The transformation of German enterprise software maker SAP AG over the last couple of years has been nothing short of dramatic.
Until recently, SAP was seen as a legacy pillar of global commerce whose growth was on the wane. Though at one point more than 60 per cent of global transactions touched an SAP system, the company had failed to invest sufficiently in innovation by the time the global economic crisis hit. The rise of cloud and mobile device-based applications saw SAP lose steam and cede ground to nimbler rivals such as Salesforce.
The company is now well into its second act. After investing in the cloud and mobile space, the company’s top executives believe that the new ‘Hana’ software platform (an in-house product) will be a catalyst for SAP’s reinvention. Hana’s ‘in-memory’ computing allows businesses to perform tasks and processes in a matter of mere seconds, rather than a few hours.
Bernd Leukert, member of the Global Managing Board of SAP AG, is the man making sure that the company’s core business suite is successfully powered by Hana. In an interview to The Hindu, Mr. Leukert talks on the changing nature of enterprise software, global headwinds and why he’s excited about India. Edited excerpts:
The first nine months of this financial year have seen SAP missing growth forecast targets, and a general slump in sales. What kind of headwinds do you see for the software industry?
First of all, we are proud that we continue to report double-digit growth. This is not something all companies can do these days, and we are proud of that.
What we are seeing though is a shift from massive upfront investment and the deployment of software through an on-premise approach towards cloud deployment and a subscription-based model.
From a client perspective, it is simple. They would rather want to consume software as a service. What this means is that clients no longer want to have upfront or huge capex investments.
The other dimension that we see… is that due to the massive innovation happening in the computing space [such as mobile and tablets], our customers require more and more education regarding the latest technology. They have to educate their own employees regarding the latest developments in application innovation and software-IT innovation, which, in turn, requires massive investment on their part.
We see clients hesitating to spend huge amounts of money in a short-timeframe to keep the education levels of their employees high. So, the upfront investment part and the education challenge are two headwinds. How do we tackle this? Well, we try to turn it to our advantage. If customers want to go to our competitors, who are primarily only cloud-based providers, it makes them think ``Oh this is a new start. What happens to our old data, what happens to our old investment,’’ and so on.
All of our customers worry about what happens to their data and old investment, whenever they start considering the enterprise cloud. What we do is offer a smooth transition and migration into the enterprise cloud immediately by offering all the capabilities with new applications.
Within the Asia-Pacific, which is widely touted as a growth region, sales and growth have also dropped. Why? What is your outlook for this region?
There have been some leadership and execution issues. However, last quarter was a little better. We just had a big conference in Beijing two weeks ago, and we are excited. The opportunities in Asia are huge, specifically as well in China and India.
Look at China, we see GDP growth rates forecast between 7.5 and 8 per cent. In Europe, we could only dream of that kind of growth!
For us, this means that we will continue to invest in Asia… we will continue to invest in China more than ever before. We have also identified sweet spots where we can benefit significantly from these tremendous growth rates.
Some of these sweet spots are in the finance, banking, supply chain and manufacturing sectors. So with that investment and general stabilization on the leadership side, Asia will be a growth driver in the future.
One more thing you need to understand specifically in India, which is hurting, is the whole macro-environment and the political instability. This is a reason why it has hurt for the last six months. This is also a good point in China also. Though we had execution issues with our leadership there, the election in China hurts as well. Corporate budgets are frozen until the election happens. And now that the elections in China are over, companies are starting to plan their budgets for the next three to five years. In India, this [problem] is now coming a bit later.
How is the idea of core enterprise software changing, either through the way you conceive it or build it?
Well first of all, the deployment model will change and has already started to change. From on-premise, I see a strong trend towards the cloud.
The other thing is that very traditional business processes will fundamentally change as well.
For instance, traditional ways of getting insights into taxation, in general,was boring in the past—but it is becoming reinvented these days. Let us take an example of the very traditional field of finance. Without Hana, a CEO or a CFO of a company looked at the company’s P&L account at the end of every month, quarter and year. Much of the announcements and forecasts that he gives to the financial markets are mostly based on this basic P&L.
Now with Hana, you can get minute-by-minute insight and, that too, at your fingertips. If a CEO has a meeting with a financial analyst in two hours, all he has to do is press a button and see how his business is doing on that current day. This is an example of a very traditional business application that is being reinvented by the application of Hana. So we are forced to think this way when it comes to enterprise software.
We are at a point in time where the complete logic of these programs is being reinvented. And this is always to the benefit of the end-consumer, in this case the CEO or the CFO.
In enterprise software, you see the cloud coming and disrupting the general order of things. Where do you see the balance between an on-premises delivery model and delivery through the cloud? Will these two deployment models co-exist, the way Wal-Mart and Amazon do?
At the moment, it is not yet 50-50, with the percentage of on-premises deployment and cloud deployment being equal. But you are right.
Personally, I forecast that it will hit 50-50 very soon. From a business perspective, this would mean that our revenue and our business model will change from an up-front licence model to a subscription-based business.
I fully confirm that, in the near-future, it will go up to 50-50.
The trend will shift past 50 per cent in favour of cloud deployment in the areas of non-differentiating commodity processes. For instance, if you talk about the area of recruiting or even sales… it isn’t an area that is a competitive advantage for a company. It doesn’t matter what industry you are in… the sales and HR part of it remain the same in most industries. Therefore, in these areas, the penetration of the cloud delivery model will go as high as 80 per cent.
There are other differentiating processes, where companies do see a competitive advantage. In those processes, at least today, they want to keep it in-house. They want to keep it inside their own data centres. For example, I was in France and was talking to a perfume maker. He has a highly complicated product process. His company’s core competence is the secret behind the product process. He doesn’t want to give that up to the outside world. While with Hana we could accelerate his product process, he doesn’t want the cloud-delivery model… as it could kill his intellectual property. So, there are core competencies which, for another three to five years, will still see an on-premises approach.
What makes you excited about India, despite the low cloud adoption rate and general economic uncertainty?
First of all, from a personal point of view, when I leave India I am always more inspired and more motivated. That goes with the openness for innovation, the openness for change, the openness for conquering new opportunities that you see here. India is absolutely leading in that category.
With that impression, you leave as a happier person than when you first flew into India! It is difficult to explain why, but when I come here I’m in a totally different mood than when I leave. India is one of the growth markets. We have headquarters in Germany, but India is our biggest innovation lab. This is definitely due to the attitude of the people…it is due to the huge number of highly educated students who come out from your universities and so on. And do not forget the huge language advantage we have here. English is a natural ingredient of everybody here, but if you go to other countries such as Russia or China, there are language barriers. I’m not saying it’s impossible to communicate there, but here it is a huge asset.
From a market and investment perspective, I have no doubts in saying that it was a perfect decision for us to come to India fifteen years ago.