SAP - the last six months in review
- Summary:
- Take a stroll with us down memory lane as we review how SAP has fared in the last six months.
SAP is almost always a favorite topic for diginomica readers but over the last six months, the firm has dominated our internal content leaderboard. As I peer over that leaderboard, SAP-related content featured in eight out of the top 10 stories and nine out of the top 12, accounting for 18% of overall traffic. That's an awful lot given that we create something around 1,300-1,400 pieces of content each year.
These results should come as no surprise given that SAP is the dominant global ERP vendor and so is a natural attention magnet. From our side, the team as a whole can count well over 100 years of collective experience of the company coupled with extensive networks of consultants, analysts, and customers.
As I pored over the stories, I couldn't help but wonder what might have been rather than discussing what happened. Why? Much of the SAP story has been overshadowed by the appearance of Elliott Management as an activist investor. I'll get to that shortly but it blew SAP's normally polished public performances off-kilter to some extent.
There can be no doubt that the handling of layoffs played heavily into that perception with my story entitled SAP's restructuring - Hunger Games, Game of Thrones or both? scooping up nine percent of total traffic. Of itself, the restructuring was long overdue and a key component in SAP's defense of its margin aspirations going forward. The difficulty, as many people know, is that high profile departures at the board level were closely followed by what seemed like an arbitrary and cack-handed doling out of pink slips in the US. As I said at the time:
No one is irreplaceable but when you've got a platform and product that needs support, dumping the best people is little short of idiotic.
Thankfully, SAP was able to recover from some of the worst of that situation but around the world, I saw (and continue to see) many long-time buddies cast off or taking the opportunity to get out. As a surprise, reports suggest that the take up among those based in Germany has been far higher than expected, leading SAP to make an additional provision in its Q2 FY2019 results.
Speaking of the earnings call, we don't normally expect to see a huge amount of interest in those stories but Q2 FY2019 certainly caught many people's attention. Here, SAP missed a really good opportunity to talk up the (much-hated by analysts) Qualtrics acquisition. FWIW, I thought and continue to think this could turn out much better than those who fret about company valuations.
Instead of grasping the growth story firmly by the numbers, SAP buried the most important detail at the end of an otherwise highly detailed income statement. It was something I noted in light of Medallia's spectacular debut on NASDAQ. I said:
At the time that SAP acquired Qualtrics, McDermott said that in the lead up to the IPO, it looked like Qualtrics would be massively over-subscribed and therefore the premium paid was not unreasonable. The market didn't like that (among other things) and hammered SAP's stock price. Today, the pundits reckon that Medallia will hold its price premium - we shall see. But, if that is the case then regardless of how you crunch the numbers, it looks as if McDermott got it right.
The market still likes Medallia and if SAP can continue pushing Qualtrics current revenue growth of around 35%, it won't be long before the 20x revenue multiple SAP paid for the company plummets to 8x. On my recokoning, that will occur in 2021 at $1 billion in revenue.
In retrospect, the only people who were truly surprised when Elliott Management bagged one percent of SAP was SAP leadership. The timing was terrible, coming as it did just before this year's SAPPHIRE. The stock price might have popped on the news, yielding investors an instant 5-7 point gain (almost all of which has since been given up), but it cast a dark shadow over the company's ability to successfully message its much-vaunted 'XO' messaging right at the most important time of the year.
For our part, we were and remain concerned about the extent to which Elliott's involvement in the company will impact product development and customer success. When a company is focused on financial metrics, it's rare to see customers getting what they think they're buying into. For its part, SAP is charging hard on the CX moniker positioning itself as having a unique X+O offering. But it's faced with an ongoing problem.
S/4HANA adoption, as measured by the number of go-lives and high profile success stories is painfully slow. While SAP makes great play of the fact that S/4HANA is one of the best selling products of all time, with 11,500 sales in the books, there is considerable doubt about the number of go-lives. We peg it at about 2,500, some peg it much lower. If this wasn't problem enough, SAP needs accelerated S/4HANA implementations in order to truly support the XO/CX story that's bundled into the 'Intelligent Enterprise.' It's not a Catch-22 but it's not far off.
It doesn't help that there is considerable debate about the volume and degree of S/4HANA expertise in the whole SAP ecosystem. In Do SIs have what it takes to deliver SAP S/4HANA implementations? I said:
...when you dig into the detail of Gartners' (very) long report, there are genuine red flags which should be cause for concern. These are more pertinent to a buyer than drawing attention at the firms' claimed consultant numbers. Take these examples from the cautions Gartner expressed:
- Accenture: High cost and inconsistent quality of development resources
- Atos: Inconsistent client feedback
- BearingPoint: Inconsistency in subcontractor resource quality
- Cap Gemini: Inconsistent client feedback
- Cognizant: Inconsistent client feedback
- delaware: Inconsistent client feedback
Do you see a pattern developing here? The report goes on with EY, IBM, NTT Data, PWC, SAP, TechMahindra, and Wipro all cited as having some kind of inconsistency or resource issue.
One surprising finding in the Gartner report is that it dinged SAP for a lack of resources. This plays directly to the difficulty of making the XO story real.
But on the flip side, Vinnie Mirchandani believes there is a great deal to celebrate among customers and their inventive use of the gargantuan SAP portfolio. I commented:
Surprisingly for fellow analysts who can be highly combative on occasion, we were in broad agreement about many of the topics under discussion. I'm not suggesting for one minute that represents any kind of broader consensus about SAP. But it perhaps is indicative of recognizing a company that, while mired in enough issues of its own, is the only enterprise software vendor with enough product breadth to credibly hold end-to-end process conversations with customers and their LOB leaders. How far those conversations go is another matter and as we point out in the conversation, much of what we see are not products per se but projects with product potential.
I have not substantially revised that opinion although how and fi that changes depends to a large extent on the actions SAP takes in the second half of the year.
As a bonus, here's the conversation we recorded to accompany the story.
.Also on the upside, Phil Wainewright's SAP SuccessFactors HANA migration is done - hyperscale is next explained how he sees SAP fulfilling the XaaS vision but again, with caveats:
In many ways, this new venture into microservices on public cloud is even more exciting for customers than the one just ended. Moving to HANA is really just SAP's own internal housekeeping, in much the same way that its competitors have overhauled their own underlying database platforms.
The next move into a more fluid, microservices-based and API-enabled architecture should allow for much faster innovation at the application layer. That's going to be of significant interest to customers, who are increasingly demanding a new, more modern style of enterprise application.
In the field, things remain uncertain. I have already talked about the SI problem but the bigger Wild West characterization of SI behavior in the SuccessFactors bullpen cannot be ignored.
As I close out this assessment, the best I can say is that this has been a period of mixed fortunes. SAP is highly motivated to achieve the most positive media coverage it can because in the long haul it allows the company to both continue charging high-end champagne pricing while creating the impression that it is worthy of a premium stock price. But the same difficulties remain:
- How do you keep customers onside and willing to buy when the market is so rich in choice?
- How do you best anticipate the kind of aggressive and often negative commentary that comes when you miss the opportunity of making a solid case while seemingly over-egging the proverbial marketing pudding?
- How do you action the often well intentioned advisory coming to SAP from a variety of angles but in the context of a company that has enjoyed such a very long period of relative success?
