SAP CEO: SaaS Hurts Our Profits

Nov 24, 2008 (11:11 AM EST)

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January marks an important leadership change at SAP, with Leo Apotheker taking on the full CEO job as Henning Kagermann prepares for retirement. Last week, Apotheker was frank about a huge management puzzle he faces: How to bring SAP into the world of cloud computing without killing profit margins.

Apotheker flew into New York from Europe to participate in an SAP press conference on Nov. 21, where some of its customers gave testimonies on why their peers should use IT to innovate in the tough economy. Apotheker and Kagermann share the CEO title, but SAP said Apotheker will become the clear leader at the company starting in January as Kagermann begins his exit (his contract technically ends in May).

Innovating in a tough economy, however, appears to be SAP's problem as it tries to find a profitable formula for its new Business ByDesign ERP software-as-a-service. SAP introduced the SaaS product with great fanfare a year ago and then almost as quickly pushed it back as a low priority, limiting its use to a handful of customers, raising questions of whether the product was technically ready to market. Apotheker insisted that's not the problem: Not only is it "ready and done," but SAP has version 2.0 ready to go, and "it's the coolest app every written."

The problem for SAP, Apotheker said, is that it's a bad time, financially, for SAP to do a big market push on Business ByDesign. "We would be hurting our margin, and hurting our stock," Apotheker said.

He further characterized Business ByDesign's role in the bigger picture at SAP using this meteorologically inspired observation: "The gale winds blowing are also blowing in our direction. We want to come out stronger, and we will. We want to look out for our customer, bring innovation to our customer, and make sure we bring our own cost and infrastructure in place so that we weather the storm."

Apotheker's frank disclosure about the high cost of Business ByDesign highlights the problems ERP vendors face in moving from a licensed software model to one in which some of the software they offer is hosted as a subscription service over the Internet.

On the pure revenue side, it means transitioning from getting thousands or millions of dollars up front, to spreading what's essentially a rental fee across many months. Apotheker also indicated that all of the operational expenses that would go into a big push for Business ByDesign is too costly in this economy. But does SAP even have the right culture for cloud computing? Indeed, it was "built by German culture to run in a Silicon Valley cloud," he said.

Apotheker's dry, occasionally derisive sense of humor provides insight into his personality and leadership style. There was his observation that perhaps there is a "masochistic streak of wanting to be in a recession" since people "can't stop talking about it."

Yet Apotheker's dead serious when talking about what SAP perceives as a liquidity problem for some customers, due to the financial market crisis, which affects their ability to buy software. The situation of declining software license sales hasn't "gotten any worse" since company executives talked about it in October, and while SAP isn't planning any fire sales, "We have a vested interest in making sure customers come out alive, and we will work with them as much as we can, but have to also protect our own interest," Apotheker said.

Apotheker said he's looking forward to the work of John Wookey, a former Oracle executive who was recently appointed to direct SAP's SaaS strategy for large companies; he called Wookey one of the "greatest software developers to walk on the face of Earth." SAP plans to develop software services for large companies that are primarily add-ons to licensed software, but may be cheaper or easier for customers to run in the cloud.

In other product road map news, Apotheker said SAP is planning to introduce a new database-related product in 2009 that will feature in-memory technology. "We have a strong belief in the in-memory database [as it] can store infinite amounts of real-time data," he said. Apotheker said customers would use the new product for business analytics and indicated SAP will release it in coordination with its considerable Business Objects division.