Inaccuracies in SAP’s Q2 2017 Earnings Call

Executive Summary

  • SAP made a large number of inaccurate statements to Wal Street analysts in the Q2 2017 earnings call. This included falsified S/4HANA numbers, exaggerating their cloud business, pretending the SAP Digital Boardroom was seeing significant growth, miscommunicating that SAP low cloud growth was what was causing declining margins, Article Quotations, overstatements regarding Leonardo, Bill McDermott altering his previous S/4HANA’s timeline, explaining away the failure of Run Simple, degrading Workday, pretending that a 2.5 to 3-year-old product is still in its “early days” and providing a synopsis specifically designed to mislead people who don’t know anything about SAP.
  • In other words, just a standard SAP earnings call.

Introduction

On July 20th, 2017, SAP held its Q2 call with analysts. This article is an analysis of some of the information provided by SAP in this call. Much of the information in the call was breathtakingly inaccurate. Understanding why is quite interesting I comment on the quotes below.

Article Quotations

False S/4HANA Numbers

“S/4HANA adoption grew to more than 6300 customers, up over 70% year-over-year. Many other leading companies also went live on S/4 in Q2, including MG [ph] and Bloomberg.”

No that is inaccurate in that very few of those customers are using S/4HANA. This is covered in the article How SAP Controls Perceptions with Customer Numbers.

Exaggeration of the Cloud

“S/4HANA is the number one and fastest growing cloud ERP solution in the market hard stop. We are growing new cloud bookings triple digits and we see an enormous pipeline going forward. Customers are going live with S/4 cloud in as little as six weeks. Deloitte selected S/4 cloud in Q2 among many other signature companies. Centrica, a multinational utility company is using S/4 cloud as the digital core, along with an IoT solution running on SAP Leonardo. This is SAP integration at its finest.”

That is false. S/4HANA has very few customers of any size that are using S/4HANA in the cloud. Furthermore, this will not grow all that much in the future. The reason why is covered in the article Is S/4HANA Actually Designed for the Cloud? 

SAP + Google Cloud?

“We also announced that Sapphire that we have expanded our co-innovation partnership with Google Cloud to deliver integrated cloud solutions for our customers.”

This will not amount to much because Google Cloud is not a big player in the space. Secondly, why is SAP using Google Cloud in the first place? Well, SAP had to drop the pretense that they could compete in the cloud infrastructure space, which is covered in the article How to Best Understand SAP’s Multicloud Announcement.

Digital Boardroom for Growth?

“Overall, new cloud bookings grew 33%, while cloud revenue was up 29% in Q2 and 31% in the first half. Led by SAP digital boardroom our re-invigorated analytics portfolio posted triple digit new cloud bookings growth in Q2.”

It is extremely doubtful that digital boardroom has many sales, so its growth would be larger as the base was so small.

SuccessFactors Employee Central

“SAP SuccessFactors, we saw another big quarter with a new customer additions. SuccessFactors Employee Central now has over 1900 customers worldwide and that was up 48% year-on-year.”

SAP is frequently showcasing the growth of Employee Central. But this is only one component in SuccessFactors. SAP and Bill McDermott, in particular, like to continually trump up SuccessFactors, but SuccessFactors always seems to be in transition. It is really only strong in a few areas of HR. For example, the payroll functionality in SAP’s ECC system is one of the few goods things SAP’s old HRM solution. However, SuccessFactors has nothing close to as good, which is one reason why many of their customers have been so reticent to move to SuccessFactors.

SuccessFactors also continues to have integration issues going back to ECC. This really should have been taken care of at this point as the SuccessFactors acquisition five and a half years ago.

The use of the 48% number was used by Bill McDermott because it is more impressive than growth in any other area of the SuccessFactor suite. This is standard of all the comments made by all of the SAP executives in this session. The only part of the story and the most pleasant part ends up being verbalized.

The Ariba Network

“SAP Ariba now has over 2.8 million companies in a 180 countries, trading nearly 1 trillion U.S. dollars in goods and services annually on the Ariba network.”

That might be good, but SAP has not been able to leverage Ariba very well. Very few SAP customers actually connect Ariba to their SAP ERP systems.

Time to be Intensely Clear?

“Let me be intensely clear, the Internet of Everything requires hyper connectivity on a global basis. SAPs business networks lead the industry, connecting not only our customers, but also our competitor’s customers. It is the world’s network.”

Interestingly, this term “being clear,” “crystal clear” or in this case being ‘”intensely clear” seems to be a marker for a person who is about to tell a lie. It is curious that this same language appeared with Trump’s Lawyer, Jay Sekulow in recent weeks.

Trump is under investigation. Everything stated after “I want to be clear” was a lie.

And similarly, Bill McDermott states he wishes to be “intensely clear” that….IoT requires hyperconnectivity on a global basis.

That may be true, but the following statement about SAP business networks leading the industry is incorrect, but at the same time is nonsensical. What business network is Bill McDermott talking about. SAP owns a procurement application in Ariba – that has a marketplace, but this has nothing to do with IoT. SAP gets a very tiny amount of its revenue from IoT. So if this control over “business networks” is a strategic advantage for SAP in IoT, it is not showing up in the sales numbers.

Fast Cloud Growth for SAP?

“We believe SAP is the only company in the business software industry at scale to deliver both fast growth in the cloud and core license growth.

This is because SAP takes a much more customer centric approach to the transition in the cloud, protecting legacy investments, while offering the most complete vision for the cloud. The breadth and depth of SAPs end to end portfolio is the clear differentiator.”

The problem with this being that SAP is not delivering fast growth to either the cloud or to the “core” which would seem to mean core license growth.

SAP Cloud Platform Incubating Innovation?

“SAP’s innovation agenda ensures a clear path to future growth. Without API Hub and open SAP Cloud Platform our ecosystem is actively incubating new innovations. We’re excited that new partnerships will proliferate the SAP platform across the hyperscale public cloud providers.”

No, the SAP Cloud Platform isn’t incubating much of anything, because barely anyone uses it. On SAP projects, it is difficult to even get a glimpse of anyone using the SAP Cloud Platform.

Bill McDermott’s Digital Revolution and Leonardo

“At the Epicenter of the digital revolution is SAP Leonardo. Why? Because Leonardo integrates breakthrough technologies such as AI, Machine Learning, Big Data, Analytics, IoT and Blockchain.”

What particular digital revolution is Bill McDermott talking about? The move from downloading music to using services like Spotify? Bill could benefit from being a little more specific. Leonardo is a very recently introduced solution that is SAP’s renaming of its IoT solution. But it does not yet have real customers doing anything and it’s not an application as much as a toolkit you can build things with. It greatly lags other complete IoT solutions. This is covered in the article

“Customer interest in SAP Leonardo is really high. As you know there was well over 20,000 Sapphire attendees this year from 4600 companies and they all experienced in some form the potential of Leonardo. Nearly 1000 customers in 48 countries attended our local SAP Leonardo event in Frankfurt earlier this month.”

It may be, but that does not address the fact that Bill McDermott does not want to talk about that there is not very much to Leonardo and it does not have customers live on it. SAP has customers live on some customer solutions at various accounts, but Leonardo is yet another pre-released product that SAP is pretending is ready to use.

Everything About SAP is Best in Class?

“In conclusion, everything about SAPs business is best in class. It’s integrated and focused and it’s delivering on the shareholder value promise. We’re building great products, telling a great story, delivering a great service and most importantly building a great team.”

Does Bill McDermott listen to himself when he speaks?

SAP’s Exaggerated Pipeline

“We also are just getting started with more than 80% of our ERP customer base still in S/4HANA pipeline. The upside is amazing. Our company has never been stronger, more engaged and more inclusive. In fact, we have reached our goal of having more than 25% women in management positions across SAP.

  • SAP has a lot more than 80% of the customer base in the pipeline (taking Bill’s assumptions that they all convert to S/4HANA, which is not actually true), because the vast majority of S/4HANA customers don’t have S/4HANA operational. Many S/4HANA customers are not customers in the traditional sense because they received the software for free. Some customers purchased S/4HANA to setting an indirect access claim on the part of SAP. Therefore, they don’t really willingly own it.
  • What Bill McDermott is doing here is switching a negative into a positive. SAP has had very poor adoption of S/4HANA by customers. The primary reason for this is that S/4HANA close to impossible to implement. This is covered in the article How the Overall S/4HANA Suite is Not Yet Released.

So therefore I’d like to acknowledge, recognize and thank the 87,000 women and men of SAP worldwide for their immense dedication to our customers and our shareholders. For SAP, the best is yet to come, a sustainable growth company for the ages.”Bill McDermott

This line was stolen from Frank Sinatra. It is a song actually. And the idea that SAP is a sustainable growth company for the ages is really out there. Especially since outside of acquisitions, SAP has not been growing enough to be considered a growth company anymore.

Rapid Cloud Growth for SAP?

“Firstly, our committed future cloud revenue or new cloud bookings has grown by 33% and our cloud revenue growth came in at 29%, marking the 17th consecutive quarter of consistent rapid growth in the cloud.”

SAP’s growth in the cloud may have been consistent, but it has not been rapid. If it had been SAP would not have to cloud wash so hard. It would not have had to acquire cloud vendors to make the impression on Wall Street that they are more cloud-based than they are.

“Let me first be very clear, from a profitability standpoint we have been all the way through the year very clear on what our priorities are for this year and how this will impact the overall gross margin. We continue with conscious investment decisions in 2017 and we will still see mix shift effects.”

Here we go with the “be clear” preamble. And then, that SAP is “very clear” about priorities.

Cloud Investments are Causing Declining Margins?

“Remember, the majority of our investments are in our public cloud business. Our decision to invest in a new data center in the Middle East is yet another perfect example of how we are getting ready for future growth. But this, of course, put additional pressure on the public cloud margin which was 57.6% in Q2, if you back out our highly profitable business networks business.”

The problem with this is that SAP has actually invested very little into data centers. This was covered in the book SAP Nation by Vinnie Mirchandani. Secondly, why have few of these investments paid off? SAP has had a long time to get their cloud infrastructure going and they chose to invest elsewhere. At one time SAP said that they were going to go head to head with AWS. What happened to that idea?

The issue is that SAP’s margins are declining, but they are not primarily because of SAP’s investments into its cloud business, although the cloud acquisitions are related to the decline. Here is how. As SAP increasingly diversifies away from its core offering, the profit margins are lower. This is what SAP does not want Wall Street to figure out. SAP is facing a long-term decline in its profitability. This is the same long term decline that has already been experienced by, for example Micrsosoft. Microsoft still has high revenues, but the profitability outside of Windows and Office are far lower than its profitability among its first products. Microsoft, as it has diversified from its first products, has become less efficient in profit generation. And guess where the growth is coming from? (hint, not the core products).

This is covered in the book The Software Paradox.

“As we strive for running each and every business more effectively and efficiently, we continue to see improvement in the margin of our private cloud infrastructure as a service business, as well as in our business networks. Since however public cloud and private cloud are continuously increasing their share within cloud revenue, this revenue mix shift effects negatively impacted the cloud margin by approximately 2 percentage points.”

And the faulty explanation continues.

“As for our services gross margin continue – continued its very nice upward trend as expected and was 23.5% for the quarter, which is the 5.6 percentage point year-over-year increase. This was driven by the completion of previous investment projects and a strong top line increase.”

SAP gets roughly 2% of its revenues from consulting services. So why would that matter?

“So what should you all take away from this quarter? To put it in short terms, SAP is the best positioned company to shape the digital enterprise. Our cloud growth is fuelled by the breadth and completeness of our cloud offerings. All our products are linked to our S/4HANA digital core, providing a real end to end offering to our customers.”

What company is today not a digital enterprise? Companies in Somalia? The correct term is “enterprise software.”

All Cloud Offerings are Connected to S/4HANA?

SAP does not have completeness to its cloud offerings. All of the products are not only not connected to S/4HANA, they lag in their connectivity. This is really a straight up lie by Luca, who as a finance person would not have any idea if it is true as she would have never worked with SAP’s technology.

SAP to Become Carbon Neutral?

“In line with our goal to become carbon neutral by 2025, we reduced our second quarter CO2 emissions by over 40% compared to the prior year.” – Luca Mucic

How is SAP going to become carbon neutral by 2025? Are all SAP buildings going to be powered by rooftop solar, and will all plane and car transport be powered by small nuclear generators? It is interesting that even on the ancillary statements, SAP never stops with the inaccuracies.

Bill McDermott Wants Analyst to Not Give It a Moment’s Thought?

“Yeah. Hi. Thanks very much for taking my questions. I’ve got one question on the clouds and then just a clarification. If I look at the cloud revenue growth sequentially it looks like it slowed down marginally in the second quarter. I guess it’s quite a small change and momentum, but it does come at a time of management change. So I guess the questions off, firstly, are you confident that you can sustain the 30% growth rate as that business scales?

And secondly, are you confident that with the departure of Steve Singh, the management position of the cloud is still robust. And thirdly, can you just give us some metrics around the bookings duration. Obviously, that the year-on-year growth is strong, but can you talk about duration. – Charles Brennan

Thank you so much for the question, Charles. I’ll start it off and then hand it over to Luka. So first and foremost on the cloud, the bookings and the revenue don’t even spend a moment on it. Basically when you book the software, obviously you’re booking the contract and that will go into revenue to be recognized.

The revenue that’s actually recognized has something to do with timing and timing in the quarter for sales and so on. And some of these sales happen to have been a little bit more back ended than usual. The pipeline for the cloud is fantastic. The 30 plus percent cloud growth and the pipeline to support that is ever intact. The business looks really, really strong.”

Right. So according to Bill, anything that looks different than what SAP is presenting “don’t even spend a moment on it.”

And then Bill wants to convince the listeners that the sales are more backend than usual. But why would that be? What was different about this quarter than Q1? Then Bill goes on to praise the pipeline. Well, the pipeline cannot be validated by the analyst. So Bill is changing the topic from something the analyst can verify, to something where the analyst needs to trust Bill McDermott.

Are SAP Executives Friends for Life?

“And just to show you the class of SAP. I next week along with the executive board will be flying out to Seattle to have a going away party for our great friend Steve Singh. So this hotel when you check into SAP you don’t check out, like we’re friends for life. And that’s the kind of company we are.” – Bill McDermott

Well this is nice. Bill did an interesting thing here. He pivoted way from the question. The question was not whether Bill and Steve would be friends for life. That seems like a personal matter. The question was how was SAP going to deal with the loss of a strategic executive.

On top of this, he then goes back to priasing SAP for being very classy. So this is a non-answer.

“A question for Bill and maybe you know, Luka if you could touch on this too. I mean, obviously we’ve seen the S/4HANA customer account number go up 70% this year, but and I’m assuming that’s a big part of what’s driving that that license growth.”

This is a bit of accuracy. Let me be “crystal clear,” S/4HANA is doing very poorly and has few live customers.

“How do you think, where are we, I guess, what’s hitting our win with S/4HANA, because the customer count might be high. But you know, our checks still say that penetration still has the way to go even within side those. So how do you think about where we are in the cycle and I guess the sustainability of some of these you know, the six consecutive quarters of growth on license?” – Philipp Winslow

And that is true. The S/4HANA sales numbers are highly exaggerated versus those companies actually using the application or implementing the application. Many companies that started implementing S/4HANA stopped after what they learned about S/4HANA.

Early Days for a Product that is 2.5 to 3 Years Old?

“Thank you very much, Phil, first of all for your kind remarks. We are in the really early days of the S/4HANA momentum. First of all, if you apply the 80:20 logic, you know, you’d be a lot closer to 15 or 20 then you would be to 80% in terms of the penetration and all the opportunities that are out there.

And you know that’s the traditional base we’re talking about. We’re making a bold move into customers that haven’t seen SAP and may not even be thinking of SAP in the mid-market, in the upper mid-market.”

But it isn’t early days for S/4HANA.

  • SAP released Simple Finance in June of 2014.
  • SAP released the rest of the suite (S/4HANA overall or EM) in Feb of 2015.

That is now between 2.5 and 3 years ago. How is July 2017 still “early days?”

Here are some of the statements from that announcement.

“When Hasso Plattner invented SAP HANA, we knew the day would come for SAP Business Suite to be reinvented for the digital age. At a moment when businesses around the world need to enter new markets and engage with their consumers in any channel, there’s now an innovation platform designed to drive their growth. This is an historic day and we believe it marks the beginning of the end for the 20th century IT stack and all the complexity that came with it.”

Hasso did not invent HANA. That is a myth distributed by Hasso Plattner and by SAP. For details see the article Did Hasso Planner and his Ph.D. Students Invent HANA? That is or course not relevant for an earnings call, but it highlights the difficulty SAP in telling the truth on even ancillary topics. Even how invented something is altered by SAP. Of course, Bill McDermott will suck up to Hasso Plattner. He works for Hasso Plattner. Therefore, Bill helps sustain the myth of Hasso inventing HANA.

Furthermore, it seems like something that is so great that it should have had no problem in adoption. Right? Well according to even the SAP biased ASUG in their S/4HANA survey of 2016, S/4HANA had 350 live customers. 350. This is covered in the article How to Best Understand ASUG’s S/4HANA Survey.

“So as we assert our will in different marketplaces in different industries, I would call this the earliest possible days of S/4HANA in terms of the rotation and the real catalyst for continued growth in the company.” – Bill McDermott

Yes, in McDermott-speak 2.5 to 3 years is the earliest possible days. If we create a time chart for McDermott-speak, it would look something like the following:

  1. Earliest Possible Days: Up to 3 Years After Launch
  2. Early Days: 4 Years After Launch
  3. Adoption Begins in Ernest: 5.5 years After Launch

“Yeah. It’s hard to add anything to that. I think adoption always in our industry is kind of an S-shape and we are clearly basically still in the early adopter phase. As you pointed out some of the early adopters have a long way to go to really roll it out across the entire end state. And now we see the first emergences of fast followers kicking in. So we have lots of room to grow.” – Luca Mucic

Luca has the same strange time concept that Bill McDermott, where an application begins wider adoption somewhere around the 5.5 year mark?

“And more importantly even S/4HANA is invigorating growth in other elements of our portfolio as well. CUC was very strong I highlighted this. Analytics was strong in the quarter that goes along nicely with the digital board room concept that S/4HANA really brings to life. So we will be having a lot of fun with this baby which is just barely becoming a toddler by now.” – Luka Mucic

From the beginning of this statement until the end this is false. However, apparently, Luka thinks about babies pretty often. And in a few years from now, when S/4HANA sees adoption (according to Bill and Luka) it will really be something!

Run Simple Ahead of its Time?

“And Phil you know, one CEO said something interesting to me yesterday, he said run simple was actually ahead of its time and I think he said right, because the most intractable challenge of our era is complexity, and when you think about the idea of a digital boardroom simplifying the management process for executives around the world and you think about taking cost out and improving productivity with HANA and S/4HANA and aligning all the management team with the line of business cloud and the network, you’re talking about just a story that doesn’t end because there’s so much room for all these companies to radically simplifying grow if they can apply the right digital technology. So it’s really early days and it’s an exciting era for us Phil.” – Bill McDermott

Run Simple was a marketing construct that was dropped as was covered in the article Is SAP’s Run Simple Real?

Run Simple has been dropped as a marketing construct not because it was “ahead of its time” but because it was completely false. SAP makes the most complex software with the highest maintenance costs in the categories that SAP competes in, which can be seen at Brightwork’s online TCO Calculators.

As a long-term SAP consultant myself, I found it the height of deception to have a “Run Simple” marketing campaign. The idea behind Run Simple was a simple counter-marketing to message the opposite of SAP’s well-earned reputation for being complicated and expensive. Furthermore, HANA and S/4HANA, in particular, are even more complex than what customers were exposed to by using Oracle of DB2 as the database and ECC as the ERP system. SAP has drastically increased complexity on SAP projects by introducing HANA and S/4HANA while pretending that these two items allowed companies to “Run Simple.”

S/4HANA to Beat Up NetSuite?

“And then secondly, perhaps for kind of Bill, you know, it’s now been a couple of quarters that the NetSuite deal has been closed. What do you see from a competitive perspective form that kind of combination and perhaps also give us an update on Workday? Thanks. – Gerardus Vos

And Gerardus, I’ll offer you an answer to your question on NetSuite. You know, Oracle strategy seems to be – to stay relatively large enterprise with Fusion, but to have a two tier strategy with ERP and take NetSuite down market and that’s understandable, the platform has been around for 20 years. So it will probably do better in the low end markets. We see them. We compete with them. S/4HANA is just going to be a runaway story in that place, up or mid-market, even lower mid-market.”

So far has this turned out to be true? Not from Brightwork’s research into S/4HANA.

Workday is Good, But Only for Parochial Buyers?

“Workday obviously, Workday can hold their own. If you’re – especially if you’re in the United States and you’re dealing directly with the Human Capital Management Executive. It gets a little bit more interesting for us when it’s a more comprehensive decisions for companies than just HR Director.

For example, they don’t really have a platform. So the SAP Cloud platform and the extensibility of that. If you think about S/4HANA and the nucleus of the 21st Century Enterprise and all line of business executives evolving their use of their individual line of business with the center of gravity, the data and the process of the company. You know, that’s game set match for SAP.

And when you talk Total Workforce Management, we’re the only one with the network around contingent labor and therefore Total Workforce Management and that’s why Gartner and others say, if you have more than 5000 employees it’s all about SAP, because what you see with Workday against SAP is a good fight with the LOB HR director in the United States.”Bill McDermott

So this is how Bill is trying to distract from the fact that Workday is having good success versus SAP. Workday customers tend to be far happier than SAP customers. It is true that the larger the company and the larger the decision-making apparatus the more SAP will tend to win against Workday. Workday is limited to HR and finance.

Workday customers tend to be far happier than SAP customers. But according to Bill, they should not be happy because they don’t have a platform? The SAP Cloud Platform which was the renamed HANA Cloud Platform and which is covered in the article Was the HANA Cloud Platform Designed for HANA Washing, has very few customers using it. Therefore, in terms of use SAP does not have a “platform” either. In fact, the entire term platform is meaningless the way Bill is using it. It is simply a way to take an unsubstantiated shot at Workday which is pulling business from SAP.

Also, is it true that the larger the company and the larger the decision-making apparatus the more SAP will tend to win against Workday? Workday is limited to HR and finance.

This is simply an executive attempting to cover up a weakness. Secondly, SAP has ridden SuccessFactors for years now. However, the acquisition is old at this point. SAP’s acquisitions normally decline in competitiveness the longer they are held by SAP.

S/4HANA Has 850 Live Customers on S/4HANA?

“Yes, sure. I think Bernstein [ph] as well. But we have over 850 live customers now to just over two and a half thousand projects ongoing, so it continues to be very successful. And as Bill said these customers are also investing in the top product. So this is really a tremendous success story for a city and the more they go live, the more expansion we will see.” – Rob Enslin

Nope. S/4HANA has far fewer live customers than this. The biggest story about S/4HANA is how low the uptake has been and how immature and problematic S/4HANA continues to be. SAP has been continuously misrepresenting the uptake of S/4HANA as is covered in the article How SAP Controls Perceptions with Customer Numbers.

If SAP has 2500 S/4HANA customers in ongoing implementations, it would be unmissable. But the S/4HANA job market is actually very small.

S/4HANA as a 21st Century Digital Platform?

“This is Bill, Ross. You should think about S/4HANA as a growth story. We shouldn’t spend all of our time on how much of that growth story and what percentage of that will be recognized one way or the other. I think what you should think about it is the 21st century digital platform for a successful company, is the best run SAP and S/4HANA is central to that.”

Bill’s similarities to a politician become more and more observable the more one listens to him. And like a politician, he continually diverts his audience away from details, up to higher level of abstraction, where Bill feels more comfortable. Bill actually detests details, and that shows in his constant redirections of questions. And the finishing piece is the description of S/4HANA as a “21st century digital platform.”

The Bill McDermott Timeline of Retroactive Expectations Lowering

“Do I believe that the theme is there for continued growth on a positive basis even on the upfront license recognition for S/4HANA? Absolutely. And do I think that the cloud and the full rental model for S/4HANA in the high end, as well as upper mid-market in mid has only scratched the surface so far? Absolutely. That’s why I say it’s such an early moment in the evolution of this growth story, you should just feel really great about it.” – Bill McDermott

Once again, Bill is trotting out the “Bill McDermott Timeline.” This is where things that he predicts that do not come true, have not come true only becuase a sufficient amount of time has not passed.

“And we are very confident that while we talked today a lot about HANA, we talked a lot about S/4HANA, when we talk again in one or two years, Leonardo will be equally important to our financial success than what we talked today about S/4 and HANA. So this should give you some inspiration what’s possible.” – Bernd Leukert

This is the most important quotation in this call. This indicates that SAP is about to switch horses to Leonardo. If SAP keeps analysts focused on S/4HANA, they will catch on that SAP has been misleading them the entire time. Therefore, SAP needs to change topics. Now Leonardo will be the rallying cry, while SAP hopes that they can distract analysts with the “great Leonardo story” so they do not ask any questions about S/4HANA.

Bill McDermott’s SAP Synopsis for Simpletons

“And if I was just to summarize it for you in five simple points, HANA, S/4HANA, the line of business cloud, the business network and Leonardo and IN five fingers you can tell the entire SAP story and what’s so compelling about the SAP story is in all areas we have the greatest breadth, depth and reach into industries and global markets of any competitor in this space.”Bill McDermott

And the master of oversimplification explains SAP in a uniquely false way that one would use on preschoolers, and misdirection drops the mike.

“This is our product that we resell, has nothing to do with databases. Clearly S/4HANA and HANA, therefore, is the absolute standard. That’s the main contributing factor what support profitability has actually continued to climb up and continues to be a positive contribution.”Luka Mucic

Luka knows nothing about SAP’s products and proves it with every new statement she makes.

Conclusion

SAP’s mislead the analysts on this call multiple dimensions. Each of the people speaking from SAP obviously has many millions of dollars in stock options, so this model where you obtain information from people that have a clear financial bias to mislead you so that they can exercise their options at the maximum price makes little sense.

It is reminiscent of the newspapers I used to read when I was in Pakistan. The information is interesting, but only from the perspective of analyzing what the powers that be would like people to believe. It has no inherent validity.

Clearly, when SAP anticipates that it will be speaking to people who can’t directly validate their statements, the lying is in a different dimension.

References

https://seekingalpha.com/article/4089120-saps-sap-ceo-bill-mcdermott-q2-2017-results-earnings-call-transcript?page=2

https://www.successfactors.com/en_us/solutions/core-human-resources/employee-central.html

https://diginomica.com/2015/12/09/saps-steve-lucas-on-why-hana-beats-oracle-ibm-microsoft-and-aws/

https://news.sap.com/sap-unveils-next-generation-enterprise-software-new-business-suite-sap-s4hana/

How SAP Has Been Secretly Outsourcing Hosting

Executive Summary

  • How Interested is SAP in Hosting?
  • Secret SAP Hosting
  • The Evidence that SAP Has Been Outsourcing its Hosting
  • The Traditional Manufacturer / Dealer Network Issue
  • The Uncompetitiveness of Consulting Company Hosting

Introduction

I wrote this in a previous article.

The purpose of this article is not to announce anything but to get customers thinking about using more SAP cloud offerings. However, this is really a white flag of surrender. SAP has not been successful with its own cloud, and there are many reasons why. One is that SAP is not even interested in hosting. They outsource the hosting to companies like IBM, WiPro. All while pitching to Wall Street they are a big cloud company. How they do this is the subject of a future article.

However, IBM has been losing very significant data center business to AWS and to a lesser extent Azure. CSC, another dinosaur like IBM has been losing business to AWS and Azure in a similar fashion. I mean what I take from it is that SAP realizes their goose is cooked and their old strategy did not work. Even Salesforce now uses AWS. Evernote now hosts with Google. So it is demonstrating that the large scale economies of scale of companies that provide hosting.

Secret SAP Hosting

What is explained in this article is not public information. SAP keeps a lid on this and even the customers are not told. But what may be even more intesting that what SAP is doing is why they have been doing it.

SAP’s marketing materials show many cloud-based third-party applications. However, SAP does little of its own hosting except for its newly acquired applications that were already cloud-based before they were purchased. Therefore, most of SAP’s database and applications revenue is from applications not in the cloud.

How Interested is SAP in Hosting?

For years the vendors most dedicated to SaaS, vendors like Arena Solutions and SalesForce, hosted their own applications.  Yet as the IaaS market has matured, that model is more being called into question. Even Salesforce, the largest SaaS vendor recently began outsourcing its hosting to Amazon Web Services. Even for SAP, who tries to heavily market that it hosts its own applications, many companies are now offering third party hosting for SAP software.  Overall, it seems that SAP is actually not all that interested in providing hosting, which raises questions about how a vendor like SAP deals with third parties hosting their software.

The Evidence that SAP Has Been Secretly Outsourcing its Hosting

What I learned is that SAP sends out a hosting proposal to their consulting partners to perform the hosting. Interestingly, the customer is not even made aware that their hosting is not provided by SAP. It is laid out in the book SAP Nation 2.0 that SAP is not even interested in hosting. But one questions how much of this disinterest is based upon the traditional manufacturer/retail relationship. Under this relationship, a manufacturer must be careful to not upset its dealer network by offering its items directly to consumers. For instance, you cannot go directly to Ford to purchase a truck. It would certainly cost less to do so, and even if you are willing to drive the truck away from the factory location where the truck is produced, Ford still won’t sell it to you. You must go through their dealer network. As with on-premises software, this dealer network was created before the Internet was created. Previously, all communication was handled by the dealer. But now customers go to the Ford website to learn about the truck, but then place their order through the dealer, not through the Ford website. Dealers are in fact increasingly less of a source of information about cars for car buyers.

This is explained in the following quotation from the Economist on car dealers.

The internet was supposed to do away with all sorts of middlemen. Yet house sales are mostly conducted by estate agents, and car sales are still finalised in cavernous showrooms that smell of tyres. Technology is diminishing the role of car dealers, however. Customers are using the internet for much of the process of choosing a new car, and are increasingly getting loans and insurance online rather than buying them from the dealer who sells them their car. In many cases car buyers turn up having already decided which model and which options they require; and, having checked price-comparison websites, how much they will pay.

There were, in fact, legal bans that prevented automakers from circumventing dealers.

Two decades ago Ford and General Motors tried to revive this idea from the industry’s early days, but they were deterred by resistant dealers and restrictive laws in some American states. The legislation, enacted in the 1950s to protect dealers from onerous terms that carmakers were trying to impose on them, is now being used to put the brakes on Tesla. It has battled to open stores in several states where direct sales are banned or restricted (see diagram). And it is winning most of its fights. New Jersey and Maryland recently overturned bans, though the struggle continues in Arizona, Michigan, Texas, and West Virginia.

However, while the auto manufacturers may like to circumvent dealers if it were not for state laws that were encouraged through dealer lobbying, SAP’s situation is different. SAP is dependent upon its “dealer network” of consulting companies to recommend SAP. SAP tells Wall Steet and the world that customers pick SAP software because they think it is the best. That is far from the case. Instead, these consulting companies recommend SAP no matter what the quality of alternatives because it is profit maximizing for them to do so. SAP consulting companies don’t generally care what the best software is, or what meets best with a client’s business requirements. They need to maximize their billable hours, and SAP allows them to do this. SAP is one of the few software vendors to outsource nearly all of their consulting to other consulting companies. Of all software, SAP takes the longest to install and the most billable hours to implement and then to maintain. (See online calculation at Brightwork Research & Analysis

Consulting companies will recommend SAP, adjust RFQs to match with what SAP can do, and generally tilt the playing field as much in SAP’s favor as possible. They, of course, admit to none of this and like to present themselves as looking out for their client’s interests. However, historically they have only kept either Oracle or SAP application consultants on staff (although this is slowly changing). SAP needs constant recommendations by its dealer network to maintain its position. Therefore it is of two minds on SaaS and Cloud.

  • Satisfying Wall Street and the Current Trend: Because of pressure from Wall Street and somewhat from customers, SAP must continue to tout itself as a SaaS or Cloud vendor.
  • Satisfying SAP Consulting Partners..i.e. the Dealer Network: Because most of its software portfolio is still primarily on premises, and on-premises software has proven more effective at locking in accounts combined with the fact that its dealer network make money primarily implementing on-premises software, SAP either needs to keep selling on-premises software, or need to bring in their consulting partners on hosting, or risk losing their endorsement as they see themselves cut out of the revenues. And SAP knows the only reason they are recommended by the major consulting companies is that SAP “socks it to their partner’s pockets.”

The Uncompetitiveness of Consulting Company Hosting

SAP faces a problem when bringing its consulting partners into the hosting loop. And that is none of them are competitive at it. If we take IBM and CSC, which have historically had the largest data center and hosting businesses, even these firms are rapidly losing market share to AWS. IBM and CSC are so dated in their offering versus AWS and Azure that this will continue into the future. And all of the other consulting partners, like WiPro or Accenture, have even less ability to compete than having IBM and CSC. So SAP’s answer is to outsource to partners that have lost already to AWS. Secondly, SAP has essentially given up its fight against AWS and Azure and has elected to make their SAP Cloud more compatible with AWS and Azure. I covered this topic in the article How to Best Understand SAP’s Multicloud Announcement. 

Conclusion

SAP has been trying to have it both ways as they have increased their hosted offerings. They want to project being Cloud to customers and to Wall Street. They want to continue to enrich their consulting partners for whom they rely upon for recommendations against all reason to SAP customers. This is a textbook reason why a company that has a basis on in the previous era of technology is the wrong company to be the leader in a new era of technology. They have too many arrangments to protect under the previous model, that worked spectacularly for SAP. But now they are forced to pretend to be in a new era when their approaches are still based in the previous era.

References

https://fortune.com/2016/05/25/salesforce-inks-major-aws-deal/

https://www.economist.com/news/business/21661656-no-one-much-likes-car-dealers-changing-system-will-be-hard-death-car-salesman

https://www.autoremarketing.com/retail/direct-to-consumer-sales-debate-goes-way-beyond-tesla

https://www.vox.com/2014/10/26/6977315/buy-car-hassle-free

Research by Eric Marti, Garth Saloner, and Michael Spence has concluded that as much as 30 percent of the cost of a car is the cost of distribution.

But as Gerald Bodish wrote in a 2009 analysis from the US Department of Justice, the most expensive part of the whole process is hiding in plain sight — it’s the stockpiles of unsold vehicles sitting around on dealers’ lots. He observes that in late 2008, there was a staggering $100 billion worth of unsold dealer inventory, with an annual carrying cost of $890 million.

Bodish cites a Goldman Sachs analysis indicating that replacing the current inventory-heavy method with a more efficient build-to-order method could reduce costs by 8.6 percent. Real-world experience from Brazil, where Chevrolet sells Celtas direct to consumers, shows a somewhat more modest savings of 6 percent relative to what’s paid at traditional dealerships.

https://www.gsb.stanford.edu/faculty-research/case-studies/disintermediation-us-auto-industry

How SAP Mislead Analysts on Q1 2017 Earnings Call

Executive Summary

  • SAP provided a large amount of false information on their Q1 2017 earnings call, while none of the Wall Street analysts seemed to notice.

Introduction

On April 24, 2017, SAP held its Q1 call with analysts. This article is an analysis of some of the information provided by SAP in this call. Much of the information in the call was breathtakingly inaccurate. Understanding why is quite interesting I comment on the quotes below.

We will begin with SAP’s introductory statement around S/4HANA.

Introductory Statement and S/4HANA

“The facts show that we are executing our winning strategy at scale. Our customers are endorsing the unique breadth and depth of SAP core cloud networks, and all come with soaring adoption for our new innovation on a global basis. We believe SAP is the only company in the business software industry to deliver soaring cloud growth and double-digit license growth.

Driven by S/4HANA, our core innovations are growing really fast with software licenses up 13%. We now have more than 5,800 S/4HANA customers with global companies like Energy SE, choosing S/4 in the first quarter. Big brands like Citrix Systems selected S/4 cloud edition, the leading intelligent cloud ERP solution in the market by far.”

This is greatly exaggerated in the area of S/4HANA. SAP has, according to ASUG (which is highly connected to SAP and actively censors any negative information about SAP) only 350 live S/4HANA customers.

And I estimate this to be far below this level as covered in the following article The Math of Probable S4 & Fiori Apps Usage. This article was written some months ago, but the actual number of live customers has only increased incrementally since it was written.

It is also true that SAP routinely exaggerates the numbers of S/4HANA customers, as explained in the article How SAP Controls Perceptions with Customer Numbers.

Question from Michael Briest on S/4HANA

“And then just, Bill, on the S/4 uptake, could you give some data points? I think Ross asked around but maybe the number of public cloud customers that you now have on S/4, and whether also the 400 overall S/4 additions in the quarter was as you expected, would you think that maybe it will accelerate as we go through the year in 2017, you will see more adds than the 2016? Thank you.”

Uptake of S/4HANA will not accelerate in the short to medium term. S/4HANA was announced far too early, and it is not a functional ERP system. This should not be surprising as most of the S/4HANA suite is not complete as is described in the article How S/4HANA EM Suite is Not Yet Released.

Answer from Bill McDermott

“Yes, Michael, maybe let me first address the question around the cloud gross margins. For this year, we expect roughly stable overall cloud gross margin. You have seen in Q1 that we are slightly better in the Q1 cloud gross margins compared to the full-year 2016. But I think assuming a stable cloud gross margin is a fair assumption here.”

“In terms of the March 2020 targets, yes, we absolutely believe that the SaaS/PaaS business, will the biggest net accelerator on cloud gross margins as we exit 2017. They have a huge catch-up to do. But if you think about the fact that at the moment we are essentially operating duplicate infrastructures across the main ones of our SaaS/Paas assets, especially SuccessFactors, that of course is a massive cost burden that will basically go entirely away once all of the customers are migrated by the end of this year. Hence we are still confident that we will achieve the gross margin progression marching towards around about 80% that we have in mind for SaaS/Pass by 2020.”

  • Wait for SAP for PaaS?: The first sentence in this paragraph steps into SAP’s problem and offers information counter to what is occurring. PaaS, or platform as a service, has never been a business SAP has made much money from. In the recent article How to Best Understand SAP’s Multicloud Announcement, I cover how SAP put a brave face on what cannot be interpreted as anything but a concession of defeat to AWS, Azure, and Google — allowing greater integration of the SAP Cloud to AWS and Azure. SAP merely is not a PaaS vendor. AWS and Azure, in particular, are enlarging the PaaS market and gobbling up market share from data center providers like IBM and CSC at a rapid pace.
  • SuccessFactors Again?: SAP’s constant referral to SuccessFactors may sound impressive to SAP newbies, but it highlights how little of a cloud vendor SAP is. Walk into the vast majority of SAP accounts and cloud applications from SAP are nowhere to be seen. SAP’s core on-premises applications, ECC, BW, APO always seem to be there. SuccessFactors is still a relatively recent acquisition and has had zero to do what made SAP what it is today. SuccessFactors is mostly a true Cloud offering (although it does not have transparent pricing, and while I am not sure, if I know SAP they do not allow month to month cancellation as pure SaaS needs to)
  • Duplicate Infrastructures?: It’s hard to tell what Bill is talking about here. He began with a false premise at the start of his comment. And I don’t know why he says duplicate infrastructures are being run. I guess my question would but why. SuccessFactors acquired over five years ago, so why has this not been worked out already? This speaks to the disorganization of the Cloud offerings that were described in Vinnie Mirchandani’s SAP Nation 2.0.

Overall, whatever happens to SuccessFactors is not reflective of the applications that were developed internally, and these applications are still overwhelmingly delivered on premises. SAP is engaged in a massive campaign of cloud washing where it both overstates how many customers are using things like S/4HANA in the cloud and then attempts to confuse customers and analysts by commingling SaaS applications like SuccessFactors and Ariba and Concur with the rest of the portfolio. But Bill McDermott is showing signs of being a parrot on SuccessFactors. Virtually every time the topic of the Cloud comes up, Bill begins talking about SuccessFactors. The trick he uses is to make a general statement about SAP and the Cloud and then say “especially SuccessFactors.”He might as well say “only SuccessFactors (and Ariba)”

Although dated, a surprisingly frank article in 2013 in ASUG that referenced an analyst named Albert Pang pointed out that 52% of Cloud revenues at SAP came from just SuccessFactors.

“SuccessFactors and Ariba accounted for the bulk of SAP’s Cloud Applications subscription revenues in 2013. Recent acquisitions included Fieldglass for contingent labor management and Seewhy for Cloud marketing. SuccessFactors alone generated 49 percent of SAP’s cloud subscription revenue in 2013. So where did the other 51 percent of cloud revenue come from? Ariba, mostly.”  – ASUG

This article is dated, but I doubt the story has changed much from that time as things like S/4HANA Cloud or HANA Cloud Platform (I think now SAP Cloud) have not driven very much revenue.

On The Number of S/4HANA Customers Per Quarter

Question from Michael Briest

Yes, on S/4, do you think – you did 400 or so in the quarter with 500 in Q1 last year. I know it’s a small quarter but were you disappointed by that? Do you think you’ll do more this year than last year, and just an update on public cloud within that?

Answer from Ron Enslin

“Michael, great question. I think we’ll continue to accelerate the S/4, the HANA business. It still looks pretty strong. The pipelines look strong. What we are seeing that value stories are now coming out consistently across all the customer base. And it is truly the digital story for SAP and our customers and I think you’ll continue to see that.

Were we happy or disappointed with 400? I think the bigger topic is we have 5,800. We have a snowballing effect now that on the go-live customers and we have more and more projects ongoing that are more complete than just finance and logistics, so it’s really a very, very good story for all of SAP.”

Continue accelerating what? SAP even by ASUG’s inflated measure has 350 S/4HANA customers live (as of their survey in 2016, but SAP’s S/4HANA numbers are not growing fast enough for this number to be much larger than that 350 now). The first independent research on S/4HANA which Brightwork Research & Analysis is publishing soon is showing that many of these live S/4HANA implementations don’t seem to make very much sense. There is just no way that what Ron Enslin says regarding “value stories now coming out consistently across all of the customer base” is true. The opposite is true. S/4HANA was implemented by these companies far before it was ready to be implemented. Ron performs a trick here. First, he starts with an unsubstantiated claim, which is that values stories are coming out. Then moves to the proposal that you will continue to see something that was unsubstantiated. This is to me at least a marker of a person who is trying to trick the listener. And when I happen to know that there aren’t value stories coming out, then that puts the presenter in an even worse light.

The discrepancy which is difficult to hide is that SAP by the most optimistic measurement, that is by ASUG, has 6% of its customers for S/4HANA live. It is also known that most of those customers paid little to nothing for S/4HANA. Some of these customers were coerced into purchasing S/4HANA in ways that I will be explaining in a future article. As these clients have not implemented, they have not purchased the HANA database.

HANA is really where SAP wants to lead these companies to the costs as well as the restrictions rise as soon as they purchase HANA (which can be used to lock in accounts to a high degree, ensuring, even more, purchases after HANA is purchased).

The bottom line is that SAP is not getting much revenue from S/4HANA. And S/4HANA has been one of the largest launches in the history of enterprise software. I cover S/4HANA’s readiness in the article How the Overall S/4HANA Suite is Not Yet Released. This article was written a little less than a year ago, but it is still valid.

But What Ron Enslin demonstrates here is that whenever a person responds to weakness by stating “the bigger topic is” that is a Kelly Ann Conway pivot. That means the speaker can’t provide a positive answer to the question so simply pivots to something else, which is often irrelevant to the topic asked. If asked if a murder was committed, the answer can be “the bigger issue is the price of housing, it is outrageous!” But here Ron pivots to what is a misleading statement. SAP has 5,800 companies that own the license, with the vast majority using it as shelfware.

His later sentence is confusing, but what he means to say is that S/4HANA is more than just Finance (Logistics is the rest of the suite, so it would not make sense to say these new implementations are “more than Logistics.” But from my research, that is most likely not true. And there are obvious reasons for this that are covered in the “Overall Suite” article link I just listed.

More from Bill McDermott

“And the one thing that you have to keep in mind on S/4HANA and the answer is definitely you’ll have a more this year than last year by a lot is when you are the CEO of a company, just think about that as your digital core and then you have all the tax rates of the line of business, the business network, machine learning, AI, the internet of things, I was recently meeting with the CEO of an energy company who chose us to rip and replace the competition and it’s a net new customer to SAP. It was the strength of S/4 as the core platform but it was also the attach rates of all the other entities within the company that aligned their board and called SAP as the ultimate winner, and that would be a more difficult decision to make than status quo, so the innovation is there Michael. We are going to win every place. It’s going to be an unbelievable year.”

This sounds like it could have been uttered by Donald Trump.

“Its going to be an unbelievable year.” could be enhanced and made even more Trumpish with with “beleive me, beleive me.”

This paragraph stands out for its disregard for the mind of the listener. If we think for a moment, Bill McDermott with stock options makes over $50 million per year. But look how idiotic this paragraph is. And then consider how misleading it is. This is what $50 million buys you regarding propaganda.

There is in fact very little innovation in S/4HANA. Code analysis by a colleague indicated that 93% of the code in S/4HANA is from ECC.

I had exposure to the system and talked to people who have used it, and it is mostly just ECC with some adjustments. These adjustments are covered in the Simplification List, which I analyze in the article Analysis fo SAP Provided Information in S/4HANA 1610.

  • Most of the Fiori apps don’t work, and they need to be set up with a special server, but the number of customers that have invested in this for Fiori is minimal.
  • Customers are not reporting very much improvement from using HANA as the database, which could have been predicted by observing the benchmarks as I explain in the article What is the Actual Performance of S/4HANA?

Bill McDermott on S/4HANA

“Now since we reinvented our core ERP system on S/4HANA, we are the only company in the world that can tell a C-level decision maker, you can run new transactional systems and your analytics all on one database, one common S/4HANA platform for all of your ERP activities. And why this is so powerful is every single CEO you talk to wants to align this all stuff, meaning the management team and the people motives of a company along with the hard stuff, which is the transactions and the financials of the company. Only SAP unifies this in one real-time in-memory suit and there is the S/4HANA self.”

Well if every single CEO Bill McDermott speaks to want to align with “this stuff” why is the S/4HANA uptake so tiny?

The issue Bill McDermott is describing related to running the same database for the ERP system as for analytics is not a very big issue for customers. Data can be brought over into the data warehouse, and this has been a good design for decades. If every single CEO wants to align to “all this stuff” it is most likely because the CEO does not have enough of an understanding of software or business intelligence to know why it is not very advantageous. CEOs at most companies are not technologists, so they don’t know. Furthermore, other ERP companies are not following SAP down this path of using an analytical database for ERP to sit on top of. So if it is so advantageous as SAP states, the question should be why not.

Furthermore, other ERP companies are not following SAP down this path of using an analytical database for ERP to sit on top of. So if it is so advantageous as SAP states, the question should be why not? Either SAP is the only ERP vendor to figure this out, or it is simply not that much of an advantage.

The SAP BW and Business Objects are designed to run on data warehouses and not on S/4HANA. The most impressive analytics product that SAP has in its portfolio is Lumira, but Lumira does not sell very well, and I am told Lumira lacks in substance. And I have yet to hear of Lumira being run on S/4HANA. The things that Bill McDermott is describing in his quote, SAP customers are simply not doing in any significant number.

Rob Enslin on S/4HANA

“Yes, I think people forget that the S/4HANA ERP, there is nothing out like it in the market at all. When you look what it does and how it changes businesses and how it connects digital supply chains, it is by far the next generation ERP and everyone else is far way behind. And then when you connect everything, the machine learning and IoT and analytics space, we are the only company on the distribution side and on the product side that have a true supply chain end-to-end for the digital world and I think that’s the major difference. There is nobody out there that can actually talk about what it looks like in a digital world to connect an ERP system and actually look at next generation of applications, and I think you will see us changing it more and more AI and artificial intelligence becomes relevant for S/4HANA. So I think the opportunity is huge. I think the S/4 cloud opportunity is going to be incredible.

Some of the companies that signed up like more pretty significant company in the chemical business and just committed to SAP and I think you’ll see us do really well in this space.”

If S/4HANA is so fantastic, why have so few companies implemented it? Why when people use S/4HANA do they see little value in it observe so many things that do not work in it and generally see it as more of an upgrade that benefits SAP versus benefiting customers? Why is it estimated that around 93% of the code of S/4HANA is ECC’s code?

Comments from Rob about connecting to digital supply chains also don’t add up. I have not heard a lot from Rob Enslin, but his quotations are indicative of a person who is deliberately misleading the audience, and it is offensive to be deliberately lied to. It (hopefully) goes without saying that ECC already connected to “digital supply chains.” I mean that term is a bit ridiculous. The supply chain itself is not digital. That only happens on Star Trek. But the information system that manages the supply chain is digital in that the data is stored in a binary code. S/4HANA is not bringing anything in the supply chain area that ECC did not have. If Rob does not understand that, then he is not a good source of information on this topic.

Things like machine learning and IoT are not things at this point with any SAP product and are more conference talking points. Devices are communicating with one another, but this has nothing to do with S/4HANA As I cover in Why SAP Leonardo Seems So Fake, SAP wants to convince customers to move device data to S/4HANA so it can then sell them Leonardo.

The statement about “true supply chain end-to-end for the digital world” tells me this person is not in touch with anything real.

Bill McDermott On Latin America

“And keep in mind just in closing on this topic, Adam, if you take Latin America – take a market like Latin America – this was an on-premise market up to about 18 months ago. Today we get more revenue out of the cloud in Latin America than anything on-premise, so this is an interesting dynamic. There is another region that’s now crossing over to more cloud revenue than the on-premise world and we’ve been in business for a little while. And in 2018, the cloud eclipses the on-premise revenues of SAP.”

Truly this is a statement designed to mislead the audience. Latin America is a minor region for enterprise software. Companies in Latin America cannot afford SAP’s applications in most cases (there are exceptions like ByDesign, BusinessOne, etc.). Therefore it is not surprising that if SAP decided to open up hosted solutions to Latin America, that it would rapidly exceed on-premises installations. But SAP will not make very much money from this increase. This is a low margin market for enterprise software.

More from Bill McDermott on SAP’s Monopoly Power

“So here is my hypothesis on the industry. Why is SAP the de facto standard business software company in the world? I’ll tell you why. Because even if we don’t win every sale and somebody at a point solution level takes something, they still have to live with us and the other 80% of the enterprise.”

I don’t know what “and the other 80% of the enterprise means. Many companies don’t have any SAP so it seems Bill is overstating the case.

Actually, this is the type of statement a monopolist would make. SAP is used very frequently (it is not the de facto standard, but it is prevalent). But it should be because their software is so good, not because other vendors have to “live with” SAP.

More from Bill McDermott

“And frankly when you are thinking like CEOs think, they want things to be simple. So if you are at least good enough in all the other areas and you own the core, you’ll own the edge, you’ll own the network, you’ll own IoT, and I think that’s represented in our numbers. And I kindly ask you all to take the back of the envelope approach, add up the revenues that others are getting from M&A, add up their core declines, one plus one equals negative two, and when you add out SAP’s numbers, one plus one equals three plus.”

SAP makes the most complex software in each area offers (except for the acquired applications). I have worked in SAP for 20 years, and nothing in SAP is easy. Every day it takes significant effort to get SAP to do things that other applications do far more easily. In the Brightwork Research & Analysis TCO calculators, the complexity of SAP shows in its higher TCO. SAP has the highest estimated TCO of any application in each of the categories that are evaluated by Brightwork.

So whatever reason that companies choose SAP (which is often because it is robust, has a large product portfolio, is recommended by a consulting company) it is not because it is simple. I cover the inaccuracies around SAP being simple in the article Is SAP’s Run Simple Real?

The rest of the quotation from Bill is lacking in any substance worthy of commentary.

Question from Gerardus Vos on S/4HANA

“Hi, thanks for taking my questions. Just have two on S/4 probably for Bill. Just first regarding the adoption and what you see in the pipeline in that last year and a half, there was a lot of smaller deals on a deficient level. Do you start to see in the pipe now large enterprise-wide adoption for S/4? Then secondly, how many go live did you have in the quarter? And then finally, a question for Luka on the gross margin. The drop in the core business in software and support in the quarter was a bit of an unusual given the good improvement we’ve seen over the last four quarters. Was this an aberration and should we expect that gross margin takes up pretty out of three-quarters, or is there a structural reason why it’s coming down now? Thank you.”

Response from Rob Enslin

“So when it comes to the go live for S/4HANA, we have now over 700 go lives. That’s up significantly more than – as I said earlier on, more than 2,700 projects ongoing. Almost all of those projects are 1610 versions, so significant logistics. And when we look at the large enterprise, I would pretty much say that there is almost every single one of our large customers that have a plan or obviously implementing it for at some point. We’ve seen it with my advisory board. To the group, every single one of them has a project or some of them are already live with significant parts of their business. Luka?”

Incorrect. 700 go-lives are far higher than even the inflated number by ASUG of 350 provided in their 2016 survey. And the majority of these go-lives, which most likely number less than 200, have major problems. S/4HANA is currently one of the very riskiest applications that one can implement. If there are 2700 S/4HANA implementations on-going, it is not showing up in the market for S/4HANA skills. It is still rare to see requests for S/4HANA implementation skills.

Polls on expected implementations for S/4HANA do not show that customers all plan to move to S/4HANA, as the following quotation from E3 Magazine, published April 10, 2017, attests.

“More than two years after SAP launched S4 amid considerable fanfare, user adoption has been underwhelming. In the UK, just 5% of customers have deployed S/4, a survey by the UK and Ireland SAP User Group found. Nearly half have no plans for S/4 at all. Similarly, 60% of members of DSAG (German speaking SAP user group) have no S/4 plans or are undecided, and 50% don’t consider the early stage product a “real alternative” to traditional ERP. Licenses are also righly wary about functionality parity between S/4 and SAP’s Business Suite 7. According to industry experts, it could take 5 to 10 years before SAP can fully rewrite 400 million lines of code for S/4 to be on functional parity with Business Suite. Of course, SAP observers are well aware of SAP’s mixed track record for new product delivery.”

On the SME Market

“So first of all, I’d like to say that SAP has been a very, very successful company without putting all the wood behind the arrow in SME. And one of the detractors to really growing and taking over the SME market had been the limitations of and on-premise business model. It’s just not fast enough to scale as fast as a company like ours would like to. Well, that now has been taken off the table. You have B1 on HANA. You have ByDesign growing very fast. But now we have S/4 Cloud edition that without a doubt, market down with giant crayon will be the leader and not only small, medium sized but even upper mid-market for cloud computing in the ERP world. So that business is on a tale and I think that’s a big bogey of growth that is upside as we think about our future.”

SAP has not taken over the SME market. SAP is too expensive to implement and operate for the SME market for most of SAP’s applications. SAP can sell customers in this market B1 or ByDesign, but these are undifferentiated offering is a market teeming with competitors. And once purchased, these applications do not allow SAP to upgrade the account by purchasing a lot of other SAP applications.

SAP’s business model is simple. Sell the ERP system to a large company with a significant IT budget. Use the ERP system to penetrate further in the account by making the integration argument that the customer so that the customer purchases non-ERP systems that connect to the ERP system. Buy off the consulting companies and IT media outlets to serve as repeaters for SAP’s messaging. This strategy only works with very much effectiveness at the larger companies that purchase SAP’s ECC or S/4HANA ERP system. B1 and ByDesign are simply commodity applications that don’t create the network effect for SAP in the customers in which they are sold.

  • Running BusinessOne or BI on HANA makes no sense because HANA is far too expensive and complex for the SME market. And SAP will be unsuccessful trying to push HANA into that market.
  • ByDesign is not growing very fast. A while back ByDesign was supposed to be sunsetted. People that use ByDesign tend to despise it, and it is not considered a competitive product.
  • The S/4HANA Cloud edition is not the cloud in any significant numerical way. ERP systems typically require some customization, particularly the larger companies that tend to be SAP’s sweet spot, and that can’t work in the cloud, so it becomes a private cloud or hosted. However, this is not cloud, and will not provide the same cost benefits and maintainability as true cloud or public cloud. All of this is covered in the article Is S/4HANA Designed for the Cloud?

More from Bill McDermott

“Bernd, I’ll let you make some comments on that and Rob – but also we ran through the Fortune 1000 and 2000 a little while ago with 350,000-plus customers but when you think about the SME market, there is literally millions of them out there that could be in the SAP portfolio and we are going after it with everything we have. So I think you’re now seeing us completely unified on S/4 cloud edition being something that could take over the market.”

SAP has been saying this for years, but still has not replicated anywhere near its success in tier 2 and three markets as it has in the tier 1 market. The reason for this is SAP is mostly a vendor that works best in the tier 1 market.

SAP is the most expensive software in the world with the most costly implementation and the most costly maintenance and therefore TCO.

  • SAP’s complexity and the fact that it is the only vendor to outsource their consulting to other companies (that have an incentive to extend projects to maximize billing hours) means that no other vendor ‘s applications are as expensive to implement or maintain.

These are not good fits for the SME market. SME’s in many cases use SAP’s lower priced applications, but the model here breaks down. SAP is suited for and is the best fit for the tier 1 market. A decade and a half of focusing on the SME market has increased the number of customers for SAP, but this is not SAP’s bread and butter.

On the S/4HANA Cloud

“S/4HANA Cloud, if we take the overall triple-digit growth and then look at the customer list, it’s in the range of between 35% and 45% of net new names and this gives us tremendous opportunity not just to convert and install base from an on-premise into the cloud, as well to conquer complete new markets. And this is the path we are going forward, and looking at the numbers we are confident that this path is really resonating very well. Rob, any additional comments from your side?”

The growth here is small companies that SAP is obtaining because their complexity is very low. These companies have not driven and will not drive revenues. They are being added more to impress analysts than because of revenue potential.

On The Private Cloud

“In the private cloud, the HANA Enterprise Cloud also continues to be a fast-growth business for SAP. Led by SAP Digital Boardroom, our reinvigorated analytics portfolio grew in strong double-digits across cloud and software in Q1.”

Close to no one uses the SAP Digitial Boardroom. And feedback from customers is that SAP’s analytics across the board are mostly vaporware.

On SAP’s Acquisitions

“SAP’s track record of strong M&A is also validated with our amazing cloud growth. We have one rule, only by the best companies in the business. Now these best-in-class assets have been fully integrated for many, many years, and all of our growth in the cloud is totally organic. That’s something very new to our industry. Our new cloud bookings surged to 49% growth in Q1. Our cloud revenue grew by 34%. SAP Hybris, our customer engagement solution, saw a triple-digit new cloud bookings growth in the first quarter.”

SAP does not own the best companies in the business. It owns a hodgepodge of vendors that don’t make a lot of sense for SAP to own and seem to have been acquired to make an impression on Wall Street and improve its “Cloud cred” rather than to improve operations. Most of them are still not completely integrated back to SAP ERP.

The growth in the cloud is not organic. It is based upon a strategy of acquisition. The acquisitions are the only area where SAP is successful with the cloud, which is where the vendors were already successful with the cloud before SAP purchased them. SAP still gets the vast majority of its cloud revenues from two acquisitions, SuccessFactors and Ariba. These are two vendors who were already Cloud when SAP acquired them.

It is unclear which analysts SAP is referring to that gave SAP the highest ranking in cloud HCM for core HR. SAP pays analysts that rank them, so it is difficult to determine what the IT analysts think. IT analysts like Gartner are filled with analysts who do not and have not ever touched enterprise software. Gartner and many other IT analysts spend most of their time talking to executives in vendors and software buyers. This is covered in detail in the article, Gartner and the Devil Wears Prada.

In this quotation, SAP is merely segmenting the description so that SuccessFactors can seem more impressive than it is. SuccessFactors was one of many HR solutions when SAP purchased it, and that has not changed after the acquisition. Overall SAP has a very poor track record with acquisitions.

  • Business Objects, one of SAP’s highest-profile acquisitions is now entering a period of steep decline as SAP has stopped investing in it.
  • Sybase, another high-profile acquisition is also in decline.
  • SAP has done very little with Ariba since the acquisition. Ariba does not fit in very well with SAP’s core offering of ERP because Ariba primarily specializes in indirect procurement. SAP needed to purchase a company that performed direct procurement. Companies like Ford Motor and New Balance may have selected Ariba in the first quarter, but they will have a problem leveraging it with the rest of SAP if that was Ford and New Balance’s intention. Ariba, as with all of SAP’s acquisitions, is now less prominent, several years after the purchase, then when SAP performed the acquisition.

On IoT and So On

“Our internet-of-things business is already the leader with Goldwind Science & Technologies, and Energy [indiscernible] selecting ASAP in the first quarter. We are accelerating internet-of-things innovation, including predictive maintenance, logistics, autonomous payments, quality assurance, anti-counterfeiting and industrial securities. We are also focused on machine-learning, which we believe takes the work out of workflow. Our first wave of machine-learning enabled application is already commercially available today. Examples include invoice and payment matching, predictive recruiting, intelligent sales forecasting, sales discount approvals and data-driven renewal management to name a few.”

This is a deceptive paragraph. SAP has very little IoT business. This paragraph is to future sell the analyst on all the great things that SAP is involved with. As a consultant with many new SAP product implementations under my belt, I can say that working in new SAP offerings is always fraught with problems. A very large percentage of them fail, and the story is most often not a pretty one. As more information comes in from global implementations as Brightwork gains access to more data points, the information globally looks about the same as the information I obtained over two decades of SAP consulting.

I have yet to see anything from SAP in machine learning. This entire paragraph by SAP falls under the category of vapor.

All of this things have very little to do with what is happening on SAP projects. This is a lot of selling of the future to financial analysts, but these are not things that are proven. So SAP can say anything about what is in development, and it is difficult to verify or contradict.

On Future Prospects

“Near half of S/4HANA transaction in Q1 were net new business. More than 80% of our ERP customer base remains in the S/4/HANA pipeline, which is swelling by the moment. We are growing double-digits in every region of the world. Our organic SAP cloud innovation is now the biggest part of our growth story. With the 22nd most valuable brand in the world, Sapphire now 2017 will be the biggest in SAP history.”

SAP is a very valuable brand, and SAPPHIRE in 2017 may be the biggest in history. But the earlier statements are just not correct. The net new business of S/4HANA may very well have been highly promoted.

S/4HANA as a Digital Core

If you think about S/4HANA and the digital core, there is no doubt that SAP is winning and that we are continuing to take substantial market share. As we continue our acceleration to the cloud, increased not only the predictability of our revenues but we will also improve gross margins and profitability. This is what the entire executive board of SAP is committed to. A strong free cash flow generation while investing for the future provides significant optionality around strategic decisions aimed at driving customer and shareholder value. SAP is extremely well positioned for success through 2020 and far beyond.

The statements about S/4HANA from SAP are inaccurate and exaggerated and are intended to mislead the analysts on the call. SAP does not even see fit to explain that S/4HANA is still not complete as I covered in the article Why the S/4HANA EM Suite is Still not Released. The article is nine months old, but still applicable today.

The truth of S/4HANA has virtually nothing to do with what is being stated by SAP in this quotation. I have analyzed S/4HANA from many dimensions and documented these conclusions in articles.

Conclusion

SAP’s mislead the analysts on this call multiple dimensions. Each of the people speaking from SAP has many millions of dollars in stock options, so this model where you obtain information from people that have a clear financial bias to mislead you so that they can exercise their options at the maximum price makes little sense. (Bill McDermott alone makes over $50 million a year in compensation when stock options are included)

It is reminiscent of the newspapers I used to read when I was in Pakistan. The information is interesting, but only from the perspective of analyzing what the powers that be would like people to believe. It has no inherent validity.

When SAP anticipates that it will be speaking to people who can’t directly validate their statements, the lying is in a different dimension.

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References

https://seekingalpha.com/article/4065023-saps-sap-ceo-bill-mcdermott-q1-2017-results-earnings-call-transcript

https://www.asug.com/news/sap-cloud-revenue-almost-exclusively-successfactors-ariba

*https://e3zine.com/2017/05/10/risk-vs-reward-key-questions-s4hana-crossroads/