With Christian Klein now the sole CEO of SAP, the German technology giant faces the colossal task of shifting its ERP software customers to the cloud.
Christian Klein became SAP’s Chief Executive in April, after having served as co-CEO with Jennifer Morgan since October 2019. The top leadership appointment came at the height of the first wave of COVID-19, which has posed particular challenges for Europe’s biggest technology firm. Many of its customers in industries such as automotive and energy had been hit hard in the early months. And the business software market, long dominated by SAP, had become a battleground.
Klein decided some bold measures were in order. In October, the new CEO presented changes to SAP’s business model that would lower margins in the short term and also put the company’s revenue and profit targets off for two years. The news coincided with fairly flat third-quarter results, lopping 22% off the company’s share price. This subtracted €35 billion from SAP’s market value, its biggest drop in 21 years.
The central change at SAP is an expedited shift to the cloud, specifically moving more of SAP’s installed customer base – about 35,000 clients – from its legacy on-premises ERP software to its next-generation cloud-based ERP. This will take immense persuasion, akin to winning customers all over again, amidst ferocious competition. “You've got to keep all of those customers happy again, you've got to go back out and prove your value and worth to them because someone like Oracle is licking their chops,” said Trevor White, an analyst at Nucleus Research. Other rivals such as Salesforce and Workday in America, SAP’s biggest market, are also ready to pounce.
SAP has lagged other technology firms in transitioning to the cloud, and at present it exists as a hybrid: Some customers have moved to the cloud, while others continue to use SAP’s software on their premises. The slow pace is due to the complexity of shifting very large and often customized business processes to the cloud. As Klein pointed out, this is much harder than uploading human resources, sales or customer relationship management.
Further, shifting away from more traditional ERP systems is no small matter for SAP itself, as this has long been its core business. According to Gartner, SAP controls 21% of the ERP market, with no less than 92% of Fortune 500 companies across industries using SAP software. A flawless transition is critical; thus SAP is proceeding with caution, though Klein admits “COVID was clearly an inflection point.” The company will have to accelerate the pace of change despite lingering resistance.
SAP must persuade not only its clients of the benefits of the cloud, but also its investors. The traditional model of selling software licences garners a hefty upfront sum. With cloud subscriptions, customers pay much less initially – hence the need to forego short-term gains. But as The Economist points out, recurring revenues are increasingly prized by technology firms. They are more predictable, and they build a closer relationship with customers. Mark Moerdler of Bernstein believes that a shift to the subscription model will eventually bring SAP a big revenue lift. The company, and crucially its investors, will need to stay the course.