During the keynote at SAP TechEd 2013 and in a subsequent meeting, Vishal Sikka, executive board member SAP gave the strongest indication yet that internally, the company has accepted that maintaining growth in the existing core, on-premise business is in decline - at least in the short term. This is good news.
Over the last few months I have been privileged to attend a number of briefings on SAP product strategy. The common theme throughout has been an enlargement of the renewal and transformation message with which Sikka peppers many of his public presentations. He sees the technical transformation of SAP solutions via HANA as a proxy for the way the company has to transform itself going forward.
A key point from the keynote demonstrate what I mean:
This was something I noted from the earnings call but which was never directly addressed in any of the analyst questions. The feedback I got on this earnings call is that the market was relieved that SAP managed to pull off a decent performance.
— Dennis Howlett (@dahowlett) October 22, 2013
Internal soundings suggest the company is quietly confident for the full year outcome but as I noted in a follow up, the company is being cautious. The last day's stock price suggests there is some optimism, despite Sikka's public remarks. (see stock price image.)
However, even if top line revenue continues to grow in line with expectations, it is the margin that will be impacted in the short/medium term. Several factors weigh into this analysis.
Ushering in the new...SAP
SAP is now thinking much more seriously about consumery approaches to market with add-on applications that are/will be a fraction of the price one usually associates with SAP. The idea is to both scale out adoption yet keep distribution costs in check via marketplace initiatives. However, there are many areas where SAP sales people will need to be 'in the deal' and especially where there are bundled infrastructure and applications deals. At the same time, SAP anticipates that many of these applications - if not all - will be cloud offerings.
Now comes the question - how to compensate the field since cloud is a different model? SAP has figured this out and part of the answer directly factors into why the margin will be lower. For the time being. SAP has not disclosed precise measures but has hinted at this in some conversations.
How well organized is SAP for this transformation? Another clue came from Sikka's presentation where he talked about SAP operating in a heterogeneous applications environment. This is a message that is entirely at odds with the usual 'we own it all' and 'not invented here' mantra that has been trotted out for many years.
In short, Sikka used the occasion to signal loud and clear (to those that have ears to hear) that a central part of that transformation has to come from being a much better partner than it has been in the past. Evidence comes in the repeated references to partners building HANA apps and the 'big data' folks looking for partner examples.
That will not be easy.
Sloughing off the old
On the first day, one disgruntled SI told me how a HANA team swooped in on a deal they had already negotiated and blew them out the water with offers of free consulting. Why? 'We want to the logo.' SAP has done this kind of thing for years, but in this case it represented a direct broken promise to the SI community. That behavior has to change unless SAP wants to run the risk of losing SIs to more attractive and SI friendly vendors.
What we see are two things going on:
- SAP ridding itself of old attitudes that quite frankly made it look like an arrogant bunch of developers where only they knew what is best. That came across in the emphasis Sikka placed on technology an an enabler of improving the lot of humanity as a whole. Anyone who spends time with the man will know that he truly believes that.
- Second, there remains a disconnect between Sikka's vision and the field. Initiatives like BW on HANA via AWS trials will help surface that reality but it will need many more examples.
The pesky cloud topic
Finally, there is the whole cloud messaging. Sikka said on several occasions that 'everything' will go to the cloud. However, SAP's definition of 'cloud' is a somewhat elastic and changing thing. Right now, it is really some variation of existing data center hosting (HEC) and a public cloud (HCP.)
In quieter moments, Sikka acknowledged that the company is not wholly certain how this will shake out but it needs to get those ducks in a row before the market - and more importantly customers - will be convinced that SAP is on the right track.
I sense that it is. But. The complexities of a large and diverse customer base, an important constituency of which will not wish to go 'public cloud' as largely understood by other vendors combined with a clutch of other product lines that need consolidating or refactoring onto the envisioned technical architecture presents SAP with a significant communications problem to customers, partners and the financial markets.
Nothing is going to get fixed the way the financial analysts will want in the immediate future. It's simply too big a picture to present in a simplified fashion such as would satisfy that group.
However, the starting point of signalling declines and margin levels is a good opening position to take and one from which SAP can build.
If nothing else, it is one of only a very small handful of vendors which is actively seeking to find a path between the rock of application market trends and the hard place of short term analyst projections. The hard piece will come in convincing both customers and the financial markets that its strategy - while somewhat chaotic looking today - has a clear logical basis going forward.
PS - I've not touched the partner topic in this discussion. Let's just say that some of them already see the writing on the wall as it relates to reduced billable hours - and they don't like it one bit. They too have to transform.
Featured image via Donnie Berkholz
Disclosure: SAP is a premier partner and part funded my trip to TechEd