SAP ramps up S/4HANA public cloud division - exclusive with new chief Darren Roos

Last week, my colleague Den Howlett posted The definitive guide to making a successful SAP S/4 HANA business case, which included updated numbers - and arguably the most convincing case SAP has made for S/4HANA.

Howlett's bullets included this tantalizing bit:

• There is now a dedicated S/4 cloud division.

True, and there's more: the new cloud division has a new leader, Darren Roos, who joined SAP in 2014 after a nine year stint at Software AG. Obviously, this raises questions about my prior article from SuccessConnect on the SAP S/4HANA public cloud with former lead Ross Wainewright.

This prompted a call with Roos where he explained the changes and what this means for SAP's commitment to the S/4HANA public cloud. He also responded to several of my concerns.

A note on what we call "cloud"

Before we dig in, a note on terminology. Though I am referring to the S/4HANA public cloud, I will call it the S/4HANA cloud for the rest of this piece. SAP has a so-called "private cloud" version of S/4HANA. As of SuccessConnect, 50 percent of S/4HANA projects sold were on the private cloud.

That means of Den's updated number of 4,100 S/4HANA customers, 40 percent of which are net new names; we can reasonably expect about half of them are "private cloud." (See his post for many more updated S/4HANA numbers).

But for the rest of this piece, I will simply refer to the S/4HANA public cloud as the S/4HANA cloud. This distinction matters. It's the right way to describe it - SAP is largely doing that on its product page. The "private cloud" version is really a hosted version of S/4HANA. Nothing wrong with that; it's a very different move for customers as they get to keep all their SAP ERP customizations. SAP is increasingly calling the private cloud a "hosted" version in my discussions with them; that's the right and transparent way to describe it to a cloud-savvy customer base.

Why SAP's future rests on the S/4HANA cloud

Though the S/4HANA cloud still has modest customer numbers (you can see what they were as of SuccessConnect in my prior piece), it's my belief that SAP's future rides largely on the success of the S/4HANA cloud release.

Not only is ERP (gradually) moving to the cloud - like HR and CRM before it - but the most compelling S/4HANA business is about cloud-based integration with Hybris, Ariba, Concur, SuccessFactors, and external cloud vendors as well. This business case is really about transformation for a digital economy, with cloud being the go-to-platform. That happens at a customer's own pace, but that's the future as I see it. That's the frictionless enterprise model we are pre-occupied with at diginomica, based on use cases across vendors and platforms.

S/4HANA cloud under new leadership - what's changed?

Whether or not SAP agrees with my view, it's clear from Roos' appointment as the head of a new division that SAP is very serious about the S/4HANA cloud. So what's changed since my talk with Wainwright?

First, what hasn't changed:

• SAP still views 2017 as the year for S/4HANA cloud customer growth, in particular the latter half of 2017.
• SAP's urgency around S/4HANA includes market pressures by other vendors, in particular Workday's push into financials, as well as Oracle's pending NetSuite acquisition. SAP plans to compete with the combined HR and Financials of SuccessFactors and S/4HANA Finance, while using its core ERP strengths to push well beyond finance- an intent that is clear in how S/4HANA is positioned as S/4HANA Enterprise Management, with a full/classic ERP scope including manufacturing and supply chain.

What has changed:

• S/4HANA is now run as a separate division with Roos at the head. That means S/4HANA cloud no longer reports into Mike Ettling at SuccessFactors. Roos reports directly into Rob Enslin and Bernd Leukert, both of whom sit on the Executive Board.
• I also heard the most convincing words to date from the S/4HANA cloud team on the importance of multi-tenancy, which isn't a term I obsess about as much as some, but it relates to doing cloud at profitable scale, something that SAP has struggled with historically, for example in its early Business ByDesign pursuits.

Inside the new S/4HANA cloud division

OK - first question - why Roos? Roos was asked by Enslin to join SAP to help drive the European business, which as per Roos had "struggled a bit" in 2011 and 2012. So Roos joined as the Chief Operating Office for SAP's European business in 2014. Soon after joining SAP, Roos also took over as Managing Director for the UK, SAP's third largest business unit globally, another unit that had been in decline: "We managed to grow that business, somewhere around 40% in the next two years, put in place a new management team."

Roos told me that turnaround built "quite a bit of credibility with the board," ultimately leading to Roos' current appointment as head of S/4HANA cloud, or, formally, President of the SAP ERP Cloud. So what about the new division? Up to this point, S/4HANA was part of SuccessFactors, which Roos described as the perfect "incubator" for a fledgling cloud business with aspirations of SaaS-like scale. Roos:

What you had with SuccessFactors was a mature, public cloud business that had already gone through the growing pains of how you run a public cloud - everything from the data center operations to the provisioning to the customer engagement executives supporting people post-sales, and the sales process for cloud - all of the comp issues. SuccessFactors had a scale business, operating globally. It had figured a lot of these things out. It made sense to incubate S/4HANA underneath the SuccessFactors fold.

Now the incubation period is declared as over. In truth, S/4HANA cloud was always a "silo" business with its own development organization. Roos says this is more than a leadership change:

The decision to put me in charge is not just the decision to say, "Okay, we're going to take it out of SuccessFactors." What we've also done is we've aligned the business directly beneath me. In other words, the part of development that are developing the product come across to me. Services comes across to me, and the GCO [Global Customer Operations] component, the sales components, comes across to me. It's an as an end-to-end business, which gives us, I believe, a far greater level of agility in competing with what is clearly a particularly agile and aggressive competitor in the landscape at the moment.

That means Roos has full decision-making authority across the S/4HANA cloud business. Roos is confident this will give SAP the ability to develop the product faster without being encumbered. He also thinks his background outside of SAP via Software AG gives him some outsider (non-ERP) attitude that will be important to driving change.

I'm very excited about the opportunity. It's a big step for us in a market which is obviously incredibly important to SAP.

Addressing concerns about SaaS models and cloud scale

My biggest concern about the new plan: how is Roos going to make sure that the learnings from SAP's SaaS businesses are injected into S/4HANA cloud, now that it's a separate group? This is no small issue; SAP has a way of losing track of cloud business fundamentals when left to "invent" cloud. It has done far better incorporating cloud know-how from its acquired SaaS products.

Roos acknowledged this concern. He intends to address is it in two ways:

• Tight collaboration with all of SAP's LOB cloud chiefs.
• Recruiting top talent from SaaS competitors.

Roos is still finalizing his appointments, so I can't write about them at presstime, but as one example, his director of sales is coming from a major SaaS competitor. As for that tight collaboration:

I have no shame in asking for help. There's no pride that I need to overcome. I think that's giving me a really big advantage... Our customers don't want a basic ERP app. Our customers want an integrated suite of cloud applications. My engagement with Ariba and SuccessFactors and Cloud for Customer is way beyond getting advice on how they would guide me towards setting up and driving this business. It's equally about how do we present an integrated solution to our customers. They're absolutely all on board with that.

If we all go to market as individual LOB's and ignore the massive potential that there is, we'd be idiots, and none of us are idiots.

But that raises another concern. Roose mentioned a "suite" of cloud products. Customers want cloud integration, but they don't want a suite of vendor products forced upon them. Roos responded:

I don't think customers want to be locked into a suite. You're going to run into customers who will say, "Hey, I want everything you offer, but I want to use Salesforce for that part of it." What's powerful there is to give the customer choice.

I don't want to leave you with the wrong impression there at all. One of the guiding principles we've discussed is: what is driving the concept of an application economy? An open stack. The intention is to have a team that is focused on building very tight relationships and integrations, with both the SAP cloud LOBs, as well as our competitors and peers.

Finally, my concern about multi-tenancy. I've heard many odd things from SAP executives about multi-tenancy over the years. It's not the term that matters; it's the willingness to learn from vendors who have already operated SaaS at scale versus the hubris of inventing cloud via terms like "mega-tenancy." (By contrast, I've never heard Mike Ettling or anyone at SuccessFactors mince words about the importance of multi-tenancy, elasticity, easier upgrades, or any other SaaS benefit) Even my prior talk with Ross Wainwright left me with some reservations on this point.

Roos pushed back on whether customers care about multi-tenancy in S/4HANA right now, but he didn't back away from the goal of multi-tenancy at the application level either:

The topic of multi-tenancy is a little bit of a red herring. The customers who use our products today, whether it's multi-tenant at the database level - which it already is today - or whether it's multi-tenant at an application level which it is not today - that's not relevant to them. Whether I can bring it to multi-tenancy tenancy at the application level in the next twelve months, or the next nine months rather, because that is the plan - all of that is completely irrelevant to my customers.

But Roos did acknowledge that when the S/4HANA cloud scales, multi-tenancy matters:

Today, the fact that we're not multi-tenant in the application level has zero impact on my ability to envision the product, zero impact on the security of my product, zero impact on the cost of my product - at the scale that I'm at today. But: I want to fix it, because when I hit a billion euros annually, it's going to make a difference.

He went on to mention they are working on a solution that may enable application multi-tenancy even before the twelve-month goal they have internally set: "This is something we recognize we need to change. We're confident that we can do it." Roos also spoke of the benefits of true cloud products:

I want to make sure as we evolve the product, we've got a much greater level of automation, that we're able to show the differentiated value by bringing in loads of new technology, which we wouldn't necessarily be able to do on-premise - whether that's embedded analytics, whether that's artificial intelligence, whether that's a digital assistant. There are loads of capabilities we want to bring into the S/4HANA cloud that are much slower to bring on-premise.

The wrap - adoption goals for 2016

So where does that leave us on adoption goals for 2017? Roos intends to nail down customer satisfaction before he scales:

We could very easily win thousands of customers next year. Whether we can win thousands of customers and get them successful, I don't know yet. I'm setting my sights a little bit lower on the number of customers that we win yet next year. Let's make sure we get the processes right next year, and then put ourselves in a position to be able to move very aggressively after that, knowing that we've got the scale in our data centers, that we've got the scale in our processes.

Roos was reluctant to offer an exact on-the-record number until he is confident that they can scale with customer success, but the way I see it, the first half of 2017 will be ramping up operations with gradual (successful) go-lives, with the goal of seeing a significant bump in S/4HANA cloud customers in the second half of 2017. Roos also swore me to secrecy about the amount of developers working on S/4HANA cloud, but I have the green light to agree it is a substantial number.

This ties into a bold comment Wainright previously made to me about being able to leapfrog competitors like Workday in functionality as SAP ports over more and more SAP ERP functionality to S/4HANA cloud. Roos isn't seeing functionality as the missing piece:

I don't believe we will dominate because we have breadth and depth of functionality... It's because of the way that we have a single code line for S/4HANA. What my team needs to do is give cloud qualities to what is already a very robust solution.

I reject the criticism that SAP's S/4HANA cloud customer numbers prove SAP has missed their opportunity. But I do think this is SAP's last big swing at the plate for a digital ERP-and-beyond platform. How the market will respond, time will tell. Roos has promised us updates; we'll hold him to it.