SAP Doubles Down On Cloud Computing

Doug Henschen| Informationweek

SAP accelerates its transition to cloud services, raising subscription revenue forecasts and rolling back profit expectations as it invests in cloud growth.

SAP’s strategy over the last four years focused on mobile, in-memory, and cloud. Over the next four years SAP’s focus will be on cloud, cloud, cloud.

The shift was clear Tuesday as soon-to-be sole CEO Bill McDermott said the company would “make the courageous move to transition the company to the cloud.”

“We’re moving our core business to the cloud with the Hana Cloud Platform, and SAP will take full ownership to help customers simplify their landscape and execute their business plans,” McDermott said, envisioning customers moving their SAP Business Suite deployments to SAP’s Hana Enterprise Cloud managed services.

Where competitors such as Salesforce.com, Workday, and NetSuite are pure-play cloud vendors, SAP made clear its cloud will combine software-as-a-service offerings like SuccessFactors and Ariba with private-cloud delivery of the SAP Business Suite — the so-called “core” company applications.

Setting an ambitious new goal for cloud growth, McDermott said SAP will reach €3 billion to €3.5 billion ($4.1 billion to $4.7 billion) in cloud subscription and support revenues by 2017. That’s up from €758 billion ($1.0 billion, non-IRFS) in cloud subscription and support revenue reported in 2013 and a forecast of €2 billion ($2.7 billion) by 2015.

Reaching this goal will come at a cost. Acknowledging that cloud investment will affect the bottom line, McDermott moved back SAP’s forecast of reaching a 35% profit margin by 2015. Instead that goal will be reached in 2017.

“We’re moving the 35% target down the road two years so we get the market share we deserve,” McDermott said.

Of course pure-play cloud vendors will stand in SAP’s way, but co-CEO Jim Hagemann-Snabe asserted SAP is outgrowing these competitors. “In line-of-business, HR, sales, procurement, and finance, we are growing faster than pure-play cloud players like Salesforce.com and NetSuite,” Snabe said.

Reaching or exceeding €3 billion in cloud revenue by 2017 will be no small task and will undoubtedly require additional acquisitions. But McDermott said future cloud growth would be “primarily” organic while possible deals would be “tuck-in” acquisitions.

“We have been opportunistic where we see we can move the company forward with a solution that would be better bought than built,” he said.

SAP’s strong cloud growth over the past year was achieved for the most part through the acquisitions of SuccessFactors and Ariba for $7.7 billion. In 2013 SAP spent an estimated $1 billion to add Hybris, an e-commerce vendor that realizes at least part of its $150 million in annual revenue from the cloud.

With Tuesday’s announcements, SAP seemed to push the Hana in-memory platform to the background by emphasizing that everything the company does will run on the technology. It will be the engine running everything SAP offers in the cloud and it will continue to be an alternative to traditional databases like Oracle, DB2, and Microsoft SQL Server for customers running the SAP Business Suite on-premises. But SAP is no longer offering separate growth projections for Hana because “as an integral part of SAP solutions it becomes more complicated to allocate a separate revenue number for Hana,” said SAP spokesperson Jim Dever.

It’s an artful move away from the Hana hype just as Microsoft and Oracle are gearing up to introduce in-memory options for their flagship databases in 2014. McDermott spun the change in emphasis as a mark of success: “Hana is now a serious brand that we’re not having to push as hard as we used to.”

So get set for McDermott’s simplified SAP. Of course it will be mobile first, he promised, and it will offer “beautiful” new Fiori user interfaces. We’ll also be reminded that Hana is there running behind the scenes and available as an option for on-premises deployments. But the big emphasis for the next four years will be everything cloud.

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