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ANALYSIS-SAP pitches cloud transformation to pandemic-hit customers

* German software group promotes ‘Rise with SAP’ package

* Touted as a way to transform business processes

* Pandemic may dampen appetite for root-and-branch upgrades

* Rivals also covet growth opportunity targeted by SAP

BERLIN, Jan 28 (Reuters) - SAP says it is ready to lead customers into a cloud-based future, but the business software group may need all its powers of persuasion to convince its 400,000-strong client base to launch a major overhaul of systems in a pandemic.

The leading provider of vital enterprise applications from financial management to logistics this week launched its “Rise with SAP” pitch - the result of a strategic pivot announced by CEO Christian Klein last autumn that stunned markets and caused its biggest share price slump in a generation.

Investors balked at Klein’s abandonment of his mid-term profit targets as SAP winds down its legacy software-licence business, which is profitable and cash generative, replacing it with subscription revenues that are standard for cloud services and are more spread out over time.

Clients are keener, argues Klein, telling Reuters in a recent interview that they “want to make the move to the cloud, to get more resilience and to transform their business with SAP together”.

Industry experts say SAP’s shift to hosting more standardised applications from remote datacenters is key to keeping up with rivals such as Salesforce and Oracle .

Even so, they question whether SAP’s core customers are ready to embrace running the beating heart of its newest systems - the S/4HANA database - in the cloud rather than the more bespoke version typically hosted at on-site datacenters.

“Fewer than 10% of its existing customers have actually begun their journey to S/4HANA,” said Christian Hestermann, an analyst at Gartner Research. “SAP must make that transition easier for its customers.”

TIME TO MARKET

The “Rise with SAP” event showcased Siemens, the German industrial conglomerate, as a case study of a large business looking to reconfigure its business processes as part of the cloud migration.

Industry consultants point out, however, that many firms are not ready to tackle a potentially costly and disruptive upgrade to their entire enterprise landscape amid an economic slump caused by the COVID-19 pandemic.

Some, such as bricks and mortar retailers, may simply want to add e-commerce to their portfolio, said U.S.-based IT consultant Vinnie Mirchandani, while for healthcare providers adding “telemedicine” features like the ability to run remote consultations might be a greater priority.

“The question is not that there will be a secular decline in what SAP is doing,” said Mirchandani. “But, in the short term, people don’t have the money for it.”

SAP’s influential German-speaking user group DSAG gave a guarded welcome to the Rise initiative, but cautioned it should not be a “one-way street”.

“If, in the course of a cloud transformation, it transpires that an on-premise product offers a better fit then it should be clear from the outset that it is possible to go back,” DSAG board member Thomas Henzler said.

SAP has made it clear that Rise is not take-it-or-leave-it proposition: It will continue to support hybrid solutions that mix on-premise and cloud elements.

ALWAYS ON

Industry veterans say customers may also prefer to stick with the software licence model, which allows them to invest in upgrades when they want, whereas subscription-based Software as a Service (SaaS) is always on.

“You can’t just say hey, I’m gonna wait a little bit on this,” said one executive who spoke on condition of anonymity.

“It’s like electricity, you know, you get your monthly bill.”

Other clients may find it difficult to digest the accounting implications of the SAP switch, noting that software licences count as below-the-line capital spending whereas subscriptions are an operating cost that can cut into reported profits.

“That is killing your EBITDA (core profit). And if you’re a private equity-owned business, that’s quite a conundrum,” said Sean Roberts, who leads the public cloud team at Ensono, a provider of cloud, hybrid and mainframe managed services.

GOING FOR GROWTH

SAP’s Klein expressed confidence that clients would go for the all-cloud option that will offer the most flexibility to connect SAP’s own apps, as well as those of its competitors, while promising a reduction of 20% in the so-called “total cost of ownership” of its services.

SAP, which reports final 2020 results on Friday, forecasts that cloud revenue will grow to more than 22 billion euros ($27 billion) by mid-decade from 8 billion euros last year.

Competitors are eyeing that growth too, however, as SAP makes its platform more open to companies that may prefer to pick and mix enterprise applications from a range of vendors and look to “hyperscale” cloud providers like Google or Amazon Web Services to run analytics.

“SAP doesn’t face an existential threat,” said Matthias von Blohn, Vice President Insight & Customer Strategy EMEA at SAP’s chief competitor Oracle.

“But it doesn’t have any trump card in its hand to increase its market share. SAP is in defence mode. And the hyperscalers are sucking away the innovation budgets of SAP’s customers.”

$1 = 0.8262 euros Writing by Douglas Busvine. Editing by Mark Potter

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