How SAP is Acquiring Itself into the Cloud - Brightwork Research & Analysis

Table of Contents: Select a Link to be Taken to That Section

Executive Summary

SAP proposes it is a cloud vendor, but in reality, it acquires itself into the cloud.
Because of how poorly SAP manages both acquisitions and acquisitions infrastructure, the acquisitions are less than they appear to be.

Introduction

There is a lot of discussion about SAP’s movement to the cloud. In the article What SAP Moving to the Cloud Means for Current HANA On-Premises Purchases, I described the confusion and poorly explained implications on this topic.

See our references for this article and related articles at this link.

One important observation from the new “cloud strategy” is that SAP is not moving SAP core products to the cloud. Instead, SAP is obtaining cloud growth principally from its acquisitions. These acquired software vendors were already running in the cloud when they were acquired.

List of Acquired Cloud Based Software Vendors

This list of acquired cloud-based software vendors includes:

Success Factors
Fieldglass
Hybris
Concur
Ariba

And, there are quite a few others. This is explained in this quote from SAP Nation 2.0.

“SAP’s product portfolio has exploded, and in the last decade there have been nearly 50, seemingly disconnected acquisitions.”

Cloud Growth or Cloud Acquisition?

According to Forbes, SAP increased its revenues 22% from cloud offerings.

But wait one second. What is that sentence meant to communicate?

I ask because the sentence does not differentiate between cloud migration versus cloud acquisition. These are two different things.

Almost all of that 22% growth came from acquisitions.

I read through a lot of the sort of high-level analysis that you get from Forbes or Wall Street analysts. What I found was they seemed to have a fundamental misunderstanding as to what SAP is doing. SAP is tricking them, and they are by-in-large buying into the story.

All of this information about cloud growth is also inconsistent with what I see on projects. These acquired vendors are not apparent on my SAP accounts.

Cloud cheerleaders are promoting SAP to engage in more acquisitions to keep the cloud story going.
Analysts want to continue to see SAP’s growth coming from the cloud. They will provide a more positive view or rating of SAP if they continue to see this.

This is leading SAP to make cloud acquisitions to impress Wall Street simply.

How Much Has SAP Changed its Story on Acquisitions?

SAP has certainly changed its tune on acquisitions. This is explained in the following quotation from the book SAP Nation 2.0.

“When Oracle launched its acquisition spree a decade ago, SAP had marketed itself as a “Safe Harbor” to customers of the acquired companies. that has changed dramatically with customer observing “SAP used to have a non-invented-here mindset. Now it is a net new mindset. They are constantly trying to get new revenues from us.””

Wall Street Pressuring SAP to be Cloud

Outside of Oracle its difficult to find a vendor that is less cloud than SAP.

This is not the first time I have seen this. SAP was pressured by both Wall Street and IT analysts to get into marketplaces (which turned out to be a giant lead balloon) as well as get into advanced planning. All of this was back in the late 1990’s which was at the height of the tech bubble.

The marketplace investment was a write-off. This was a waste of time and resources.
SAP’s investments in advanced planning have been in many ways successful. SAP owns a substantial portion of the overall advanced planning software market. A lot of functionality in SAP’s ERP system is supply chain related. Advanced planning is just an extension of this. On the other hand, SAP has spent a lot of development money on some advanced planning modules but has not penetrated much beyond demand, supply, and production planning. The interest in some their planning modules outside of this core area has dropped off due to quality problems. Still, this was a case of Wall Street pushing SAP in a direction that ended up working.

Strategic Acquisitions?

The top officers in SAP have much of their compensation based on the stock, so even if they believe Wall Street is wrong, it is hard to vote against your financial interests. Moving to the cloud may be a good strategy, as it will have to happen sooner or later. But, at least some of these acquisitions make little sense to me.

Let us take the example of Ariba.

The Logic of the Ariba Acquisition

To those who are only familiar with the procurement software market, Ariba may at first glance appear to make some sense. Ariba is very prominent in procurement software, but they are prominent in indirect procurement. Indirect procurement is the purchase of items that are consumed by the purchasing company (office supplies, furniture, etc..). What SAP needed, if they were going to expand into procurement software, was a direct procurement acquisition. That is the procurement of items that are used by a company to either make an item or which are resold.

This type of acquisition could have been integrated into their ERP system and would have connected back to the Materials Management module. Companies don’t need to run MRP and DRP on office supplies, forklifts, and furniture.

Years after the Ariba acquisition I have yet to see Ariba make any impact on any of my clients. Ariba is still selling its software, but the acquisition did not allow SAP to leverage the purchase for it to make much of an impact. The reason for this is simple.

There is no significant strategic interplay between Ariba and SAP.

This brings up some interesting questions:

Do Wall Street analysts have any idea how SAP software would potentially work with Ariba’s workflow??
On what basis then are they giving the thumbs up on these acquisitions? Is it on the simple foundation of the acquired company using a cloud distribution model?

I ask because in reading various analyst reports I can’t find any more profound justification.

These are analysts who do the type of superficial research where they have bought into SAP’s wrong numbers on HANA growth from SAP’s press release. I found that information in a pure form directly placed into many Wall Street analysts research reports.

With Wall Street pushing for cloud acquisitions, SAP ends up being not being very selective. And that is how SAP has arrived at this bizarre mishmash of cloud assets that they have today. And if I were compensated like McDermott, that is given extensive stock options to make a splash with acquisitions I might do the same thing. I have, to be honest here.

Is SAP Right?

I was hired by a SAP consulting partner to see if there was the way to market Ariba companies that use contract manufacturers. I found, actually to my surprise, that they weren’t one.

Ariba is trying to get into the direct procurement software market, but Ariba’s primary products do not represent a bill of material. This is a problem for direct purchase.
I found that companies would be far better off just going to a vendor that is prominent in the direct procurement space rather than trying to shoehorn Ariba into the workflow. Simply because SAP happens to own it now.

No one at the consulting company I performed this analysis for had any experience in Ariba. They presumed that because SAP makes the acquisition there would have to be some intersection between SAP’s applications and Ariba’s applications.

They were, of course, disappointed with what I found.

SAP’s Problems Managing Cloud Infrastructure

Something nearly never mentioned is now SAP manages the cloud infrastructure of its acquisitions. This is covered in the following quotation from the book SAP Nation 2.0.

“Even where SAP offers public cloud options-for example with its SuccessFactors and Concur customers– the individual data centers are undersized and often supported by co-location vendors around the globe. SAP’s about 82 million cloud users are fragmented across products and across geographies. Little attempt appears to have been made to date, to consolidate data centers that support them. While compliance requirements dicate regional diversity in such facilities, they are further reminders of Balkanization in the SAP economy.”

How About Maintaining SAP’s Price Premiums in the Cloud?

It appears that SAP wants to keep its price premium and margin while moving to the cloud. It is a consistent feature that experts in this area declare that SaaS should not always be considered less expensive than on-premises. SaaS vendors do have a more efficient delivery model — without a doubt. However, this often translates to lower prices — but not always.

It all comes down the competition.

As noted by InfoWorld, some SaaS applications like SuccessFactors are as lower-priced SaaS solutions. But this is because of the competition from Workday. Without Workday, most likely SuccessFactors would be selling for a significantly higher price. (although after pricing SuccessFactors myself, I don’t see what InfoWorld is talking about)
According to economists, the very existence of long-term higher than average profits is evidence of monopoly power. And SaaS/cloud-based applications are more difficult for the vendor to maintain long-term monopolistic power.
SAP is moving from its on-premises model where it enjoys great monopoly power more of its revenues coming from the cloud.

This brings up a major issue that should be discussed, but that I never hear discussed anywhere. That is that SAP and their consulting partner’s margins.

What About The Margins of the SAP Ecosystem?

And building on this point the margins and revenues of many SAP consulting companies are not sustainable the more SAP moves to the cloud. If the large consulting companies see their margins on SAP decline, they will stop recommending SAP. It is as simple as that.

No one cares less about what software is recommended than the large consulting companies. The singular determining factor has been which software maximizes their revenues and profits.

The partners at the big consulting companies perform this calculation behind closed doors. They then turn around and declaring whatever software makes them the most money as being the best thing in the world. That is the state of advisory services in IT today. In a way, their recommendation is for the client to simply do whatever makes them buy the most consulting hours from them.

Delivering software the most inefficient way maximizes the revenues and profits of consulting companies.

Transitioning From the Fat Consulting Model

I keep up with some cloud/SaaS software vendors. None of them follow the “fat” consulting model that is a universal implementation approach followed by SAP and its partner ecosystem. Cloud providers have a far more efficient model where they have multiple accounts service by a “consultant.” This is a resource which usually travels very little and primarily performs remote consulting. These companies don’t rely on consulting partners, which is why no consulting partner ever recommends them.

How are SaaS vendors able to do this?

Their software is much easier to configure and troubleshoot than SAP.
They control the software instance as it is hosted with them. Their consultants easily flip between working from one client to the next by switching the selection of what data they are looking at within their application.
Most of the cloud vendors don’t charge for consulting. Instead, it is wrapped up as part of the monthly subscription fee. Therefore the incentive to place people out at clients evaporates under that model. Cloud vendors employ far fewer consultants than do vendors for on-premises vendors when adjusted for revenues.

All of this has very substantial implications not only for SAP and their implementation partner ecosystem but also for IT employment.

I covered these employment impact in the article How SaaS Changes the Labor Needs in IT. It was not a particularly successful article. It is probably too policy-oriented, and that is boring to many people. Still, the implications of the changes that are in process to software delivery should be understood. Long story short, the large expansion in the IT labor force that has occurred over the past four decades may very possibly be coming to an end.

Go to top

Conclusion

SAP is apparently trying to accomplish two contradictory objectives.

Pump up the stock price by pretending that is is more cloud-based than it is — which also leads to making cloud acquisitions.
Maintain its historical margins in its offerings (cloud and on-premises), and of its consulting partners, which are its lifeline to continued referrals.

And that is where all of the SaaS acquisition comes into play. Every time they make a cloud acquisition, Wall Street nods in approval.

In most of its press releases now SAP showcases its cloud acquisitions. They are constantly reinforcing with Wall Street that they are “all about the cloud.” That is why SAP is acquiring its way into the cloud.