On the business software company's acquisition strategy, its five-year plan to win, and why IBM isn't a frenemy.
Last week SAP, which supplies software that helps run the finances and operations of tens of thousands of companies, announced its 2014 revenues and cut its 2017 profit target. The reason? Its ongoing transition from a traditional software model (pay up front) to the as-a-service model used in the cloud (pay as you go) is depressing revenues. The company’s stock took a tumble.
In late November, I sat down with Bill McDermott, SAP’s chief executive, in his office in New York to talk about this moment in the company’s almost 43-year history. It’s a period of change that all established companies must endure, especially in the technology industry. McDermott explained why he wasn’t expecting to be rattled by a temporary bump in the road.
Our conversation, lightly edited, below.
Before we begin, tell me why you’re here today, at this small and medium business summit the company is holding.
We have 276,000 customers around the world. Eighty percent of them are SMEs. We look at it based upon the size of the business, zero to $500 million [in revenue]. It’s a big base. With our new technologies, you have a chance to really better serve SMEs. Hana [SAP’s in-memory database] radically reduces the IT stack. You can run your small, medium-size solutions in the cloud so you don’t have to buy the hardware, the infrastructure, or the people. You can rent the software. So it’s much more pleasant now to access the solution.
The other thing is, you have the business network. As you know we made a bold move with Ariba [acquired in 2012 for $4.3 billion] and I think it’s indirect materials. Then we went with this idea of the temporary labor force, which is now playing out very interestingly. By 2020, half of the workforce will be Millennials. A lot of those Millennials will be entrepreneurs and they will be their own company. They will not work for corporations. Some will, but not all. So to have a temporary labor force that’s growing in the world by 40 percent a year and the Millennials making up half the work force, it’s not too bad of an idea to support the business network, which is the Fieldglass move we made [acquired in March 2014].
The next move is Concur, on the travel and expense side. Now you have the whole travel and entertainment network which these small entrepreneurs and SMEs can plug into. I’ll give you an example to underscore why it matters. There’s a CFO at Mediafly, which is a small company, John Evarts is his name, he taught me something here last year. He basically uses the Ariba network as his CRM system to sell into the Fortune 1000. Because he’s a member of the network, he now has access to the big boys, which he would have never gotten if he wasn’t in the network. You with me?
That’s why the assets we have are really important to small businesses. Finally, I really like what we’re doing on the social responsibility side. On the CSR side, we take 100 of our Millennials and we send them to emerging markets around the world.
Your own employees, you mean.
Yeah. Fully paid. And they do things to help the world run better and improve people’s lives. And you know better than I do, the young ones want a cause they can believe in, not just a paycheck. So there’s all this stuff coming together.
And let me just conclude on Hana. There’s 1,700 startups on Hana now. So if you think about health care, and trying to help save people’s lives, whether it’s cancer research or doing something like post-op care for cancer—based on certain genome characteristics—or it’s banking, and you’re coming up with a risk management or fraud solution and you’re a small company and you’re building on Hana…we’re funding these companies, and we’re also partnering with them in a go-to-market strategy so they can get off the ground and start making money and be successful. At some point they become a big partner; at some point, we could even buy them. Or, they just become an OEM to SAP where we split the money based on certain mashups that we do. So there’s a lot going on.
You mentioned Concur. Take me a little bit into to the war room when you wanted to make this deal.
2010. I became co-CEO. We’re in the strategy room. Where are we going to take SAP? We were number one in business applications and analytics. We’re a good company. Participating in a $110 billion market. How do we at least double, maybe triple, our addressable market? That was the business challenge. We said, where’s the world going in the next five years, from 2010 to 2015? Mobile. And that was obvious based on the Millennial generation being the only one ever born into the device.
So that was a trend we wanted to capture, and we did by buying Sybase. So they had the number one unwired platform and fueled the next ambition we had—big data, or if you like, what I prefer, “consumer-oriented contact,” where you have insight that’s meaningful to the ultimate consumer. Yes, big data is the engine. But the empathy for the consumer is even more important. So data is doubling in the world every 18 months, we knew we invented Hana, we had great access to these Sybase engineers to really drive our program, so that was the first move. Sybase was the first big one. We did it in the first 100 days.
And now we’re at 2015, the beginning of the next cycle.
Yeah, but I’ve got to stair-step you a little, alright? So that was the idea of mobile and in-memory computing with Hana. The third big thing was the cloud. Andrew, as you know, in 2010 we had no revenue and no users in the cloud. So we bought SuccessFactors. We bought Ariba. We bought Fieldglass. Just as three very specific things we did. We also bought Hybris to spirit on customer engagement commerce and invented our own cloud for customer, which now has 400 logos of great companies around the world running essentially what you would think of as CRM in the cloud, like unto Salesforce only a better platform and a better user experience. Now you’ve got 44 million users in the cloud, you’re the number-two cloud company as measured by revenue. Soon you’ll be number one, not that far into the future. Very interesting—and that’s a four-year timeframe.
The next thing is the business network. So Ariba, the ambition there was to really open up indirect materials. Here’s why. If you look at any company today in any industry, they form these industry clusters. And these global networks are highly fragmented. It’s not like it used to be in the old days where I’m in New York and all my partners are across the street and we’re building stuff together. They’re accessing my materials and these services and these OEM relationships and third-party relationships from all over the world. That can only be conducted in a very agile business network where it’s totally digital, commerce is conducted in a global economy, and it happens at the speed of thought. There you go with Ariba.
Now, Concur. This is the other piece. As you know, the vision that I’ve got is, “run simple.” We run really sophisticated systems on a global basis. But in this world, if it doesn’t come through simple on the device, where everything is beautiful to see, use, and consume, you’re not relevant. I really believe Concur puts the “s” in “simple” for SAP. But it also does something else that’s really interesting. It builds a wildly significant business network. Here’s why. It’s a $1.2 trillion addressable market. It’s a big market. Each one of those business travelers has a high wallet share on the network with very good margins. So you can make your money on the SaaS model but even more on the transactions.
I’ll give you an example. You take an Uber ride through the Concur network. I get a piece. You make your reservation on certain airlines.
You get a piece.
I get a piece. You eat at certain places, I get a piece. You stay at certain hotels, I get a piece. Eighty percent of the travel that’s done by businesses gets done outside the corporate travel department. So I say that companies should simply dictate based on grade levels at companies: here’s how much you can spend on meals, ground transportation, hotels, and air transportation. If the global economy and the open trading networks available to you—whether it’s Expedia or Orbitz connected through Concur—can give you a better experience? (claps) Go for it! I want you to be happy. Now why do I need all that infrastructure around this global service in my own company that’s managing travel? Think about this. Most companies spend six or seven percent of their total profits on managing T&E.
Sure, it’s the most variable expense after salary.
Bingo. So 84% of Concur’s revenues are generated in the United States where only 30% of the travel budget is driven in the U.S. We’re the most global software company in the world. Here we go: grow time.
Alright. Quickly, the IBM deal—give me some color on that.
I want to make it clear that IBM and SAP have been great partners for three to four decades now.
I call you “frenemies.”
Yeah, and I want to be friends. I really do. It’s better to be friends because there’s so much more that we could do together as friends.
The way I look at it, customers are going to have choice. They’re either going to run their business in their datacenter, in a private cloud that might be managed by a company like IBM or even SAP, or they’re going to run it in a public cloud. With SAP they could run our line of business solutions, our business network solutions, or the whole suite in the public cloud.
In the private cloud, many customers will mass-customize that installation. IBM has agreed to take the Hana reference architecture and the high standards by which SAP wishes to have the private cloud run…it gives us another distribution channel, it gives customers additional choice. And I think it’s really good for both companies and therefore I highly support this.
I’ll give you an example. Yesterday I read that Lufthansa did an outsourcing arrangement with IBM that was over $1 billion. Lufthansa is a great SAP customer, which means SAP and IBM get to operate together in many of the biggest, most important companies in the world. Why should we give the customer choice and help the customer achieve their goals?
Fair enough. You talked about this six-year plan. Why did you announce [in late November] that you were going to make an announcement about it [in January 2015]? What’s the mentality?
The first thing is, I don’t know who’s doing the math. I basically said a 2020 vision. That would be a five-year plan. Twenty minus 15 is five. (laughs)
Well, journalists and math, you know.
Basically what I was saying is, as we announce our 2014 results and our guidance for 2015, on that earnings day I would essentially establish the guidance for 2015 and I would lay out a vision for 2020. On the investor day, which will be in February [3rd], and I plan on conducting it at the New York Stock Exchange, I will have the financial analyst community come in for a deeper dive, year by year, on how we see the trajectory of our growth strategy going. The idea is really simple: in 2010, we gave ’em a vision for 2015. It’s 2015 now—it’s time to give ’em a vision for 2020.
But there’s another thing. I have great confidence in our business and this company and our strategy.
Do you think your core business will hold up? You’re in a period of transition. In 2010, you wanted to grow the business, and you plotted it out. Now you’re in a period where the transition is much bigger than you. What are those challenges?
SAP will remain ever strong in the core. There are many customers that run very sophisticated global businesses on that core. They’ve invested heavily in it. It has near 100% renewal rates in every aspect of our core. And they’re going to be able to innovate on top of that core by adding cloud dimensions to it or, simply, if they choose to run it in their data center, they’re absolutely free to do that. That core is rock-solid. I call it Fort Knox.
The second thing is, a lot of them are going to want to do things in the private cloud. We’ll enable that. We talked earlier about IBM. Partners that are really good with Hana and the reference architecture are free to run in a private cloud environment the SAP applications. This gives customers additional choice.
Then the uninitiated customers that really want Hana, that radically want to simplify the IT stack and go all public cloud, will have that option as well. The big idea around this is the business network and the integrated enterprise. Andrew, you know very well—when we think about what happen to the best-of-breeds in the on-premise world, why did they go away?
They didn’t change. Status quo.
Exactly. They might have been best in certain functionalities, but they didn’t breed. So the integration challenge became unbelievable. With SAP and SAP Hana, whether it’s on-premise, private, or public cloud, you’ll have an integrated enterprise and a business network that’s unmatched in the industry. We’re going bold.
Alright. I spoke with Ursula Burns awhile back and I asked her what the most misunderstood thing about Xerox. There’s so much loaded into that name; you know this. Then I read some of your book and I thought, what if somebody says, “SAP is a good company, behaves well, don’t expect too much of it”? (A primary school teacher told McDermott’s parents the same thing about him as a boy, as described in Winner’s Dream.)
The most important thing for companies is you not only have to change but disrupt yourself and change way ahead of the market curve. You can’t get caught behind that curve. In 2010 we laid out a bold vision which we executed on for 2015. In 2015, we’ll lay out another generational bold vision in how we intend to execute. We are staying five years ahead of the market dynamics we live in today to ensure we never get caught behind the power curve. We love change because change and transformation equals growth company. SAP is a growth company.
Do people not understand that?
They do not understand all the dimensions of the strategy. For example, the business network is the sleeper, and I think a lot of people haven’t fully comprehended it. Secondly, I don’t think a lot of people have fully comprehended that Hana is the de facto standard in-memory platform for OLAP and OLTP. And that is the only database in the world that can do transactions, analytics, and all the unstructured stuff like social. And it’s gonna blow everybody away. There’s no shot! We win this. We’re going to win this thing. And now we’re at the top of the hill cruising down.
This item first appeared in the Jan. 27 edition of Data Sheet, Fortune’s daily newsletter on the business of technology. Sign up here.