October 11, 2019 / 12:47 AM / 4 days ago

UPDATE 2-SAP's McDermott steps down after decade as chief salesman and dealmaker

* McDermott makes way for Morgan, Klein as co-CEOs

* Decided against renewing contract

* Exit follows entry of activist Elliott

* Focus now on cloud transition, margin expansion (Adds more context, executive and analyst quotes)

By Douglas Busvine

BERLIN, Oct 11 (Reuters) - Bill McDermott stood down on Friday after a decade building up SAP as the world's leading enterprise software company, handing the task of completing its transition to cloud computing to new co-CEOs Jennifer Morgan and Christian Klein.

SAP announced the management overhaul, with immediate effect, after rushing out third-quarter results that showed it gaining traction in its drive to offer a more streamlined range of services and boost profitability.

The announcement brings down the curtain on an era in which McDermott struck a string of multi-billion-dollar deals that established SAP as Europe's pre-eminent technology group but also created complexity that frustrated many clients.

"SAP would not be what it is today without Bill McDermott," said Hasso Plattner, a co-founder of SAP who chairs the company's supervisory board.

"Bill made invaluable contributions to this company and he was a main driver of SAP's transition to the cloud, which will fuel our growth for many years to come."

Plattner founded SAP in the early 1970s with three former IBM colleagues. He exerted quiet influence from behind the scenes, giving room for extrovert McDermott to play the role of showman and salesman.

The new leadership combines Morgan's focus on customer relationships in SAP's North American markets with Klein's background in process innovation that is rooted in SAP's German heritage.

"Bill was able to place SAP firmly in the cloud market and begin a difficult transition to an entirely new way of doing business, all the while still delivering the revenues investors were looking for. That's no mean feat," said Joshua Greenbaum, principal at EAConsult.

"Jen and Christian are in a good position to further SAP’s own transformation while delivering the technology to fuel their customers' own transformations. It won't be easy by any stretch of the imagination, but the foundational elements are in place."

ACTIVIST INVESTOR

McDermott's exit follows the entry this year of activist investor Elliott, amid broader market concern that his acquisitions - including last year's $8 billion deal to buy customer relationship platform Qualtrics - had caused SAP to lose focus.

He responded by launching an efficiency drive, promising to expand profit margins by 5 percentage points through 2023. After a wobble in the second quarter, SAP's latest results showed the strategy shift was delivering positive results.

Growth in new cloud bookings more than doubled to 38%, lifted by a major three-year cloud deal with an unnamed partner, while operating margins expanded by an underlying 1.7 percentage points.

McDermott, speaking on a late-night call with reporters, denied bowing to pressure from Elliott, saying he would have had to decide on renewing his contract in early 2020. He chose not to, on his own terms, in consultation with Plattner.

"I've enjoyed a great run and an exciting ride," said the 58-year-old New Yorker, who has worn dark glasses since he was blinded in one eye by an accident at home. He will stay on in an advisory role until the end of the year.

"You get to the point where you've done what you set out to do and then some," he added. Asked about his future plans, McDermott answered that it was too early to say before adding with typical ebullience: "I'm just getting warmed up."

SAP has brought fresh management talent to the fore over the past year in preparation for the handover.

Morgan, a polished saleswoman who joined SAP in 2004, was handed board-level responsibility for cloud and 'go-to-market' operations.

Klein, who came to SAP as a student, was promoted to the position of chief operating officer. He has managed SAP's flagship S/4HANA database - the 'brain' for applications that include finance, human resources and logistics.

Yet some clients, in particular in its home market, have become increasingly vocal about the challenges of upgrading SAP's complex products for the digital era, instead demanding 'out-of-the-box' solutions.

"Bill has always had a desire to hear from customers - he wanted to know from me what customers had to say, both the good and the bad," says Geoff Scott, head of the American SAP User Group (ASUG).

That discontent has created an opening for long-time rival Oracle, which trumpeted its success in winning over SAP clients with its own cloud business suite at a recent U.S. user conference.

Klein dismissed Oracle's claims: "None of the customers that were shown there have left SAP," he said. (Reporting by Douglas Busvine; Editing by Tom Hogue and Christopher Cushing)

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