SAP Does The Cloud Revenue Shuffle - InformationWeek
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Doug Henschen
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SAP Does The Cloud Revenue Shuffle

SAP's Vishal Sikka is stepping up, Jim Hagemann Snabe is stepping away. But is SAP changing its business fast enough?

SAP Co-CEO Jim Hagemann Snabe said he wanted to step away from a demanding job at the right time. Soon-to-be sole CEO Bill McDermott said that executive board member Vishal Sikka will step up his leadership role and that SAP is a global company, not a German company. And SAP Chairman Hasso Plattner said SAP will now "move into the cloud with all we have."

These were the key points that SAP's top brass offered on Monday during an analyst briefing in which the company discussed when and why Snabe is leaving. The explanations made it clear that SAP's leadership structure, the character of the company and the nature of its business are all changing.

Snabe won't be stepping down until May 2014, but Plattner, chairman of SAP's supervisory board, said he was obliged by public-company regulations to announce the changes once Snabe told him he wanted to transition out of his role and be released from an employment contract that extended to 2017.

Snabe's explanation that he wanted to spend more time with family didn't curtail speculation that Vishal Sikka's expanding role contributed to Snabe's decision. In the wake of Lars Dalgaard's departure from SAP in June, all development activities were placed under Sikka's control -- despite the fact that product strategy has been a key focus for Snabe as co-CEO.

[ Want more on SAP's changing priorities? Read SAP Sees Cloud Growth Accelerating. ]

"Now that Vishal Sikka is responsible for all innovation topics, were there simply not enough duties left for you to stay co-CEO?" a financial analyst pointedly asked Snabe.

"I've always felt that leadership is about... developing leaders around you that take on bigger challenges," Snabe responded. "I'm proud that we were able to convince Vishal to take on a big, big role...but that had nothing to do with my decision."

As if Sikka's role wasn't big enough -- with 20,000 developers now reporting to him -- McDermott said the executive's role will "grow in a huge way" once Snabe departs, as will the roll of Rob Enslin, president of SAP global field operations.

Questions from German analysts focused on what some described as the Americanization of a German company. McDermott, who leads from SAP's U.S. headquarters in Newtown Square, Penn., is SAP's first U.S.-born CEO. Vishal Sikka is based at SAP Labs in Palo Alto, Calif.

McDermott and Plattner both offered soothing words about SAP's German heritage and key German executives remaining, but they also stressed that SAP is a global software company, "not a German, American or Chinese company," as McDermott put it.

"We pick the people in our global company by talent and promote them to the right positions regardless of where they sit in the world," Plattner said, adding that 46% of SAP's employees are in Europe, the Middle East and Africa, 30% in the Americas and 24% in the Asia-Pacific region.

As for the changing nature of SAP's business, the question is whether SAP is moving fast enough. Last week the company reported second-quarter results that fell short of financial analyst expectations. Cloud revenue grew sharply, but on-premises software sales fell for the first time since McDermott and Snabe became co-CEOs.

SAP executives insisted that the company is ready to move into the cloud, yet the vast majority of the company's current annual run rate of $1.2 billion in cloud revenue comes from SuccessFactors and Ariba, cloud businesses acquired last year for a combined $7.7 billion.

SAP's says it's ready to bring its core Business Suite applications into the cloud on the Hana Enterprise Cloud, but this managed services (private cloud) platform was only introduced in May, and it's not the type of software-as-a-service platform that many would-be buyers associate with "cloud."

SAP, like many vendors, is stretching the definition of cloud to make that business look as large as possible. But given than more than 90% of SAP's revenues are still tied to conventional on-premises software, it will get harder for SAP to keep reporting the double-digit gains it has been reporting during the last three years -- barring more expensive cloud acquisitions.

The fastest growth among apps vendors is being seen by multi-tenant service providers like NetSuite and Workday. SAP's innovation strategy is all about moving into the cloud and onto the Hana in-memory database. But cloud is on track to hit about 7% of SAP revenue this year while Hana will represent about 5%.

Can the tail wag the dog? By the time Snabe steps down in May 2014, we'll have a better idea whether these bets are attracting enough customers to sustain strong growth.

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D. Henschen
D. Henschen,
User Rank: Author
8/1/2013 | 5:50:32 PM
re: SAP Does The Cloud Revenue Shuffle
That's a very good question. As the old saying goes, your mileage may vary, but cloud advocates tell me they're saving money. CIO Doug Menefee of Louisiana-based health care staffing firm Schumacher Group, for example, tell me the shift from big, up-front capital expenditures to smaller, ongoing operational expenditures has saved his organizations a boat load of cash.
Examining total cost of ownership, Menefee says a three-year ROI analysis makes on-premises look good, but when
you get to five years and have to figure in upgrades and related professional services, hardware refreshes and other IT work and expenditures, Software-as-a-Service has a lower TCO.

Shumacher is a midsize company that has been shifting more and more IT over to SaaS since it opted for in 2005. In 2009 it added Workday human capital management, and it has since replaced a hosted PeopleSoft deployment with Workday's SaaS-based financial applications.

This is just one example, but it mirrors reports we get from many cloud adopters.
User Rank: Apprentice
7/31/2013 | 11:37:43 PM
re: SAP Does The Cloud Revenue Shuffle
I'm still trying to find out how much the cloud cost savings are. Currently they're talking about saving money by moving hosting from cap-ex to op-ex, but I've heard the cloud is just cheaper than on-premises in general. Do you know anything about this?
D. Henschen
D. Henschen,
User Rank: Author
7/23/2013 | 8:42:20 PM
re: SAP Does The Cloud Revenue Shuffle
I agree on most points. Branding their cloud as "Hana" seems like marketecture, but I'm sure Hasso and Vishal would cite many reasons why everything that runs in the cloud has to run on Hana. There are persistent questions about the cost of the hardware required to run Hana, but here, too, SAP has a yarn about "dramatic simplification" and compression reducing the data and storage footprint and making up for the cost of RAM required.
Once Microsoft makes the next Microsoft SQL Server release available and once Oracle makes the next release of 12c available, there will be several in-memory database options available. It will probably take at least a year after that to see whether that takes the wind out of Hana's sails (and sales).
EB Quinn
EB Quinn,
User Rank: Apprentice
7/23/2013 | 6:48:39 PM
re: SAP Does The Cloud Revenue Shuffle
This is at least a mid-distance race, certainly not a sprint, for SAP. As long as they are prepared to continue to make best-of-breed SaaS acquisitions like SuccessFactors and Hybris, they will do fine over the long run. SAP has the cash, the channel, the services and the partners. If SAP, however, proves overly dogmatic about their own "platform" for SaaS, they will face the same difficulties Oracle faced trying to adapt "Fusion" applications from a previous generation architecture.

Goal #1 should be to ensure SAP responds to SaaS, and perhaps even takes a lead in SaaS in areas where customers have often feared to tread like F&A. If HANA is running in the background, fine, but that will not be the determining factor of whether SAP gets over the SaaS/cloud hump. They rode the Sybase acquisitions for mobility, why not acquisitions for SaaS?

Even though McDermott will ascend, there is more pressure on Vishal to guide SAP's products and technology to actively continue to address SMAC (social, mobile, analytics, cloud). McDermott doesn't have the same tech chops as Vishal, but Vishal doesn't have the same good cop/bad cop super sales management persona as McDermott. If they can avoid playing politics with each other too much, their respective individual strengths should prove successful in concert.
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