Following our last two articles covering a report on the growth of the global cloud analytics market over the next five years, and SAP’s recent announcement at their 3rd quarter earnings call that they intended to accelerate their move toward providing primarily cloud-based provider of Software-as-a-Service, IgniteSAP would like to take this opportunity to explore some of the ways in which this may affect the further development of SAP Analytics Cloud.
Given that SAP Analytics Cloud is already using a cloud architecture it seems to be ideally suited to provide us with a basis for a meaningful discussion on the subject of its development in line with SAP’s revised mid-term goals, and it may also serve as a model by which we can illustrate how other SAP products may function after the transition to a cloud-based subscription model.
We are yet to be given details on the schedule of events for SAP’s cloud ambitions, other than their indication that the move would be over the course of five-years, so an exercise in speculation of carefully limited scope and based on the current status quo would seem to be prudent.
SAP’s change in strategy was made clear by SAP CFO Luka Mucic in the recent earnings call:
“…we’ll be moving large parts of our ERP customer base from on-premise to the cloud, move them out of the upfront software licensing model and into the rateable subscription licensing model …because we are increasing customer lifetime revenue as we are expanding our role from a software vendor to a cloud provider for a significant part of our portfolio. This means we not only deliver software and support services but also the required IT infrastructure and operational services… The potential uplift here is substantial, but even more important is the associated up-selling potential of the Business Technology platform, additional SAP solutions and partner applications developed on top of it …we do not have to deliver all of that ourselves, but … can also procure required capacities from our strategic partners, bundled and at scale.”
CEO Christian Klein summarised the motivations behind this strategy and the predicted outcome.
“The increasing customer preference for cloud is ultimately positive for SAP as we are already the second largest enterprise cloud application vendor, and we continue to grow rapidly even amid the COVID-19 crisis … we are further addressing this market need, accelerating the cloud transition and tripling our cloud revenue to more than EUR22 billion by 2025. The ambition is based on moving our large on-premise ERP workloads to the cloud, and gaining market share for our leading cloud applications, firmly establishing our platform as the basis for business transformation in the cloud, winning in new markets, increasing our R&D invest to deliver new innovations in the Industry Cloud Business Network for sustainability, strong focus on our customer success to ensure adoption higher than usual, and ultimately lifetime value.”
To begin our exploration of SAP’s strategy few simple facts may be extracted from these two statements.
SAP’s original business model was built around its role as a software vendor. Their products were intended to be purchased with a one-time payment, and added customer lifetime value to the business was added in the form of upgrades and improvements to the software. This did not force customers to regularly upgrade but they were encouraged to do so in order to gain added functionality and other benefits from the software: and given that businesses want to have all possible advantages over their competitors then SAP was able to assume that along with added sales of other SAP products, a customer’s transactions with SAP would not be limited to one purchase. This added value enabled SAP to demonstrate consistent growth in the business. The new pricing structure will be based on becoming a cloud provider and access to the software aspect of that service will be in the form of regular payments. This means that while there will be a delay in revenue SAP will ultimately see a more stable and larger revenue stream. Bundled subscriptions will encourage users to adopt other products in the SAP portfolio from a pricing point of view as well as the benefits of integration that come with using one software package.
An article published on the 26th of August by seekingalpha.com with the title “SAP: Cloud Will Drive The Stock Up Over The Long Term” makes a strong case for the long-term growth of SAP cloud revenue. Over the 2nd quarter this year including the lockdown period cloud revenue for SAP grew by 13% in the Americas, 18% in the Asia Pacific region, and 29% in the Europe/Middle East/Africa region.
The article went on to point out why the inherent stability in the SAP cloud strategy would see further investment and long-term growth:
“With cloud revenue expected to represent ~30% of overall revenue and cloud/software revenue representing nearly 85% of overall revenue, the highly recurring nature makes it easier to predict revenues.”
Although SAP stock had a sudden drop of just over 20% (to the level it held at the start of the pandemic) with the release of the 3rd quarter earnings, the preceding statements of overall stability and growth by seekingalpha.com still hold objective weight. The reaction of investors can be considered a reflection on their own attitudes to the practice of investment as much as an assessment of SAP. Like the Rorshach test, which presents test subjects with ambiguous images for interpretation there is no objective truth in their reactions but a subjective expression of feelings. This analogy is not used to downplay the importance of investors but to put their implicit prediction of the valuation of SAP in context. As the global economic climate stabilises into 2021 investors will be more inclined to seek out good prospects for growth, over protecting what assets they have already. Though the article was written prior to SAP’s revision of mid-term ambitions, its focus on the long-term remains relevant.
“Cloud revenue will continue to be one of the biggest revenue growth and margin expansion drivers for the company over the next several years, and investors will closely follow any trends in the market.”
There are other stabilising effects of subscription-based pricing to keep in mind as well. In his statement at the 3rd quarter earnings call Luka Mucic also pointed out the benefits to SAP of the associated up-selling or cross-selling from the delivery of support services, and also delivery of IT infrastructure and operational services. Added to this is the income derived from deals with partners where both parties agree to endorse each other’s products, so that an industrial manufacturing customer of Bosch, or Siemens for example may be presented with the option of buying into SAP products as they have been proven to integrate well with their own technologies.
The associated-services-and-bundles method of up-selling will become increasingly prevalent with cloud provision as SAP will be able to develop more dedicated facilities and infrastructure at scale. The customer benefits from this in that they will not have to fund the set up and maintenance of their own facilities, with regular overhauls as processing power and methods of data storage are surpassed by new technologies, but only invest in the provision of the service to the scale that they require it. This also improves the sustainability of the larger cloud business network as less energy is required for the sum total of computing power necessary to run the economy, because the computing work of thousands of smaller personal computers and networks can be done in one data centre.
In order to clarify the following paragraphs it is necessary to define the terms we are using as there is some ambiguity in the use of language regarding emergent technologies, particularly in cloud computing.
SAP’s re-branding of “SAP Business Objects” (part of their business intelligence solution) as “SAP Analytics Cloud” was intended to focus public perception of the product on the cloud-based architecture but many of SAP’s products partake of this same architecture.
As a remotely accessed database S/4HANA is a “cloud” product and in fact a great deal of other software products being released today. Discussing the evolution of cloud computing on synextra.co.uk Chris Piggott alludes to the ambiguity of the term “cloud”:
“As early as 1995, clouds started to appear within network diagrams and represented anything too complicated for non-technical users to understand.”
Today the term generally denotes remote storage and processing but the variety of uses for this software architecture makes it somewhat difficult for companies to differentiate from each other and to make their potential customers aware of the uses of a product. This is one of the tasks facing SAP and we may see a campaign of re-education around cloud computing and the development of a new set of terms to distinguish one form of cloud computing service from another.
SAP Analytics Cloud sells itself currently as a centralised business intelligence platform. The cloud aspect of the architecture is really the means by which it achieves the centralised and real-time “control panel” view-point.
The key functionality of SAP Analytics Cloud can be split into several areas. Firstly, facilitating the retrieval and import of different types and formats of information regarding the operation of the business from various sources (for example from other SAP apps, the public cloud and private networks). Secondly the filtering and organising of that information so that it may be interpreted. Thirdly, the interpretation and representation of that information so that actionable business decisions can be made, or shared with other stakeholders so that group decisions can be acted upon.
The structure of SAP Analytics Cloud gives these various aspects the terms “Datasource and models”, “Visualisation”, “Collaboration”, “Presentation” and “Administration and Security”. This last category is something which is becoming increasingly important to cloud applications: that is the protection of corporate and private data along with the challenge of granting access to the right information to the correct individuals so that they may do their work uninhibited.
In a previous article IgniteSAP discussed some research published on the growth of the cloud computing market over the next five years. As part of this discussion we spoke with an experienced Subject Matter Advisor of SAP Analytics Cloud about the potential development of Business Intelligence software: what functionality was likely to be added or improved, and what would be desirable and achievable within the wider context of the evolution of cloud computing.
Our Advisor highlighted some key areas which we would like to share.
We are likely to see/would like to see:
We can see in the response of our contact to our queries around the potential development of the software that this user suggested improvements that fall within each of the categories of function that we specified above: Retrieval and Import, Filtering and Organising, and Interpretation and Representation. This suggests that as SAP Analytics Cloud (and previously Business Objects) has been adopted by a first generation of users and as cloud service provision has become more widespread, users have formed clear opinions as to how it should be improved in each area of its functionality. We should also say at this point that these categories of function (expressed in this manner) may also be applied as ways in which the delivery of cloud-based software services could be improved as well.
Our trusted SMA also raised a couple of other points about the next five years of cloud computing and SAP Analytics Cloud in particular.
SAP Analytics Cloud was believed to have an important role to play in the integration of various types of data (due in part to the complementary modular structure and easy integration of their other software solutions).
Another area which our respondent raised was the question of how SAP could facilitate users of SAP Analytics Cloud to “pull out the right business insights out of the tons of data”. This falls within the category of interpretation. It is great to have all of the information but it must be carefully classified, weighed and measured if it is to provide the right business insights. The problem of reducing large data-sets to actionable outcomes without distorting the truth contained within them is an issue that will become increasingly problematic as access to big-data is propagated.
“Adaptability to connect to all kinds of data-structures” was also a desirable feature which SAP would do well to pursue. Keeping in mind that the volume of data available for inclusion in the decision-making process is huge, the SAP user we questioned pointed out that it would be necessary for SAP to employ intelligent algorithms in order to speed up the process of filtering, presumably so that more time is freed up to spend considering strategy rather than low-level administrative tasks. The ability of an algorithm to “judge” qualities in data rather than quantities is as yet rather limited.
Another feature that was expected was the provision of more means of representation of the data like “dynamic visualisation formats”. Although SAP Analytics Cloud makes some provision for geographic data mapping (with locations) and time-based data sets, the representation of some complex (and multi-dimensional) information cannot be encompassed by graphs and pie-charts.
SAP Analytics Cloud takes into account the ways that humans process information (representing in a 3-d space and narrativizing) with an emphasis on models and “stories”, but this is certainly an area for further research and development, particularly as sometimes the human understanding of the picture is the weak link in the chain, regardless of how it is represented.
With a wider view we could extrapolate from this small case study to the rest of the SAP portfolio. Our categories of function: Retrieval and Import, Filtering and Organising, and Interpretation and Representation may be applicable to all software that seeks to utilise the cloud architecture. Conversely, we might also apply the label of “Business Intelligence” to the whole portfolio. So, we can see that the areas of overlapping between SAP solutions is considerable and may expect there to be extensive renaming of applications and transferring of functionality between the existing boundaries as SAP accelerates its transition from software vendor to cloud service provider.
Despite the recent adverse reaction to SAP’s revision of its mid-term ambitions and the move to the cloud, the strong business case for re-focussing on cloud computing has been made. The public appetite for the advantages of cloud-based software services is growing and users of SAP Analytics Cloud will see some changes ahead of the rest of the portfolio.
While it is necessary for SAP educate users as it develops its own cloud provision it is also necessary for them to listen and react to the needs of SAP users who are the best resource for the company as Beta-testers. We see that “the cloud” used to mean the complex area of computer networking that non-specialists don’t need to understand. What is apparent is that we all need to understand the cloud just a little bit better if that is where we are headed.
