SAP Chases Constant Cloud Customers

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The completion of SAP’s acquisition of SuccessFactors raises as many questions about the future of SAP as there are about its past.

One of the key questions is when and how many of SAP’s 183,000 customers would migrate to the Cloud, something that SuccessFactors and its peers have embraced with gusto and benefited handsomely from it as a result.

The obvious answer is that with 14% of SuccessFactors customers, representing nearly 500 organizations, already using SAP applications, it’s just a matter of time that many more SAP customers will choose SuccessFactors as their onramp to Cloud deployment either as a matter of necessity or convenience.

For anyone interested in using SuccessFactors to improve their eRecruiting, performance management, succession planning and even Cloud-based Core HR business processes, SAP will position SuccessFactors as the front and center of its Cloud strategy.

SuccessFactors and its Cloud technologies will take precedence over SAP’s evolving Cloud offerings resulting in the shelving of products such as Career OnDemand, according to SAP.

SuccessFactors will also become the designated Cloud model for SAP to sell and deliver HCM products including Core HR and talent management applications. By May 2012 SAP is expected to come up with specific plans to integrate its entire Cloud portfolio with its existing on-premise products.

Lars Dalgaard, CEO of SuccessFactors, is expected to join the powerful SAP Executive Board as its sixth member(the others are its two co-CEOs, CFO, COO and CTO) capable of shaping the future of the company. I would not be surprised that Lars’ real title is the Chief Cloud Officer of SAP.

All these mean that SAP’s $3.4-billion deal to buy SuccessFactors has transformed the company with its Cloud strategy taking the center stage and evolving from context to core.

Will Customers Buy It?

SAP’s emphasis on the Cloud comes at a time when enterprise applications customers are also transforming themselves in a trajectory similar to moving from Casual Cloud to Constant Cloud.

As Rentokil Initial, a $4-billion business services company, and a growing list of other organizations are favoring Cloud-based applications over on-premise software, the implications for vendors like SAP are significant. Since 2007 Rentokil Initial, which employs 66,000 around the world, has drastically reduced its investment in on-premise applications specifically those from Oracle following increased adoptions of Cloud systems from Salesforce.com to Workday.

Similarly hundreds of SAP customers like ConAgra Foods, Hilti, and Kimberly Clark have been using SuccessFactors for years suggesting that their spend with SAP would have increased had the vendor provided an equally compelling Cloud-based option.

As a result, SAP’s positioning SuccessFactors as the front and center of its Cloud strategy is no longer a matter of convenience, but rather a necessity for the vendor to win in the future.

That brings us to the issue of using SAP’s track record to determine whether the SuccessFactors deal and the current Cloud push would be a ringing success. One is tempted to equate SAP’s current Cloud obsession with its foray into eCommerce(remember SAP Markets?) during the Dot Com boom in 2000. Every software vendor was doing it then, as they are now.

After the Dot Com bust, SAP quickly reverted to its core business of selling big ERP systems. Its subsequent acquisitions including Frictionless Commerce for its on-demand sourcing applications, Triversity in retail, Crossgate in B2B integration and more recently the deal to invest in SAF AG for forecasting and replenishment have been made to augment its sales pipeline. Their impact has been modest at best.

Business Objects and Sybase were bought to help SAP shore up a specific product category. The former has made a stronger impact than expected and one could argue that SAP’s recovery from the deep recession would have been held back longer without the help of the business intelligence products from BusinessObjects. On the other hand, it’s too soon to gauge the ready acceptance of Sybase database among SAP’s installed base despite growing signs that Sybase is being fully integrated into SAP’s sales operations.

In short, most of SAP’s past deals have been more opportunistic than cataclysmic. The question is whether the inclusion of SuccessFactors will become the catalyst to shake SAP at its core. Today SAP is much more diversified with its fledgling in-memory agenda as well as the ambition to become the fastest-growing database company, not to mention its all-important business analytics strategy.

Even with a stated goal of building a €2 billion Cloud business by 2015, compared with €201 million from the combined SuccessFactors and SAP’s Cloud subscription and support revenues in 2011, the target amounts to about 14% of SAP’s applications license and maintenance revenues if they continue to grow at 10% annually through the projected period.

Still the steeper the ramp of its Cloud revenues, the more likely its license and maintenance revenues would be eroded. In the coming months, any unexpected shortfall on either could wreck havoc to its stock price as much as to its ability to target Constant Cloud customers, while easing its dependence on on-premise business.

Perception, duly noted in the Dot Com era, now matters more than reality. The mere act of SAP’s throwing its weight squarely behind the Cloud and thusly reconfiguring its business model is akin to what Amazon.com was aiming to achieve by turning the world of retailing upside down.

The latter has done it with conviction and clarity and I am eagerly awaiting the former to do the same.

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