Deputy Editor-in-Chief, Computerwoche

SAP at 50: The software group is at a crossroads

Apr 07, 2022
ERP SystemsSAP

SAP made German software history, but the company is facing a number of new challenges. Now the young management team around CEO Christian Klein has to prove itself.

Christian Klein
Credit: SAP SE / feinkorn photography

These days, the town of Walldorf is not really in the mood to celebrate — even though the managers of SAP, which is headquartered there, have every reason to do so. After all, the software giant can look back on 50 years of successful company history. On April 1, 1972, five former IBM employees — Claus Wellenreuther, Hans-Werner Hector, Klaus Tschira, Dietmar Hopp and Hasso Plattner — launched SAP Systemanalyse und Programmentwicklung GbR. The foundation stone for the largest and most successful European software manufacturer was laid.

Half a century is an eternity in the otherwise fast-moving IT and software business. New technologies can sweep established providers from the market overnight and allow new players to rise meteorically. SAP has weathered all the changes and storms on the market and has held its own to this day. As a result, the German software manufacturer plays in the premier league of global IT providers and can even look back on a longer history than the software giants Microsoft (founded in 1975) and Oracle (1977).

So the company should be in party mood for its 50th birthday. However, the current global crisis is putting a damper on SAP’s celebrations, particularly since the software company was quickly caught up in the maelstrom of war following Russia’s brutal attack on neighboring Ukraine, which violated international law. The call for help from the Ukrainian government, led by President Volodymyr Zelensky, also went out to the world’s major software manufacturers — including SAP. Ukraine urgently called on Microsoft, Oracle, SAP, and others to cease doing business in Russia and thus stop supporting the war machine of Russian autocrat Vladimir Putin.

The appeal met with a sympathetic hearing at SAP. Chief Executive Officer Christian Klein strongly condemned the Russian assault: “An act as inhumane and unjustified as this is an attack on democracy and humanity,” he said in early March. “Its consequences affect us all.” Klein stressed the importance of economic sanctions against Russia. “We are in constant exchange with governments around the world, have every confidence in their guidance, and fully support the actions taken so far. We are stopping business in Russia and Belarus aligned with sanctions and, in addition, pausing all sales of SAP services and products in Russia.”

However, the leadership in Walldorf also seemed somewhat overwhelmed by the war situation and the publicity it was generating. The phones wouldn’t stop ringing after Zelensky approached SAP directly, insiders report. Discussions were raised about how far the consequences should go. To shut down the SAP cloud there? What about facilities such as hospitals or drug manufacturers in Russia that run SAP software? Drawing a clear line here was apparently difficult for SAP management. But in view of the brutal actions of the Russian army, the pressure was mounting. That’s why SAP stepped up its game once again and announced at the end of March that it would also discontinue its cloud operations in Russia.  

The software provider announced that it would continue to support the Ukrainian government and aid organizations with its own products. In addition, SAP has already collected more than €3 million in donations. More than 4,000 SAP employees have offered housing and other assistance to refugees from Ukraine. SAP also plans to provide office space to store donations such as medicine and food. “We stand united alongside the global community in all efforts to end this unjust war in Ukraine, and we continue to do everything we can to restore peace,” is the clear message from Walldorf.

Economic uncertainty

However, this may take time. Initially, economic uncertainty is likely to shape future business. Indicators including Germany’s ifo Business Climate Index, consumer sentiment and the forecasts of economic experts on growth prospects in Germany and worldwide are pessimistic. Exploding energy prices, repeatedly interrupted supply chains (as is currently the case due to the COVID-19 shutdown in the Chinese metropolis of Shanghai) and collapsing markets are all currently causing concern, and not just for SAP management.

The Walldorf-based company’s business is still stable, even though growth rates have recently been rather meager. Last year, the manufacturer took in a good €27.8 billion (around US$32 billion) and posted a profit of €5.4 billion — both figures represent an increase of just two percent compared to the previous year’s result. Other software manufacturers, such as Microsoft, Salesforce and ServiceNow, posted double-digit growth.

So there are certainly plenty of reasons to find fault with these figures. However, it should not be forgotten that SAP has an unparalleled growth story to tell over the decades. The only interruptions were during global crises: in 2003 after the bursting of the dotcom bubble (a drop of 5.2 percent in sales), in 2009 during the global economic crisis that followed the Lehman bankruptcy (a drop of 8.5 percent) and in 2020, the first year of the COVID-19 pandemic (a drop of just 1.1 percent).

Since 2000, SAP’s annual revenue has more than quadrupled. Profit even increased by a factor of nine during this period. The number of employees has exploded from just over 24,000 to more than 107,000. In Europe and Germany, no other software manufacturer can hold a candle to SAP. The number two in Germany, Software AG, has been trying for years to finally crack the magic mark of one billion euros in annual sales — so far without success. The entry of Silver Lake as one of its investors at the end of 2021 should now give the Darmstadt-based company the necessary momentum.

Even extending the comparison to Europe, the next largest software manufacturers are nowhere near SAP. The French Dassault Systèmes recently achieved annual sales of just under €4.9 billion euros, while the British Sage Group came in at around £1.85 billion (around $2.5 billion).

Worldwide, however, others have their noses in front. The world’s largest software manufacturer, Microsoft, generated revenue of around $168 billion in fiscal year 2021, which ended in the middle of last year. SAP’s arch-rival Oracle most recently achieved annual revenue of just over $40 billion.

Structural change

Overall, however, the entire software industry is undergoing profound structural change. The cloud and associated usage-based subscription models are gradually replacing the classic license-maintenance business. Oracle boss Larry Ellison boasted several years ago that he could achieve a profit margin of more than 80 percent with software maintenance alone. This did not go down well with many Oracle customers, who had to pay large sums to the company year after year for the maintenance and further development of their software solutions.

With the cloud paradigm, other players are preparing to reshuffle the cards in the global market for business software. A group of software providers that have grown up with the cloud and are not carrying legacy burdens are challenging the incumbents. These include companies such as Workday with its business software in the cloud, workflow specialist ServiceNow, and Salesforce, which started out as a CRM provider and has really annoyed the old software giants with its no-software tagline. Salesforce has been successful too: It has been growing at an unprecedented pace in recent years and has long been breathing down SAP’s neck. It is currently targeting annual sales of $32 billion (€29 billion). SAP wants to achieve revenue of €29.5 billion in 2022.

SAP is still struggling with the move to the cloud, even though the topic has been on the agenda of the German software company for almost two decades. Even the beginnings were complicated. After the turn of the millennium, it became clear that software would have to be structured differently in the future. It had to be modular, a new generation of business applications, flexible and usable via the Internet, based on the new concept of service-oriented architectures (SOA).

SAP launched a mammoth project, with Shai Agassi and Peter Zencke at the helm. The industry was soon abuzz with speculation about Project Vienna and the new A1S product. Sometimes it was said to be software for SMEs, then a modular construction kit for the entire SAP portfolio. In the end, there was much confusion. Disputes between the veteran SAP manager Zencke and the young Agassi, who had joined SAP with the acquisition of the Israeli software startup TopTier and quickly climbed the hierarchy under the wing of co-founder Hasso Plattner, threw the whole project into disarray. Timelines and costs got out of hand.

As a result of these experiments, SAP presented Business ByDesign in 2007, a standardized on-demand ERP package aimed primarily at small and medium-sized businesses. However, technical difficulties and performance problems ensured that the software never really got off the ground. SAP is said to have wasted billions on the development. In 2013, the company finally announced that it would realign its development resources. Business ByDesign disappeared into oblivion. The first cloud attempt had failed.

SAP now pooled all its resources for its new flagship product, the in-memory database HANA, which was to establish itself as the new foundation for the company’s entire software world in the coming years. Previously, SAP’s ERP installations had always required an external database system, mostly Oracle or DB2 from IBM, much to Plattner’s chagrin. Now the software group was able to counter this with its own powerful product and put an end to this dependency.  It also laid the foundation for the new cloud-based product suite, S/4HANA, which was presented to customers at the beginning of 2015 as the successor to the popular Business Suite.

A turning point

The global financial crisis following the Lehman bankruptcy and the first attempts at walking in the cloud marked a turning point for SAP. In the first decades, product and management development proceeded in a calm and orderly manner. The 1980s were marked by the R/2 software generation designed for mainframes, followed by the R/3 client-server system that dominated the 1990s.

In all those years, the founders kept a firm grip on the helm — Dietmar Hopp as CEO from 1988 to 1997, followed by a transitional year with a dual leadership until finally Hasso Plattner took the helm. He immediately brought his protégé Henning Kagermann into the leadership team, and remained in control until 2003. After Plattner’s retirement to the Supervisory Board, Kagermann steered SAP until 2009 — briefly together with his designated successor, the former head of sales Leo Apotheker.

The handover to Apotheker marked the beginning of turbulent times in Walldorf, the aftershocks of which can still be felt today. The new SAP CEO raised maintenance fees virtually overnight, sparking a customer revolt that ultimately cost him the top job at SAP after less than a year. In his wake, two managers from outside Germany took the helm for the first time: the extroverted U.S. marketing specialist Bill McDermott and the quiet Danish technology expert Jim Hagemann Snabe.

With McDermott, who became SAP’s sole CEO in 2014 after Snabe stepped down, the cloud strategy changed: The American dug deep into his pockets and bought one cloud provider after another. Between 2011 and 2018, SAP spent a total of more than $26 billion on SuccessFactors (human resources), Ariba (purchasing network), Concur (travel expense management), Callidus (customer management) and Qualtrics (experience management).

Clash of developers

However, the volume and speed of acquisitions overwhelmed the organization. The heads of the acquired cloud companies who were supposed to show the German software giant the way into the new age — Lars Dalgaard (SuccessFactors), Robert Calderoni (Ariba) and Concur founder Steve Singh — threw in the towel one after the other. This was in part due to the fact that different cultures clashed here: On the one hand, there were the startups, who were willing to settle for an 80 percent solution to keep up the pace; on the other, there was the development team in Walldorf, which was geared toward German engineering precision.

SAP is still working on integrating the many cloud purchases — partly because customers keep demanding it. But the cloud products are still orbiting independently like satellites around the SAP gravitational core.

There have also been massive changes in that SAP core. At the beginning of 2015, SAP introduced S/4HANA, a new product generation that users can choose to run on-premises or in the cloud, private or public. However, the change is still proving to be a tough one. Users have often invested large sums in their existing SAP landscape — the Business Suite and ECC products. So why switch, many ask themselves. Many find it difficult to make a business case for such an elaborate project. Migration would be expensive and take years.

In addition, not all companies want to move their new SAP system to the cloud. The vast majority prefer to remain in their own data center. Attractive offers such as “Rise with SAP” do little to change this. The company introduced the initiative at the beginning of 2021. The intention behind it was to make it easier for customers to move to the cloud with an integrated product and service package and a single contact and contractual partner, namely SAP. How the whole thing is ultimately supposed to work is still unclear to many users, as surveys by the German-speaking SAP User Group (DSAG) have shown.

So all in all, the S/4HANA train is having a hard time getting rolling. When users do get going, it is often of necessity because the end of maintenance for the predecessor software is in sight. The new release is not really generating enthusiasm.

Necessary change

If it wants to continue to play a significant role in the business software market in the cloud age, it will have to change. The days when the SAP system alone was the heart of corporate IT are over.  Today, users want to use the best software from different providers in order to be fast and flexible. Infrastructures are becoming more and more diverse, including on-premises components, a rapidly growing cloud component and, increasingly, computing power at the edge.

SAP has not yet definitively found its position in this new world. The Walldorf-based company never tires of emphasizing how important the cloud is for its own future. But as a provider of cloud infrastructure, they do not play a role in the market. Years ago, like so many competitors, SAP tried to position its own cloud offering. But SAP could not keep up with the pace and investment power of hyperscalers such as Amazon Web Services (AWS) , Google and Microsoft. Today, the German software house cooperates with the major cloud providers, and anyone who wants to can run their S/4HANA solution in their data centers.

Most companies are currently in the middle of the digital transformation. SAP urgently needs to find an answer to the question of how its own software should help its customers in this process. Recently, customers have repeatedly expressed doubts about this. SAP is still important as a backbone in the ERP engine room to keep the company running. But the music of digital transformation is playing elsewhere — not in financial accounting, order processing or materials management, but at the customer interface, the customer experience and workflow management.

SAP has an open flank at these points. In recent years, it has been too busy with the consolidation work following the McDermott era. At the end of 2019, the U.S. executive unexpectedly stepped down from his chief executive post at SAP. The personnel turbulence approached its climax. At the beginning of 2021, Chief Technology Officer Bernd Leukert turned his back on the Group. Shortly thereafter, another long-serving SAP manager, Robert Enslin, announced his departure in April.

A new generation

This marked a generational change. A new guard of young managers had taken the helm in 2019. Christian Klein, 39, was the youngest manager ever to head a one of Germany’s largest publicly traded companies. With Jürgen Müller (37 years old) and Thomas Saueressig (34 years old), young managers took over technology and product development. But since then, there has been no sign of peace in the boardroom. Jennifer Morgan, who had been appointed co-CEO with Klein, had to leave after just a few months. The highly acclaimed and publicly praised appointment of a woman at the top of SAP was thus once again history.

Meanwhile, the exodus of the old generation of SAP managers continued. In February 2020, SAP veteran Michael Kleinemeier and, surprisingly, Chief Human Resources Officer Stefan Ries took their leave. In the latter’s place, SAP brought in Sabine Bendiek, who had previously been responsible for Microsoft’s German business. In the middle of last year, Bendiek took on the post of Chief Operating Officer (COO) in addition to HR responsibility.

Shortly before the company’s 50th birthday, the next surprise followed. CFO Luka Mucic announced his departure, causing quite a bit of irritation on the market. Mucic was regarded as a stability factor within the SAP management team and as the foster father of CEO Klein. Insiders speculate that the manager had to take the blame, sacrificed among other things because of mistakes in the cloud strategy.

Now the youngsters have to prove themselves. How much time they get to set the SAP tanker on a new course will depend on the patience of investors and the protective hand of Hasso Plattner, who is still pulling the strings in the background. The financial markets are looking at SAP with a certain amount of nervousness, especially since Elliott Management, a hedge fund whose head Paul Singer is not exactly known for treating managers with kid gloves, has been sitting at the table since 2019.

In any case, the share price doesn’t really want to take off. After peaking at around €140 in August 2020, the stock plummeted to around €90 in October when Klein had to abandon the growth targets of his predecessor McDermott. Since then, there have been ups and downs.  In the fall of 2021, the share price again reached almost €130, but is currently hovering around €100.

Give and take

SAP CEO Klein is in a dilemma. He needs a future story to be able to surf the wave of digital transformation. At the same time, he has to do his homework and reorganize the existing portfolio. Users have been nagging SAP for years to ensure better integration of the individual software components and data harmonization. In addition, there is still some confusion about the products and their functions. This ranges from the technical basis — NetWeaver, SAP Cloud Platform (SCP) and today Business Technology Platform (BTP) — to the applications, where it is still not entirely clear what the differences are between the various editions of S/4HANA — on premises, private and public cloud.

Klein has promised to meet the needs of his users. From the beginning, he stressed the importance of maintaining a good relationship with his customers. He pointed to SAP’s early days, when developers co-developed the first software versions in customers’ data centers. He wants to revive this spirit. What is good from SAP’s point of view is that many customers depend on SAP and show great patience with the company.

DSAG, the user group, is celebrating its 25th birthday this year, and emphasizes the spirit of partnership as it looks to a shared future. “It’s a constant give and take,” said one greeting on the special anniversary, “and that’s what makes our collaboration so successful. Here’s to another exciting 25 years!”

Translated from an article in our German sister publication, Computerwoche.