SAP Software Head Embarks on Cloud Shift to Catch Rivals

SAP SE’s software chief may have one of the toughest jobs in the technology industry: dragging the IT operations of 45,000 businesses into the era of cloud computing.

Bernd Leukert, a 20-year company veteran, was promoted to the executive board after the sudden departure of chief technology officer Vishal Sikka in May. Now Leukert is breaking with his predecessor’s focus on fighting Oracle Corp. (ORCL) in the database market, and is responding to customers of its market-leading enterprise software who want a clear path for moving their applications to cloud-based systems.

“There is confusion,” Leukert, 47, said in an interview at SAP’s headquarters in Walldorf, Germany. “There’s no debate anymore in the IT industry that the cloud will be the preferred consumption model,” he said, referring to the shift toward delivering software via the Internet instead of installed on clients’ servers. “A road map is something we owe the market.”

SAP, projected to report 17.4 billion euros ($23 billion) in sales this year, supplies a sophisticated palette of software — some 400 million lines of code — that lets companies such as BMW, Coca-Cola Co. (KO) and Exxon Mobil Corp. (XOM) manage everything from sales and marketing to manufacturing and finance.

Dubbed the Business Suite, the product is entrenched in global companies’ everyday operations and supplies more than 60 percent of SAP’s operating profit, estimated at 5.7 billion euros this year, according to Wells Fargo Securities. SAP has 24.3 percent of the $25.4 billion market for so-called enterprise resource planning software, to Oracle’s 12.3 percent, according to research firm Gartner.

Unclear Plan

Yet its growth has slowed. Last quarter, SAP’s software and support revenue — a measure that excludes acquired cloud-computing tools — grew just 2 percent.

Excluding recurring revenue from support contracts, sales of on-premises software are actually falling as customers build fewer new applications that run on company-owned computers. Instead they’re giving more business to cloud-computing providers such as Inc. and Workday Inc., who deliver software as a service via the Web, freeing users of the need to buy and maintain hardware.

Customers and analysts are eager for Leukert to explain how SAP is addressing that trend.

“What’s the time table for moving core applications to the cloud?” said Jason Maynard, an analyst at Wells Fargo. “I don’t think they totally know what they’re doing.”

Showing Path

The confusion stems from multiple areas of focus within SAP. Former technology chief Sikka concentrated on promoting the company’s Hana database as an alternative to Oracle for storing the reams of data used by SAP applications.

Meanwhile, Chief Executive Officer Bill McDermott and former co-CEO Jim Hagemann Snabe have spent more than $15 billion since 2010 buying suppliers of Web-delivered applications in areas including human resources and purchasing, as well as technologies such as database maker Sybase.

The promotion of Hana has left some customers unclear about how it fits with the company’s plans for the Business Suite product and the inevitable shift to Web-based applications.

“In principle, Hana and cloud computing don’t have anything to do with each other,” said Marco Lenck, chairman of the German-Speaking SAP User Group, which represents customers in Germany, Austria and Switzerland.

SAP co-founder Hasso Plattner, who Leukert sometimes speaks with three times a day, acknowledges the tension. “We have to move this franchise forward,” he told software developers this year.

Shares of SAP closed down 0.4 percent in Frankfurt to 57.45 euros. The stock has lost 7.8 percent this year.

Acquired Programs

Leukert said SAP needs to show its Business Suite customers a long-term path toward getting much of their software into an SAP-run computing cloud, and how recently acquired programs can work smoothly with those that users have been running for years.

Leukert, responsible for 18,000 developers worldwide, said he plans to gradually merge the Business Suite with cloud applications. For instance, SuccessFactors’ Employee Central, an HR product for tracking workers’ performance acquired by SAP in a $3.4 billion deal in 2012, will converge with SAP’s traditional payroll system if customers move their HR software to the cloud, Leukert said.

As an interim step toward delivering its software as a Web service, SAP plans to let businesses keep the customizations they’ve made to the Business Suite if SAP hosts the software on its servers for them.

“This is a possible first step that helps companies transition to the cloud,” Leukert said.

Apple Accord

SAP isn’t alone in trying to modernize mainstay computing products getting long in the tooth. Oracle, under CEO Larry Ellison, has been acquiring cloud-computing companies and in June released a version of its 12c database software which uses computer memory to process business transactions and analyze data using the same tools — the same idea behind Hana.

International Business Machines Corp. in July struck a deal with Apple Inc. (AAPL) to support business customers’ use of iPads and iPhones. Microsoft Corp. (MSFT)’s new CEO Satya Nadella has invigorated its decades-old Windows and Office franchises by making them more adaptable for use on mobile devices and the Web.

To be sure, SAP has the luxury of a little time. Companies have invested millions of dollars in its enterprise systems over the years and many aren’t in a rush to change.

“Some ERP systems tend to be there for 15 or 20 years,” said Chris Pang, a Gartner analyst. “A lot of organizations are not going to move their whole stack to the cloud.”


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