By Aaron Ricadela, Oracle
At SAP’s capital markets day earlier this month in New York, fiscal discipline, accountability and profit margin expansion were the watchwords from co-CEOs Christian Klein and Jennifer Morgan. The new management team laid out its response to problems that weighed on the previous CEO and his team.
A month into their tenures after the Oct. 10 resignation of longtime CEO Bill McDermott, SAP’s new bosses need to quell pressure from investors unhappy with overpriced acquisitions, lagging profitability, and a bumpy move to a business applications suite called S/4HANA. Customers say they don’t fully trust SAP’s ability to help them digitize, and point to a lack of integration among acquired products.
“We have to double down on customer success,” Klein told analysts during the Nov. 12 meeting. “During 2020 we will finally deliver the business integration for all of our acquired products.”
At stake is SAP’s ability to move its customer base to an enterprise resource planning suite called S/4HANA. Businesses rely on ERP software for tasks such as financial management, supply chain, manufacturing, and delivery. In addition to slow integration (some long-acquired products won’t be knit together till next year), SAP has set a 2025 deadline to end support for older versions of its ERP applications, compelling customers to start moving to S/4HANA or consider another course. [Ed. Note: On Feb. 4, 2020, SAP announced it would extend the support deadline to 2027.]
That’s led to a disconnect between the software maker and its customers’ business strategies. According to a survey of 271 CIOs and managers of SAP customers in Germany, Austria and Switzerland released by the German SAP user group DSAG, only about a quarter of respondents said they were well informed about the role SAP’s product road map plays in their companies’ digitization strategies. Forty-five percent partially agreed, and 30 percent said they weren’t well informed.
The discontent has created an opening for Oracle to convince long-time SAP customers to switch to its cloud ERP suite. Since upgrading to S/4 requires shifting to an SAP database called HANA—a potentially costly and disruptive move—Oracle can position its applications, Autonomous Database, and cloud computing infrastructure as an architecture that businesses can buy into for the future.
At a time when companies are crafting long-term strategies to gain a competitive edge from rising data volumes, Oracle’s ability to offer an integrated suite of cloud applications, data analysis tools, and machine learning capabilities built directly into its apps and database makes it a compelling choice, according to Oracle senior vice president of cloud applications marketing Juergen Lindner.
Some customers are already moving off their longstanding ERP platforms. Oracle has cited German customers including Puma and Diebold-Nixdorf as switchers to its business applications from SAP, and executives have said more may be in the offing.
Chairman Larry Ellison has said Oracle is hunting a pace-setting customer in Germany to move ERP work from SAP to Oracle’s online applications. “I've spent a lot of time in Germany and talking to some customers, and they want to move,” Ellison said on Oracle’s quarterly conference call with analysts in September. “What they're waiting for is one really large customer who's already done it.”
Oracle has about 25,000 customers globally that run cloud versions of its ERP applications and NetSuite software for smaller and midsized companies, Ellison said at the company’s Oracle OpenWorld conference in September.
SAP on the other hand has made numerous cloud software acquisitions in the past decade and developed HANA, but “somehow forgot to rewrite their applications for the cloud,” he said.
In New York, SAP’s co-CEOs pledged to abolish decision-making silos and eliminate products with overlapping functionality, as well as those with relatively few users. Chief financial officer Luca Mucic reiterated the company’s target of boosting its cloud gross margin target to 75 percent by 2023 compared with 69 percent this year.
The company will do that by relying more on partners Microsoft, Google, Amazon Web Services, and Alibaba to run the cloud infrastructure—the computing power and storage that underpins its business applications. SAP will also winnow the 25 different kinds of infrastructure software accrued through acquisitions and in-house development it uses to run customers’ computing workloads. “It was close to impossible for us to really share resources” across groups, Mucic told analysts. Now, he said, “we have our act together.”
In addition to convincing customers to stick around for the ride, SAP also finds itself in the position of having to defending itself to Wall Street. Investors have criticized management for the rocky S/4HANA transition, for moving too slowly to integrate acquired companies, and overpaying for customer data management software company Qualtrics, which it bought last year for $8 billion. Enterprise software maker ServiceNow, McDermott’s new company, trades at about 11 times expected 2020 sales; by contrast, McDermott paid about 20 times forward sales for Qualtrics.
Those factors drew activist investor Elliott Associates into the stock this spring. Three SAP executive board members have left this year, including McDermott. On Nov. 4 SAP increased its share repurchase plan and announced a special dividend worth a combined 1.5 billion euros ($1.6 billion).
Management has its work cut out to explain how it will extricate itself from a sticky situation. “Business models are changing so dramatically in almost all industries and customers just take time,” said Klein.
Time is an asset the company can ill afford to lose.