Yesterday, SAP issued another profit warning and lower guidance resulting in a 22% drop in share price, $30 billion in market value and negative fallout for a number of other enterprise companies. Comments by SAP CEO Klein and lower overall guidance drove a number of analysts to question SAP’s future, Klein’s leadership and that of the broader enterprise market. Let’s unpack this.
Navigating the SAP challenges
The lower guidance is a result of a number of factors that are creating the perfect storm for SAP. SAP’s software is used by some of the largest companies on the planet to run their business. In addition, SAP has strong relationships with their customers that are sticky. In many ways, too sticky.
Klein took over the reins as sole CEO of SAP in April 2020. Many of the challenges facing SAP predated 2020. Add in the changes from 2020’s business climate and it would be challenging for any CEO.
As a widely used enterprise software company for decades, SAP is charged with doing two things: ensure operational stability and provide innovation. Unfortunately, those two often conflict with one another as one demands lower risk while the other increases risk. Add into the mix that companies today are looking for flexibility at speed and one can quickly see the dilemma.
Some suggest SAP has not been very innovative nor flexible in their approach. On one hand, SAP did launch innovative solutions around their Leonardo edge initiatives and cloud products a few years ago. Since then, neither has received the attention nor adoption they should have. This is a core challenge for SAP as both address massive issues facing enterprises today: cloud adoption and leveraging edge-to-cloud. SAP still has the potential to be a leader with both of these.
The challenge has been two-fold: Convincing existing customers to convert their on-premises SAP implementations to cloud and attracting net-new customers. There are a whole variety of issues why these have been problematic.
Conversion from SAP on-premises to cloud is not trivial. Much of this is steeped in business processes that are intertwined with the software processes. It’s a complex ball of yarn that needs to be untangled. The challenge is that it is resource intensive to do so and fraught with risk if something goes wrong. Not a path the average CIO wants to take a company with billions in revenue at stake. The move to cloud adds further complexity to the mix and requires a different way of thinking. Irrespective to SAP, this still needs to be done within companies.
Once the move to cloud happens, it is incredibly liberating for a number of reasons. First, it moves an enterprise beyond the constraints of on-premises footprints. Second, it moves the responsibility to manage the increasingly complicated SAP software. Third, it changes the financial operating model. Fourth, new innovations are immediately available.
The problem is getting from here to there.
The same goes for other innovative areas of SAP. Enterprises are striving to engage more at the edge and leverage customer data. SAP has some great examples of customer success with SAP HANA, but changes are needed to make it easier for the broader contingent of customers to consume.
At the same time, acquisitions of Concur and Ariba have proved challenging for SAP. Today, Concur is suffering due to its direct connection to business travel…which is relatively non-existent in today’s pandemic era. As business travel returns, so should Concur. Ariba has a different challenge. It is a great platform in concept but has adopted too much of the SAP legacy. Individually, these may not be significant, but contribute to the overall challenges.
So, what does this all mean for SAP? SAP has their work cut out. There is significant potential for SAP if they can successfully address the challenges and navigate the turbulent waters that we all face today. Each of the areas for SAP (core, cloud, edge, Concur, Ariba) will need to consider how they a) address the needs to today and tomorrow’s enterprise, b) create a path toward adoption, c) creates value for the stakeholders involved and d) is able to create a platform that remains flexible at speed. It will not be easy but bringing innovation to the forefront and creating a path for transforming enterprises is key.
Impact to the overall enterprise market
It should be noted that SAP is not the only one affected by these challenges. Enterprise hardware and software vendors are considering the changes they need to make too. Keep in mind that enterprise vendors have largely done the same thing in business for a long time. Some have started to evolve. However, 2020 has forced many to toss those strategies to the wind while accelerating others.
Large providers, like SAP and others, need to closely consider where their customers are headed and get in front of them. Most are behind and struggling to keep up. Smaller providers are seizing this opportunity and providing solutions in the void created by the separation.
2020 has created both short- and long-term changes in how enterprises operate. 2021 is already shaping up to provide, yet another, completely different scenario for vendors and customers alike.
Large providers will not disappear overnight. Their relationships and solutions still provide value to customers. The question is: For how long? Traditional on-premises software will make way for cloud. Edge-to-cloud and the data that traverses the spectrum are critical. The overall focus shifts to customer experience and business operations. Enterprise vendors will need to evaluate how they can quickly adjust to the changing climate. For today’s environment, tomorrows and the next days. There is only one thing that will be constant in our new normal, whatever that may be, change.
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