SAP Cloud Reaches An Inflection Point

After buying Concur, SAP aims to sustain momentum


What a difference a year has made SAP!

At last year’s SAPPHIRE NOW, I raised a few thorny questions about SAP’s Cloud viability and its seemingly unwillingness to forego its bread-and-butter on-premise software business. You can read the piece here.

Now SAP has won over skeptics including yours truly by first announcing its $8.3-billion purchase of Concur in September 2014 and then following that up by gathering momentum of its SuccessFactors applications for HCM, Fieldglass for contingent labor management, not to mention Ariba for eProcurement and eMarketplace as well as Hybris for eCommerce.

In its latest quarter ended March 31, SAP reported $553 million in Cloud subscription revenues, more than doubling what it posted in the year-earlier period. Even if one were to eliminate the incremental revenues from Concur pre-acquisition revenue run rate of $170 million and an estimated $20 million from Fieldglass, both expanding in the 30%+ range, SAP’s organic Cloud applications would still be clocking in a respectable 21% growth rate for the latest quarter, as shown in the following table.

SAP’s Organic Growth In 1Q15 Derived From Concur, Fieldglass Run-Rates

$M 1Q13 1Q14 1Q15 YoY growth 
Concur 127 170 228 34%
Fieldglass(Est) 20 26 34 30%
SAP excluding Concur & Fieldglass 151 241 292 21%
Reported SAP Cloud Subscription, Support Revenues n/a 241 553 130%

 Source: Apps Run The World, May 2015

So the questions to raise on the eve of SAP’s biggest customer conference are as follows:
– Are SAP’s Cloud subscription growth rates sustainable?
– How does SAP’s Cloud strategy differ from that of its rivals?
– What makes the most sense for customers to consider adding SAP Cloud products?

To the above three, the simple response is that SAP’s Cloud business will continue to be on a tear because it has reached an inflection point – meaning that the vendor has all the levers needed to drive growth through its existing installed base as well as recently-acquired customers.

A case in point is Concur, which for years has been the 800-pound gorilla in travel and expense management, will remain the dominant player based on customer and partner comments that I picked up from the recent Concur Fusion conference, which was the largest in its history with thousands of attendees. Uber and Airbnb, which perhaps are among the most overhyped tech companies in the annals of Silicon Valley startups, are both partners of Concur. (For the record, I do find Airbnb useful in booking apartments for visiting major cities).

With a valuation that exceeds that of some of the biggest hotel chains in the world, Airbnb has every intention of leveraging Concur’s dominance in the business travel marketplace after building a loyal following among vacationers. In any case, the extensive ecosystem that Concur has built will drive significant volume of transactions covering everything from expense reporting to trip planning over smartphones.

In addition to Concur, SuccessFactors appears to be gaining ground with Employee Central for Cloud-based Core HR, which now covers 71 countries and has plans to hit 80 soon as it increases its customer count, as shown in the following graphic.

SAP SuccessFactors Employee Central Customer Count
SAP SuccessFactors Employee Central Customer Count

Source: Apps Run The World, May 2015

The total number of SuccessFactors customers has exceeded 4,200 with more than 28 million users running everything from performance and goals to succession and development.

With such big-name customers as Disney, GAP and Johnson & Johnson, SuccessFactors, which will continue to anchor the Cloud HR apps within the new SAP S/4 HANA business suite, could post as much as $2 billion in SAP Cloud HR subscription revenues by 2017, according to Mike Ettling, SAP President of HR Line of Business.

Ariba, on the other hand, is now under a new management structure led by Alex Atzberger who has been part of SAP CEO Bill McDermott’s brain trust. Coincidentally, Atzberger, now president of Ariba, cut his teeth in B2B when he worked at e-Steel, one of the earliest emarketplaces, during the Dot Com boom in the 90s.

Which brings me to my second point, why SAP Cloud?

The obvious answer is SAP HANA, which is delivered both on-premise and in the Cloud, allowing customers to easily incorporate the in-memory database into their analytical engines for tasks like supply chain planning or yield optimization – crunching millions or even billions of rows of data at breathtaking speed. Despite all the claims from other database vendors, SAP HANA – with full-throttle backing from its co-founder Hasso Plattner – has helped popularize the in-memory database approach.

Among database aficionados, it would be hard-pressed to find anyone associating in-memory database with any other vendor but SAP. While SAP may not necessarily be the best in-memory database technology provider, it deserves the credit of making in-memory database possible for large-scale applications deployment.

Harkening back to the 80s, a number of vendors like Atari, Commodore and Apple claimed to have played a role in popularizing personal computers. But it wasn’t until IBM put its brand on a desktop machine that led to the PC revolution. The rest that followed were all innovators in their own rights, but they were often labeled sometimes derisively IBM clones.

Times may be different today for SAP to effectively use HANA to spark a new computing revolution because there are already many options like Hadoop stealing the limelight. Still SAP has no qualms milking every ounce out of its in-memory database. To wit, much of the assets that it acquired in 2010 from database vendor Sybase has now been folded into SAP HANA. For example, the dynamic tiering capability in SAP HANA is derived from Sybase, allowing for smart moving of staging different data in order to boost ad hoc queries, optimize disk space as well as archiving of infrequently-used data.

HANA Cloud Platform

As SAP aims to make HANA work flawlessly in the on-premise world, one can assume that it can also safely host the in-memory database by making it widely available to users via the Cloud. And that’s where the HANA Cloud Platform comes into play.

According to its partners, SAP is bullish about posting $1 billion in revenues for HCP in as early as the first year of shipping. That would eclipse the current $800 million+ run-rate of the platform led by Salesforce1 for mobile developers as well as Cloud apps partners.

Much of the success of HCP will be attributable to the efforts of its ISV partners, which are going to be instrumental in taking SAP HANA to the cloud by layering vertical expertise and other useful applications on top of the in-memory database in order to reach every nook and cranny of the enterprise – similar to the ubiquity of Relational Database technology that has served Microsoft and Oracle so well.

SAP’s vast portfolio of Cloud products may well be the viable alternative to the costly investments that many enterprises are considering making in order to develop their own mobile and Cloud applications for strategic initiatives like apps store building or talent profiling.

One of the upsides of SAP’s recent acquisitions has to do with the readily available Cloud applications that its enterprise customers can easily consume, extend and potentially exploit them by mitigating the inherent risks associated with internal developments. The availability factor alone may well be the most sensible step for SAP customers to take.

That leaves me with the final question. What could go wrong with SAP’s evolving Cloud strategy? Similar to its forays into different technology stack layers from integration (NetWeaver, for example, has been airbrushed away from its product portfolio) to in-memory database, SAP’s Cloud initiatives are a work in progress.

The company continues to show a habit of restructuring its operations regularly leaving one at times wonder who’s actually in charge and the staying power of certain projects. The fact that SAP Cloud reaches an inflection point suggests that failure is not an option anymore and no doubt plenty of people will be watching closely how SAP is riding this tidal wave in Orlando.