Software // Enterprise Applications
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2/5/2014
09:55 AM
Doug Henschen
Doug Henschen
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Can SAP Master Cloud & On-Premises?

SAP tells financial analysts cloud growth will make it the fastest-growing mega-cap company in IT.

If the investment community had any doubt about SAP's commitment to becoming a cloud-driven company, co-CEO Bill McDermott tried to erase it on Tuesday in a speech before more than 100 financial analysts in New York, not far from Wall Street.

"We are formidable on every measure," McDermott declared, after reviewing the company's position in on-premises applications, analytics, data management, and more, "but the cloud is where we are taking the company."

Echoing themes shared during SAP's last quarterly conference call, McDermott said cloud computing is the cure for the most intractable issue faced by CEOs today: complexity. "Customers are trying to get complexity out of their lives," he said. "They're looking for a company that can help them simplify so they can execute on their plans and grow."

[Want more on Oracle's cloud ambitions? Read Oracle's Hurd: A 'Once-In-A-Career Opportunity'.]

Pointing to 50% growth in cloud billings and a 39% increase in cloud subscription revenue at SAP last quarter, McDermott said cloud has already helped make SAP "the fastest-growing mega-cap company in IT."

Of course SAP isn't alone among IT giants embracing the cloud. Oracle president Mark Hurd also recently touted cloud computing as the answer to IT complexity. And on Tuesday Microsoft crowned a new CEO, Satya Nadella, who was instrumental in building the company's Azure cloud infrastructure and cloud-based Office365 services.

"SAP and Oracle have both named salesforce.com as their biggest competitive threat," noted a Salesforce.com in a public relations appeal about the "legacy giant" cloud conversion on Tuesday. Cloud talk notwithstanding, this statement suggested, customers of "old guard companies" like Oracle, SAP, and Microsoft are still "held back in their legacy models."

SAP executives insisted on Tuesday that customers are now free to choose the cloud model -- which it described as fostering agility and hastening innovation -- or the conventional software licensing model, which lets companies treat software as assets and, according to SAP, offers lower total cost of ownership over the long haul. That choice is available not just through Ariba and Success Factors, SAP's two big cloud-vendor acquisitions, but through dozens of edge applications, for everything from sales force automation to time and expense management and carbon emissions tracking. The next big push, executives said, will be bringing SAP's core apps into the cloud on the Hana Cloud Platform.

"The war [for the cloud] will be won by the superior platform," declared SAP cloud executive Sanish Mondkar, describing the in-memory technology now underpinning all SAP cloud services, including Ariba, SuccessFactors, edge apps, and Business Suite on Hana in the cloud (the last including SAP's core applications: ERP, CRM, supply chain management, and so on).

Executive Board Member Vishal Sikka took analysts on a technical tour of just why Hana is the key to simplification, promising the elimination of duplicated data and duplicated infrastructure required by conventional databases and older generations of technology that required copies of data in data warehouses, aggregates of large datasets, and batch processes to copy, transform, and analyze data. By doing analyses in memory against live transactional data, SAP will achieve "radical simplification" that will give it performance and cost advantages in the cloud, Sikka asserted.

Analysts and customers have been hearing about Hana's promise for years, but SAP brought in a new, heavy-hitting Hana customer, ConAgra Foods, to bolster its case. The $18 billion consumer products goods giant is in the process of moving multiple applications onto Hana, and it's about to complete a migration of its 20-terabyte data warehouse and analytics environment to Hana within a matter of weeks, said Mindy Simon, ConAgra's VP of IT.

"I would say our most revolutionary use of Hana has been around material forecasting," said Simon, citing the data-crunching challenge of calculating the impact of fluctuating costs for 4,000 raw materials on some 20,000 products, from Swiss Miss Cocoa to Chef Boyardee pasta. "If the price of beef goes up on the commodity exchange, what is that going to do to our margin? Hana lets us do what-if analysis, and that's crucial because volatile commodity markets have a huge impact on our margins and our pricing."

SAP co-CEO Bill McDermott at an investor-relations meeting in New York.
SAP co-CEO Bill McDermott at an investor-relations meeting in New York.

ConAgra has chosen to deploy Hana on-premises rather than in the cloud, but McDermott said customers moving Business Suite applications to the SAP cloud will have two options. First, they can bring their own license, in which case they'll buy software and pay maintenance as usual while subscribing to SAP's (or a partner's) managed services for running the software. Second, they can convert from licensing to a subscription approach, in which case they'll avoid up-front capital expenditures and take advantage of the software-as-a-service subscription model. Customers could also choose a mix of both approaches, said McDermott.

The toughest argument SAP had to make to financial analysts is that it will see "strong single-digit" growth with on-premises applications -- mostly in places like China, Japan, the Middle East, and elsewhere where cloud computing is not yet in vogue -- while also growing at double-digit rates in the cloud, with the North American market leading the way. What's more, SAP is promising 35% margins and €3.0 billion to €3.5 billion (US$4.0 billion to $4.7 billion) revenues by 2017.

McDermott said that SAP has "swept away all the old arguments" against working with the company -- such as high-initial software cost, long deployment times, and the ongoing cost and complexity of buying, implementing, and maintaining hardware -- and would thus win over more customers.

Financial analysts had plenty of clear-eyed questions about the cost models, and they poked at the many assumptions, making it clear there are doubts that SAP -- and also IBM, Microsoft, and Oracle -- can eat away at its high-profit, on-premises software cake and gain heretofore-elusive cloud riches, too.

Too many companies treat digital and mobile strategies as pet projects. Here are four ideas to shake up your company. Also in the Digital Disruption issue of InformationWeek: Six enduring truths about selecting enterprise software. (Free registration required.)

Doug Henschen is Executive Editor of InformationWeek, where he covers the intersection of enterprise applications with information management, business intelligence, big data and analytics. He previously served as editor in chief of Intelligent Enterprise, editor in chief of ... View Full Bio

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RobPreston
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RobPreston,
User Rank: Author
2/5/2014 | 12:02:30 PM
How cloud-ready is SAP?
Oracle President Mark Hurd pretty much dismissed SAP when I asked him about Oracle's main cloud competition going forward, which he characertized as "inertia" (customers still reluctant to move their on-premises enterprise applications to the cloud) and a handful of startups (Salesforce.com and Workday among them). Of course this is competitive posturing, but Doug, do you see SAP becoming as powerful a cloud player as it's saying it's primed to be? SAP was late to the cloud. Oracle maintains that SAP has yet to write/re-write its big-company enterprise apps for the cloud.
D. Henschen
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D. Henschen,
User Rank: Author
2/5/2014 | 12:54:22 PM
Re: How cloud-ready is SAP?
SAP is bringing the core to the cloud managed services style -- meaning private-cloud deployments rather than a multi-tenant approach. It argues that Hana gives it simplicity and cost advantages that rivals can't touch. Multi-tenant rivals would argue that SAP can't get economies of scale if it has to run each and every customer in the cloud as a one-off deployment -- that's hosting. SAP waves its hand and says all customers care about is results -- we'll run the software for them and give them the agility they associate with cloud computing. 

SAP's ability to deliver at Business Suite at scale (across many customers) in the cloud has yet to be proven (Ariba, SuccessFactors and many SAP edge applications, by contrast, are multi-tenant and ARE running at high scale across many customers). SAP claims some 800 customers have signed on for Business Suite on Hana, but only about 50 are in production and an unknown fraction of these are running Business Suite on Hana in SAP's managed-services cloud.  

What will Business Suite in the cloud cost? That, too, is unknown, but it's pretty hard to make an apples-to-apples comparison between Business Suite and, say, Oracle Fusion or Kenandy or NetSuite. Workday is eating PeopleSoft's lunch, but there's really not a cloud ERP alternative that goes head to head with SAP Business Suite. SAP knows this and really doesn't expect huge percentages of Business Suite customers to move to its own or anybody else's cloud -- yet.

What will the story be in 2017 or 2020? SAP execs have told me that the multi-tenant edge apps that they're building up around the Business Suite are gradually moving closer and closer to the core. Eventually, the theory goes, the multi-tenant options will be plentiful, covering much of the suite and only the really hard-core stuff -- stuff big companies want within their firewall -- will be the remnants left on-premises. SAP also talks about application "renewal" thorugh optimization for Hana and modern new Fiori user interfaces.

The flip side for Oracle is that Fusion ERP is green. It has a long way to go to be a robust, broadly applicable ERP system with industry specializations etc. and a proven track record of success either on-premises or in the cloud. Five years from now that will be another story. 
Sacalpha1
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Sacalpha1,
User Rank: Strategist
2/6/2014 | 6:30:52 PM
Re: How cloud-ready is SAP?
The cloud based Business Suite core apps are really targeted to small and medium sized businesses (SMBs).  There are a good number of things that have been "dumbed down" from the highly configurable on premises version.  This is part of SAP getting rid of complexity as stated in the article.  So they have a less complex, faster to implement, and at least initially cheaper option for SMBs.  This should garner them some market share in a market where they have traditionally done very poorly.


My guess is that existing Business Suite users in the Fortune 1000 range will do very little to nothing to their on premise solutions other than maybe some internal virtualization work (e.g., private cloud).  There's just not much of a business case for moving to an external cloud based solution and in addition, they would likely lose functionality.  The edge applications mentioned in the article is where SAP will primarily make cloud sales to the Fortune 1000.  Not dissimilar from some edge Marketing function deciding to use salesforce.com even though their core ERP/CRM is SAP or Oracle.
D. Henschen
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D. Henschen,
User Rank: Author
2/7/2014 | 10:31:17 AM
Cloud story is no longer SMB
I have to disagree. We're clearly headed away from a world in which cloud-based apps are only aimed at SMBs. Workday and Salesforce.com have proven this and Oracle and SAP know very well that cloud deployments are getting more capable and working their way up the scalability food chain.
Sacalpha1
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Sacalpha1,
User Rank: Strategist
2/7/2014 | 11:48:26 AM
Re: Cloud story is no longer SMB
Doug,

What Workday has proven is that it can sell HR apps to HR functions in the Fortune 1000.  What SalesForce.com has proven is that it can sell to Marketing and Sales functions in the Fortune 1000.  In both of these situations you have vendors selling to functions that like to be independent of other corporate functions, namely corporate IT, often times have their own "shadow IT" function and are know for rogue purchasing. Neither vendor offers a full core app ERP/CRM/SCM solution, so they can prove nothing in this space.  In addition, while SalesForce.com's CRM capabilities has decent breadth, most of the implementations are around a specific function like opportunity management and very few are a true broad based CRM implementaiotn.   In your article, SAP addresses both Workday and SalesForce with their "edge App" strategy.  So neither Workday nor SalesFroce has proven anything about replacing core ERP/CRM/SCM functions like order management, customer service, field service, manufacturing, maintenance, inventory management, capital project and asset management, procurement, and finance.

In your article, SAP says that on premise implementations of their Business Suite offer lower total cost of ownership.  This is a key statement as it says a lot about their cloud strategy.  They don't see a business case for Fortune 1000 on premise customers to start switching to a cloud version of their business suite.  I personally don't see a business case for this either, as the infrastructure benefits of virtualization and scaling can be had with no change in the application model (i.e., private cloud) and the Fortune 1000 typically have the technical capability to do this internally.  What other benefits exist that would drive them to a public cloud app model?  And do these benefits (if any) outweigh the transition costs and more limited functionality?

I'm not trying to be combative about this topic, but I see a lot of hype about cloud and very little in the way of facts or true business case driven arguments that prove the cloud transition is going to happen (again I'm speaking of core apps, not one off implementations) in the Fortune 1000.  I would love to see an article sighting real facts, figures, and profiles.  Doug, can you or someone else at InformationWeek provide some facts and data points that prove the assertion that the Fortune 1000 are going to abandon on premise for their core ERP/CRM/SCM needs and move to public cloud based application solutions?  How about profiles of 10 Fortune 1000 companies that have made the core app switch?  This could be a great article that really separates the hype from the reality or proves the hype is reality.
D. Henschen
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D. Henschen,
User Rank: Author
2/7/2014 | 12:18:36 PM
Re: Cloud story is no longer SMB
Workday is also pushing its Financial ERP up into Fortune 1000s. Hasn't progressed that far yet, but the handwriting is on the wall. I don't think Kenandy, NetSuite or Oracle will draw lines, either. Oracle is already claiming it outdoes Workday in scaling up cloud ERP for large customers.
Stratustician
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Stratustician,
User Rank: Ninja
2/5/2014 | 1:04:04 PM
I'm not convinced...
Is it just me, or does it scare anyone else that these big monolithic companies are all harking the movement to cloud?  Somehow the idea of taking such a huge ERP ecosystem/environment seems like trying to carve a Taj Mahal out of a pyramid.  It's doable, but do these legacy models really lend themselves to cloud adoption, especially by organizations who have these systems embedded internally on-premise?  I can see how many startups who can be more nimble might find an opportunity in replacing components as each piece of the overall system becomes independent subscriptions in the cloud.  Not to say that companies won't still love the big guys (after all, who gets fired for buying SAP?) but given the complexity of transitioning an on-premise deployment to a cloud deployment, as an IT person, it would scare me to imagine the points of failure.
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