The AI Threat to Europes Most Valuable Software Company

(Bloomberg) -- Christian Klein jogs onto the stage at SAP SE’s annual sales conference in a grey sweatsuit like he's taking a victory lap. And in some ways, he is. 

The 45-year-old chief executive officer took the helm six years ago just as the company’s sales were starting to stagnate. SAP — which makes software that runs finance, sales and other corporate functions — missed the industry’s shift to the cloud and was playing catchup. In one of his first earnings reports as CEO, Klein gave a bleak outlook and the company’s shares plummeted more than 20%. “I needed a glass of wine or two or three,” he said in a Bloomberg TV interview.

That's when Klein decided to give his corporate clients an ultimatum: Migrate your data to our cloud products, or we will no longer support you. The gambit paid off. Cloud sales started to boom and SAP today is the most valuable software company in Europe.

Now, Klein needs a second act. The surge in sales coming from the cloud transition is going to start declining in 2027, when SAP has said it will begin rolling back support for the older software. Clients need to move over their systems by then, so the bulk of the spending will come in the next few years. After that, SAP will have to offer new services to keep up its growth.The company is targeting artificial intelligence applications as its future, but faces competition from virtually every other tech giant in the world. Many customers are already unhappy with the expensive cloud transformation. Analysts at tech consulting firm Gartner reported concerns this year that the company is losing market share for some newer products outside of its core business and alienating clients because of its hard-nosed sales tactics. 

This year, SAP’s cloud sales are set to reach nearly €22 billion ($26 billion), nearly triple 2019 levels. But interviews with more than 20 SAP executives, employees, customers and partners make clear there are serious challenges on the horizon. Internally, some executives are worried that SAP could fail to find a strategy to get customers to use its new AI products. Investors, who had been bullish on SAP’s cloud growth, sold off the stock in recent weeks on concerns the company could be disrupted by AI.

It’s not just SAP’s future that’s at stake. In Europe, the German juggernaut is one of the only software companies that’s managed to become a world-class player in its corner of the industry. Its market cap has far surpassed its old US rival Salesforce Inc., and SAP’s position as a dominant player means European companies aren’t as dependent on other parts of the world for innovation. SAP’s strength along with a few other standouts – like ASML Holding NV, Spotify Technology SA and Arm Holdings Plc – is a point of pride on a continent that's ceded tech leadership to the US and Asia.

At the sprawling Orange County Convention Center in Orlando, Florida this spring, Klein laid out his vision for the future. He explained to the 11,000 employees, customers and reseller partners at SAP's annual Sapphire sales event how his company will integrate AI across its products. There are assistants to help gather and interpret information and agents to automate work across different applications — all sold in a convenient bundle. “Together,” Klein said when closing his keynote, “we have seen how the SAP business suite infused with business AI helps you in times of uncertainty, and how we help you to get there faster, simpler and at lower cost.” 

But many of the customers who attended the show that week were still digesting the company’s last technological push. Some expressed frustration and exhaustion from the cloud upgrade — an expensive and complex process that most haven’t even started yet. 

NBCUniversal technology executive Abhinav Gupta was the first customer on stage in Orlando to discuss his attempts to update the entertainment company’s heavily customized SAP landscape. The business has been growing and becoming more complex, and its systems now need a more refined set-up. 

“It takes us a really long time to upgrade our SAP systems, and they are quite expensive to maintain. Does that sound familiar, anybody?” Gupta said to laughs on stage.

Fatih Nayebi, vice president of data and AI for shoe company Aldo, said that while he sees AI integration as a necessity, SAP’s offers are sometimes difficult to navigate. “I need to make an effort to really understand this ecosystem myself,” Nayebi said on the sidelines of SAP’s conference in May. He wants SAP to offer more proactive support. “I really like what I've seen, and I think that's the way to go. But we just started.”

The event is supposed to be a showcase for the company’s prowess. SAP’s valuation has flown past all of Germany’s other 39 largest public companies in the DAX. It’s the only German enterprise worth more than €200 billion, and it has a market valuation about 50% higher than No. 2 Siemens. 

It was a hard slog to get there. The company was founded in the 1970s by five German IBM employees who started out building applications for accounting and invoicing. The new company’s key innovation was giving customers access to all their data in one place and significantly speeding up data processing.

From there SAP grew to become the world’s biggest producer of enterprise-application software, but the company struggled to adapt to change. In the early 2000s, cloud computing technology started to take off. San Francisco-based Salesforce popularized the service, leading the way in software that could be delivered and updated over the internet. It took SAP about a decade to start offering its own cloud services, ultimately buying its way into the market.

SAP spent about $30 billion on deals to catch up and had difficulty integrating the new businesses.

Billionaire Hasso Plattner, one of the five founders, hand-picked Klein to be CEO in 2019. Klein, who’s spent his entire professional life at the company after first joining as a teenaged student trainee, was tasked with restructuring SAP and its products so that the different cloud businesses could be integrated seamlessly into one SAP software suite and boost growth. Plattner was the last co-founder to leave the company when he finally stepped away from the chairman role last year at the age of 80, and the move to AI will be Klein’s first big test steering SAP without his mentor.

Internally, though, some executives in charge of selling SAP’s products are concerned that they’ll be able to maintain momentum. 

The growth in cloud sales is set to fade after 2027, when SAP will start charging significantly more to support legacy “on premise” systems, the managers believe, asking not to be identified discussing their observations. SAP said it will end maintenance on the systems in 2030 and that continuing to use the old software will become 'increasingly challenging and risk prone.'

Analysts expect cloud and software sales will continue to grow for the next few years, hitting 15% in 2027, according to data compiled by Bloomberg. It’s set to slow after that, though the average analyst outlook predicts growth above 10% through 2030.

To maintain its trajectory, SAP will have to convince its users to buy more services and new AI products. But most customers are still in the midst of dealing with the cloud transition. About 60% haven’t begun at all. For large firms, cloud migration of their intricate software setups can take years and cost millions of dollars.

Mercedes-Benz Group AG  is one of those firms trying to figure out how to handle its portfolio of more than 10,000 applications in the move. About 1,200 of the programs are from SAP and most of those still run on software stored on local computers, not the cloud, the German carmaker’s Chief Innovation Officer Katrin Lehmann explained when she stepped on stage at Sapphire. She said she’ll prioritize the most crucial programs and is not yet sure what will happen to the rest.

One of the things that made SAP so hard to quit historically is that customers have bespoke setups, which work in tandem on their local servers to run key business processes on sensitive data. Moving to the cloud and a subscription-based model, while initially a hassle, has made it easier for clients to mix-and-match their service providers.

It’s called the “best of breed” approach, where customers cherry pick applications from different providers, and SAP had that model firmly in its crosshairs at the Sapphire event. The mantra “Best of Breed is Dead” was plastered across slides and screens around the Florida venue this spring. 

SAP’s Chief Financial Officer Dominik Asam said the company is focused on increasing the number of cloud products per customer. In 2021, just 9% of cloud customers used at least four SAP products in the cloud. That’s grown to 23%. These setups, where SAP applications can work together, are key to future growth, he said.

Muhammad Alam, SAP’s head of product and engineering, said that the customers he’d met at the conference “universally believe” that picking different services from different providers “is essentially a burden as opposed to value.’’

“You can get the best capability, or you can get seamless integration,” he said. “You can’t get both.”

But users have always been wary of being dependent on one large software company and SAP’s customers, so far, aren’t reducing the number of other vendors they use, according to customers and partners who help businesses plan their SAP rollouts. While many are keeping SAP’s core enterprise products, they’re looking for diversity to decrease dependency and get access to the best software, the people said, asking not to be identified discussing their clients.

For example, Siemens uses SAP for its financial applications, but chose Salesforce for its customer relationship management functions and Workday Inc. for human resources around ten years ago. “We take a platform approach to ensure that we use the best tool for the job,” a spokesperson said in an email.

“We estimate that outside their core market, SAP is losing share in a number of other markets,” said Christian Hestermann, a Gartner senior director who follows SAP. Those include systems for analytics, customer relationship management and database management. According to Gartner reports, SAP grew by 6.8% in the CRM market in 2024, while average market growth was about 12%. Microsoft saw a rate of about 18% in the analytics space, where SAP also grew significantly slower than the market at 12% in 2024. 

In a July report, Gartner wrote that some CIOs moved away from selecting SAP solutions for a number of products because of the pressure SAP exerts on companies to modernize. This prompted a shift from a “SAP-first” to a “SAP-last” strategy, it said.

An SAP spokesperson did not directly comment on the remarks, but said in an emailed statement that SAP had simplified adoption “by replacing complex consumption models with transparent, user-based packages — ensuring predictability and flexibility for both cloud and on-premise customers.” 

In the past, SAP hasn’t needed to spend as much time cultivating customers. It generally sold its software licenses once and earned maintenance fees no matter if the customer used the programs or not. That’s another aspect of the business that’s changing with the move to cloud: subscriptions can be cancelled.

Klein said he knows the company will have to improve its bedside manners with customers.

SAP needs to enhance its lines of communication, share ideas and provide recommendations, he said in an interview earlier this year. The company has introduced rigorous new training for employees to make sure they understand the products. Even a C-level executive, who asked not to be identified, failed such a test the first time around. It’s also changed bonuses for salespeople to ensure they aren’t just rewarded for an initial sale, Klein said.

He put board member Thomas Saueressig in charge of improving customer care last year and asked him to make sure clients were able to actually use the products that are being sold to them — not always a sure thing in a complex software environment. Saueressig said his teams have been helping customers to exploit their full potential and adopt SAP's AI solutions. He’s satisfied with the progress so far. About 34,000 out of SAP’s 400,000 total customers are now using the AI products.

Internally, SAP employees have expressed concern that the company isn’t really showing customers what its AI products can do, people familiar with the matter said. The company hasn’t come up with convincing arguments to help sellers and partners market the applications, they said. SAP has not disclosed its AI sales. 

Gartner’s analysts made a similar observation in their report and said they have seen “very little interest from SAP’s customers and prospects looking to make investments in SAP AI,” likely due to a “complex licensing model and unclear business benefits.”

An SAP spokesperson said in an email that SAP was seeing strong and accelerating demand for its Business AI solutions. “With 240 generative AI use cases already available and 400 planned by the end of 2025, SAP is delivering scalable innovation at pace.” SAP’s AI agents were already automating dispute resolution and financial processes.

SAP is not alone with such struggles. AI employment is still in its early stages, UBS analysts including Karl Keirstead wrote in a research note in August. Some companies told UBS that deploying AI agents for complex use cases could take between two and five years, with one saying agents weren’t ready for “prime time.” They may be “70% accurate for a task, but you don’t know which are the wrong responses,” the customer said. Employees would then take “longer to find out the wrong answers than to do the task,” making it not worthwhile.

Klein may be targeting opportunities in the AI field that are simply not there yet. The UBS analysts determined that corporate customers mostly want to use AI development platforms, specifically 'from cloud providers, namely Microsoft Azure AI Foundry, AWS Bedrock and Google Vertex.'

That will make it hard for SAP to sell customers its suite of services.

“Frankly, across all our checks, we’d argue that most enterprises are still crawling,” the UBS analysts said.

--With assistance from Tom Mackenzie.

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