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What 'share of wallet' means and why it matters to SAP

German software giant reprises old motifs at annual show Sapphire

SAP has attempted to energize its annual Sapphire shindig by expounding the virtues of its strategy since €28 billion was wiped off the company's value in 2020 due to the pandemic.

The turnaround plan began with the launch of RISE with SAP, designed to accelerate customers' move to the cloud and its latest S/4HANA ERP platform with the help of global consultancies and cloud hyperscalers.

The German software giant promised customers could hold it to account for the delivery of third-party partners in the package.

But executives have fleshed out why the strategy is so necessary for the investors and what it might mean for customers.

Firstly, SAP is, in the short term, taking a sizable hit "moving large parts of our ERP customer base from on-premise to the cloud," as CFO Luka Mucic told investors in 2020.

While this means less cash upfront, it does increase "customer lifetime revenue" by not only providing software and support services, but also the IT infrastructure and operational services in many cases. "We are effectively expanding our share of the wallet," Mucic said.

At Sapphire this week, Scott Russell, global head of cloud and customer success, told journalists and analysts that companies would be happy to spend more of their enterprise budgets on SAP because it would be cheaper once they are on its platform.

SAP expects every dollar spent on S/4HANA to result in an additional three dollars spent on additional solutions.

"We had a 60 percent increase of net new customers for S/4HANA in Q1 alone. But we also measure the expansion of the existing customers. The experience that we have is when you take a financial platform the cost to serve and to expand continues to decrease, the more we're able to expand in our customer base," Mucic said at the event.

So SAP lowers its costs to sell new products once it has customers on its cloud platform. But the story might play out over several years, he added.

"They don't need to buy it all at once. We want them to be on a journey and it keeps us hungry because we've got to get the proof points, [and demonstrate] the value being delivered."

For example, SAP might put payroll on S/4HANA, but later see the benefits of extending to the contingent workforce, then adding travel and expense management and so on.

Mining for treasure

Liz Herbert, VP and principal analyst at Forrester Research, said: "Most of the big themes this year build on prior announcements: sustainability, cloud, S/4HANA, and RISE. While it is good to see alignment and continuity in the messaging, they missed some opportunities to go bigger showcasing innovative customer stories and proof points on these."

SAP did manage to detail its approach to process mining through Signavio, which was acquired last year for around $1.2 billion. "We expect this will be of interest to SAP customers due to the ability to get better business process benchmarks versus prior approaches. SAP has long been known for business process best practices and benchmarks, but this takes it to a more automated and data-driven level than in the past," Herbert said.

SAP CEO Christian Klein used his keynote to expound some of Signavio's virtues. "With SAP Signavio," he said, "we are going to benchmark your existing end-to-end process landscape against the best practices and data we collected from over 40,000 customers. These benchmarks will help you to make the case for change, allowing your business and IT leaders to discover to discover new growth opportunities."

By using the tool, companies can uncover inefficiencies in processes and fix them before they move to configurable, modular applications in the cloud, Klein said. From there, SAP promises to bring in automation as well as expand its application footprint.

"The business transformation as part of RISE with SAP goes hand in hand with the transformation of your IT landscape because by harmonizing business processes, we can enable you to remove the complexity in your IT landscape. The customizations the modifications to move to a clean and modular application landscape in the cloud," he said.

The argument goes that users get a simplified application landscape and SAP gets a greater share of wallet, but not everyone is convinced.

While SAP said its RISE initiative has won 2,000 customers in Q1 2022, more than 60 percent of those were net new customers, which suggests existing customers are still struggling to see the argument for new core enterprise applications in the cloud.

Duncan Jones, Forrester vice president and principal analyst, said: "Existing customers on older versions aren't migrating to S4/HANA as fast as SAP hoped they would. This is supported by our data, which shows 70 percent of SAP customers plan to stay on their current version."

While it was of note to hear Klein talk about modular business applications, it was "particularly disappointing to find that he's still selling this fundamentally unsound omni-suite concept," Jones said. "SAP is great at creating diagrams that appear superficially attractive, but are bad ideas in practice."

Jones explained that SAP's approach takes an inside-out view of data as internal transaction history whereas modern applications need to process external data too, and get it when they need it, rather than waiting for it to be loaded into the SAP database.

He also pointed out that the benefits of moving to one data model can be outweighed by the negatives if parts of the technical layers are inferior to competitors' systems. There were merits to following "a more eclectic strategy instead of your SAP-centric one," Jones said.

For now, SAP's strategy is working. Its latest quarterly results showed cloud revenue growth up 31 percent while revenue for SAP S/4HANA cloud increased 78 percent compared with the year-ago quarter. But this is from a relatively low base. With the majority of customers still running SAP's applications on-premises, the party, like Sapphire, won't last forever. ®

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