company keeps its eye on the shareholder value ball. 

SAP will host a conference call at 8AM CET today during which we will hopefully learn more about how Klein and Morgan divide their responsibilities. In the meantime we wish the co-CEOs all the best. The company is at a critical juncture in its history and now is a good time to refresh expectations. 

P.S. - This is a developing story which we will update as new facts emerge. 

Update - with content from Jon Reed

Jon Reed scored a call with McDermott, Morgan and Klein. With a veiled reference to the Elliott situation, McDermott said: 

We have an opportunity on our own terms to appoint two dynamic wonderful leaders who can take SAP to the next phase...There's always time for a next chapter, and this is the absolute perfect time for the next chapter from a position of maximum strength. 

During the call Klein revealed that this change only happened in the last 24 hours and so at this stage, they are not offering a formal view about how the co-CEOs will divide their roles. Apart from anything else, SAP is in its most important quarter so it will be a case of 'all hands to the pump' in order to close out deals. That places fresh emphasis on the manner in which S/4HANA conversions are managed in the sales cycle, but it also puts the pressure on the Qualtrics LOB to perform. 

Talking to the global competitive environment and SAP's position, Morgan said:

There's a couple of key areas where SAP has advantage and it's important that we never take that for granted. In the cloud world, customer success is really important. And how we support customers in the cloud world takes on a different meaning to how we supported customers in the core software years ago. Christian and I are both focused on that. 

Morgan shared that over the last few months, the company has brought acquired engineering leaders towards the center in combination with long term customer support to effectively create what she describes as 'a whole new tapestry of talent.' I hadn't thought of those changes in that way as it relates to the engineering teams so it will be interesting to see how that works out, given that today, the acquired engineering units operate largely independently of one another. 

Klein closed out with an acknowledgment that SAP has a continuing need to explain the business value of S/4HANA in much the same terms I discussed with him earlier in the week.

Update 2 - UK&I SAP User Group

Paul Cooper, chairman offered this comment:

We wish Bill well.  He took over as co-CEO (alongside Jim Hagemann Snabe) at a very difficult time for SAP, dealing with the contentious issue of Enterprise Support and both worked very closely to regain customer confidence.  We welcome a return to the co-CEO model that has served SAP and its customers well in the past. Christian has been a key exec sponsor of SUGEN’s ‘Ease of doing business’ and ‘Licensing’ charters, and he has always made time to listen to product feedback and understand how SAP could work better with customers.  We look forward to hearing Christian and Jennifer’s vision for SAP as the 2025 maintenance deadline for ECC6 fast approaches.