SAP Starts 2024 with More Cloud Cover Than Ever

SAP’s long and winding road to dominate the strategically important Cloud ERP software market is becoming more surmountable than ever, despite a number of false starts and painstaking efforts.

Robust sales of S/4HANA Cloud ERP revenues outpaced those of SAP’s other cloud products by a wide margin in 2023 as its overall Cloud software business has already surpassed its onpremise counterparts contributing to slightly more than half of its nearly $30 billion in product sales last year.

Its November 2023 acquisition of Lean IX is positioning the software vendor to capture one of the fastest-growing markets for managing cloud costs where the use of IT Asset Management applications is lightly used among small and medium sized business customers. That could mean sustainable upside for SAP given its enlarged footprint among SMBs.

The lucrative SMB software opportunity – where 79% of the addressable space is at stake – is also beginning to favor SAP after experiencing exceptional growth by signing nearly 100,000 ERP customers in a huge market segment representing tens of millions of organizations between 10 and 999 employees in 2023 as the vendor faces off against stiff competition from the likes of Infor, Intuit, Microsoft Dynamics, Oracle NetSuite, and Sage.

The latest indicators reveal a 41% jump in the number of SMB ERP customers that SAP has secured now spanning more than 94,000 organizations, including 16,022 for SAP Business ByDesign and 78,000 for SAP Business One. Back in 2019, the comparable number was 66,500.

At the same time, SAP also announced another round of restructuring that entailed a reduction of 8,000 employees, or 7% of its global workforce. Although the cuts would be made mostly through voluntary buyouts or job changes, SAP expects its total headcount of 108,000 should remain the same by the end of 2024.

All these developments underscore the painstaking but necessary measures SAP is implementing to parlay its leadership position in the overall ERP applications market to Cloud delivery as well. Currently, Oracle remains the No. 1 vendor in Cloud ERP, based on number of customers as well as associated recurring revenues. On the other hand, SAP leads the overall ERP market by a little shy of two percentage points in the $105-billion market.

During its recent earnings call, SAP CEO Christian Klein stressed the criticality of leading the Cloud ERP market, going as far as redefining the space by including supply chain, procurement, configuration pricing and quotation, and HR products from Ariba, Callidus and SuccessFactors all being counted toward its Cloud ERP Suite. Klein said the cumulative revenues of those products exceeded 10.6 billion euros in 2023 with a 33% growth rate.

Klein attributed the multifaceted advantages of SAP’s Cloud ERP Suite to its Business Technology Platform, which allows for easy integration and the embedding of mission-critical functions like logistics, procurement, travel and expense all within S/4HANA Cloud ERP. In other words, running S/4HANA will give users instant access to best-of-breed cloud capabilities normally only available from separately-licensed or third party products.

It’s analogous to a single Netflix subscription giving viewers access to Netflix-produced shows as well as flicks from other content providers.

By collapsing the boundaries that separate different functional areas and rolling them into Cloud ERP Suite could come at the risks of SAP ceding its shares in those exact markets to its point competitors.

SAP is banking on a three-legged stool that will make that redefinition less onerous. First, the use of AI could render some of these best-of-breed applications for procurement, logistics and other functions obsolete – similar to all the talks about the so-called Super Apps such as X trouncing everything else such as Paypal, Slack, or even Amazon. SAP’s vision is not that different from that of Elon Musk as it trumpets its AI copilot capable of steering users to conduct finance, supply chain, procurement, human resources, sales and marketing, IT, as well as industry-specific business processes.

The acquisition of LeanIX delivers another missing piece of its Cloud ERP Suite strategy. Dominated by such vendors as ServiceNow, Flexera, Apptio, Snow Software and Ivanti, the IT Asset Management market where LeanIX has been growing rapidly is projected to double to $3 billion by 2026 in the US and EMEA from $1.56 billion in 2019.

At a time when many CIOs are scrambling to contain their ballooning cloud costs, the use of LeanIX along with other reporting, integration and IT tools from SAP could help them build a better business case by standardizing on a Cloud ERP Suite for tangible savings and efficiency gains. Shortly after SAP acquired LeanIX, which has more than 1,000 customers, Klein said it already contributed 10 million euros to its top line for the month of December with the potential of adding at least 100 million euros in 2024.

The third leg of the stool is that SAP has plenty of room to grow by converting many of its 20,000  S/4HANA on-premise ERP customers to the cloud. Companies from telecom giant Vodafone to Hunkemöller International B.V., a Dutch retailer with $700 million in sales, have successfully migrated from S/4HANA on premise to S/4HANA Cloud. After months of planning, the latter was able to make the migration in 48 hours without a glitch.

Klein added that hundreds of net new customers are adopting S/4HANA cloud via Rise every year. Its recent introduction of SAP GROW for the midmarket will also juice up sales of SAP Cloud ERP Suite upon signing 700 GROW customers since March 2023.

During his annual video updates on SAP’s presence in the SMB ERP market, Rainer Zinow, senior vice president of product development of SAP, said the latest version of SAP Business One 10 is the base platform for BTP and AI adoptions. The subtext is that it would not take long for many of these 78,000 Business One customers to fully take advantage of true Cloud ERP capabilities – similar to those reserved for S/4 HANA Cloud – provided that they are going to be embarking on the innovation journey with SAP.

For the bulk of the past 10 years since the introduction of S/4HANA in 2014, SAP has been mostly preoccupied with upgrading its ECC customers to S/4. Then came Rise and more recently GROW and now the coming together of the Cloud ERP Suite made possible by BTP.

The journey might not have been as smooth as what SAP or its customers have envisioned, but the rewards for all the parties involved appear to finally become more tangible than ever.

List of SAP Cloud ERP Customers

Source: Apps Run The World, February 2024

• Apps Business
• SaaS Market
• Feature