SAP and the cloud: how will this strategy work out?

Reviewing the impact of the cloud

The only way is up for SAP and the cloud hopefully

'One team, one dream' was the new SAP mantra that emerged from the company's Global Field Kick-Off Meeting of 2014, which represents SAP's aspirations for simplification and market success. The company is aiming to have one go-to-market approach, one solution for a given business problem, one customer offering, and one support model.

Let's look at how this translates into SAP's cloud strategy.

Four pillars

Currently the SAP cloud strategy is designed on four key pillars:

1. Best-of-breed solutions in key functional areas, such as HR and procurement, and innovative new solutions in social selling and service for sales, marketing, service and finance.

2. Transformational integration, delivering deep and seamless process integration through three main methods: open APIs (application programming interfaces), hundreds of predefined and packaged business process integration adapters called iFlows, and the HANA cloud platform.

3. Flexibility: so that customers can use best-of-breed public cloud apps, moving their existing SAP-licensed apps to the HANA enterprise cloud that is fully managed by SAP, or using managed service options, where SAP can extend companies' existing on-premise SAP investments with the cloud.

4. Unified cloud platform: a single platform and the foundation to all SAP offerings, where the company is accelerating its plans to move the entire SAP cloud portfolio to the HANA cloud platform.

Business growth

Going for cloud is certainly a sensible move for SAP, and its business in cloud solutions showed rapid growth in 2013. SAP's annual cloud revenue run rate now exceeds €1 billion (around £760 million, $1.15 billion), and its total cloud portfolio applications now have more than 35 million subscriptions, with the company expecting total revenue from its cloud business of €3.0 to €3.5 billion (around £2.65 billion, $4 billion) by 2017.

However, lots of challenges and questions remain unanswered.

Best-of-breed solutions mean not only excellent functionality, but also high levels of security. Are vendors trustworthy enough for customers to hand over their crown jewels? In today's business environment where the moral limits of markets have been questioned, it's difficult to say that for sure.

Transformational integration is strongly desirable, but the fast innovation pace in cloud makes it more likely that SAP will continue buying small companies to fill in the emergent gaps. We have already seen this with SuccessFactors (cloud-based human capital management), Ariba (cloud-based business commerce network) and Fieldglass (cloud technology in contingent workforce management).

Analysts believe these takeovers will continue, as probably this is the only way for the technology giant to become a cloud enterprise. However, will SAP be able to seamlessly integrate all of these newly acquired technologies?

Then, can a company really be flexible if it depends on a single cloud player? Given the current consolidation of markets, especially in the IT industry, it is not unlikely that a few years from now there will only be three or four major cloud players. As well as reducing choice for customers, the impact if one of them were successfully targeted by a cyber-terrorist attack could be massive.

Revenue models

Another important point to consider is that the revenue model changes when the business model is changed from on-premise to the cloud. This puts short-term pressure on the margin for SAP.

So far the major revenue stream for SAP has been maintenance, not software licensing. In the cloud, the revenue pattern is completely different from that of on-premise software, as there is no maintenance fee and no upfront license fee – and it takes a few years for the cloud subscription fee to catch up financially with the traditional license fee plus 20% maintenance.

Revenue recognition also starts later in a cloud contract – typically around three months after contract closing when the customer has gone live with using the cloud service.

Furthermore, the switching barriers in the cloud are lower; the costs associated with changing a supplier are less than with traditional software.

This means that SAP will fundamentally have to change its business and sales model. It's still unclear how investors will react to such a shift. According to Luka Mucic, CFO at SAP, predictability and transparency are the key factors that make the cloud business attractive to both customers and investors. However, in order to achieve high growth and renewal rates, customer satisfaction will be essential. Also, it will take time. How long – we still don't know.

Shifting to cloud

The SAP HANA cloud platform as well as the HANA enterprise cloud are impressive technologies. It is incredible how HANA can process hundreds of terabytes or even petabytes in such a short time. More interesting, however, is how these enormous amounts of generated data are being transferred from the customer's on-premise landscape to the cloud in a reasonable timeline.

The hardware offerings that are a key element of the SAP HANA package are anything but cheap. While the market is trying to put pressure on hardware prices and even promote an 'open source' model, SAP is still relying on highly specialised and expensive partner offerings.

SAP has not always succeeded with new ventures. For example, SAP Business ByDesign (its solution for smaller companies) took seven years of development and the investment of €3.0 billion (around £2.3 billion, $3.4 billion), but has struggled to win sufficient customers and revenue.

We all hope that SAP has learnt from its mistakes, and that the cloud has not obscured the company's planning horizon.

  • Alan Hunt is Business Development Director and board member at RED, the global SAP services provider

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