SAP restructuring to focus on cloud

SAP CEO Bill McDermott (Image: SAP)

German vendor follows suit as the big tech firms reorganise in transition to selling cloud software

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31 January 2019 | 0

SAP is embarking on a major restructuring of its business as it targets an ambitious tripling of its cloud revenues by 2023, from the €5 billion achieved in 2018.

The restructuring will start immediately, and SAP says it will cost the company €800-€950 million, as it targets cost savings of €750-€850 million by 2020 as a result.

While restructuring is often a euphemism for job cuts, SAP management were keen to stress that this is not a cost cutting exercise, and it expects staff numbers to rise slightly as a result. It will be offering early retirement to some employees and reassigning others, with CEO Bill McDermott telling the Wall Street Journal that 4,400 jobs will be affected.

Dual aims
Speaking on an investor call, CFO Luka Mucic said the restructuring has two main aims: “One, we will further simplify our structures and processes. Two, we will ensure our resource allocation has the right mix of skills and qualifications to match our strategic growth areas.

“The cost savings from the programme will fuel investments in these areas and we expect to exit 2019 with more than 100,000 employees,” he said. SAP had 96,500 employees worldwide as of the end of 2018.

On the investor call McDermott added: “When some companies talk about restructuring they are tired companies dealing with headcount problems, we are talking about getting the necessary skills on top of the growth opportunities… what we are doing is optimising a workforce to actually increase the growth of the company.”

SAP is not the only vendor looking to take fairly drastic steps to better prepare for the cloud era. Microsoft announced in 2017 that it would be cutting 10% of its workforce to better sell for cloud.

In a leaked email published by the Wall Street Journal at the time, Microsoft’s executive vice president for worldwide commercial business, Judson Althoff, outlined how sales should look to target businesses instead of specific industries or market segments, and improve their “technical depth and better align sales and services to solution areas”.

Oracle made a similar move in 2017, creating 1,000 cloud-focused sales job openings across EMEA. While Oracle tries to tout its cloud credentials in public it has shifted to a financial reporting method that obfuscates its cloud progress, making it difficult to compare its progress to rivals.

Q4 results
SAP made the restructuring announcement alongside its year end Q4 financial results, which showed that all important new cloud bookings had slowed, from 31% year on year growth, to 23% in Q4 2018. That being said, overall cloud subscriptions and support growth jumped from 28% last year to 40% in 2018.

CFO Luka Mucic added: “New order entry surged 18% in Q4, taking the total for the full year to over €10 billion for the first time ever. This stellar business momentum sets us up perfectly for continued strong profitable growth in 2019 and beyond, while we expect our cloud growth will continue to outperform our business software cloud peers.”

For the record, full year revenue was up 5% to €24.7 billion, creating an operating profit of €5.7 billion and profit after tax up of €4.1 billion.
The vendor set its 2019 expectations also, confidently pegging cloud subscription and support revenue at between €6.7-€7 billion for 2019, a 33-39% jump.

Qualtrics acquisition
Finally, McDermott was fired up about the recently closed acquisition of Utah SaaS company Qualtrics, parroting CEO Ryan Smith’s language around the importance of ‘experience management’ to CEOs.

“SAP’s strategy is uniquely suited for the moment. CEOs are focused on delivering four key experiences: customer, product, brand and employee,” McDermott said. “With the acquisition of Qualtrics, which closed last week, SAP now combines market leadership in experience management with end to end operational power in 25 industries.”

Responding to an analyst question today, McDermott gave more detail about how Qualtrics has been integrated into SAP so far, saying: “Experience management has already been infused into our whole company as the biggest transformational idea in the culture. Ever single sales representative globally has it in their bag. We have complete synergy between the Qualtrics and SAP salesforce.

“If they [Qualtrics] are growing 45% without us, what are you going to do when you put 15,000 customer facing assets next to them? This is probably the biggest growth opportunity I have seen in my career.”

It is also important to not get distracted by the shiny new objects in SAP’s portfolio here, with its flagship S/4 HANA ERP system now counting 10,500 customers, which is up 33% from last year.

IDG News Service

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