McDermott Leaves Legacy of Bemused and Concerned SAP Customers


10/22/2019

by Michael Pearson

After 10 years as CEO of SAP, Bill McDermott stepped down this week.

It wasn’t entirely surprising news, nor was the announcement of his replacements: co-CEOs Jennifer Morgan and Christian Klein.

By the numbers, it looks like McDermott did a stellar job leading SAP for the past decade. Revenues and profitability are way up, the stock price has exploded, and SAP is well on its way to earning the majority of its revenue from Cloud.

Compared to his predecessor, Leo Apotheker, McDermott leaves the company in relatively good shape, although this is a low bar to hurdle. Apotheker’s reign was disastrous and included, amongst other bungled manoeuvres and bad decisions, the unexpected hike to customers’ maintenance fees.

However, many SAP customers, especially long-time customers, may feel disconnected or misaligned with the company’s vision and future direction.

Value Proposition Dilution

The disconnect began when SAP, seeing the writing on the wall with the maturity and saturation of the ERP market, felt the need to expand its portfolio to include non-ERP solutions. These came mainly through acquisitions such as SuccessFactors, Concur and Qualtrics.Unlike BusinessObjects, where you could easily understand the value of ERP + BI as greater together than the sum of the parts, some of these acquisitions have just not resonated with customers.

For example, the most recent blockbuster acquisition, Qualtrics, purports to propel SAP customers into the “experience economy”. With terms such as “X Data” and “O Data” many long-time customers are wondering how exactly this multi-billion dollar acquisition is going to help them run their businesses any better. If you’re a manufacturer of components and supplying the oil and gas industry, you could be excused for scratching your head and wondering what it all has to do with you.

Another example is Leonardo, SAP’s AI solution. When launched a few years ago it was promised as the next big thing, but so far few customers have found meaningful use cases for the product, and it seems to be a solution drifting aimlessly in search of a problem to solve.

In the efforts to grow and diversify the business, which was arguably unavoidable in order to survive, SAP has diluted it single core value proposition and hasn’t replaced it with anything that resonates with the majority of its existing customers.

Indirect Access

Under McDermott’s leadership SAP began aggressively enforcing contract clauses that required customers to license “indirect access”. In some cases these became legal disputes, and some ended up in court.

SAP maintains that it didn’t change anything, but was simply introducing a new way for customers to be compliant with the already existing terms of their contract. Fair enough, but customers are realizing (and many are still yet to realize) that they have to pay significant sums of money to SAP to essentially continue what they’ve always been doing.

The fallout from this still continues and, despite efforts to clean up the mess and confusion, the reality is that many customers are still unaware that they are under-licensed, and won’t be thrilled when they see the cost of compliance.

The One That Got Away

McDermott admitted to meeting with Salesforce.com CEO Marc Benioff early in his tenure to discuss a potential acquisition, when Salesforce was worth a quarter of what it is today. McDermott baulked at the price tag, and even publicly chastised Benioff for his lofty valuation.

At the time SAP was struggling to compete with CRM (a struggle that continues today). Acquiring Salesforce would have vaulted SAP to top position in CRM and given a massive boost to Cloud revenues at a time when SAP’s Cloud strategy was floundering. An SAP/Salesforce marriage would have no doubt yielded spectacular results for SAP and its customers.

In hindsight, surely McDermott would privately acknowledge that not acquiring Salesforce when SAP had the chance to do so was probably one of the biggest mistakes of his tenure.

The One That Should Have Got Away

SAP acquired Sybase in 2010 for $5.8B. You don’t hear much about the Sybase product portfolio these days. Just about all the products and technology that SAP acquired from Sybase is virtually extinct now.

Presumably the Sybase acquisition was a defensive strategy to syphon off database revenue from Oracle by giving customers a choice to run their SAP system on a non-Oracle database. This all became moot, of course, when SAP HANA arrived on the scene a few years later.

There are customers running their SAP systems on Sybase ASE, but they are fairly few as a percentage of the overall user base. The acquisition could not have been a profitable one, and aside from making almost $6B disappear, achieved little else.

The Sybase acquisition is probably one of the most expensive mistakes of McDermott’s tenure.

The Future is S/4HANA

S/4HANA was announced about halfway through McDermott’s tenure, although the planning for it was probably well underway before he took over as sole CEO.

S/4HANA is the core of SAP’s business, and although adoption has been slower than hoped for, there is little doubt that the majority of customers who want to remain on SAP will migrate to S/4, most before ECC goes off mainstream support in 2025.

S/4HANA is the glue that holds together the SAP story, and is critical to the future success of SAP.

Hopefully Morgan and Klein will find a way to weave their vision and messaging around the core SAP technology of S/4HANA so that all customers will again feel engaged, represented and aligned with SAP’s future.



Author

About the Author: Michael Pearson

Michael is President of CONTAX and claims to be one of the few people in the western world who understands SAP licensing.