BackIT services firm SAP puts turnaround strategy into motion
CEO Christian Klein has a bold plan to turn things around. It hinges on getting customers to adopt a suite of new cloud-based products that work faster and cost less to distribute and maintain
PremiumIn Christian Klein’s first year as sole chief executive officer at SAP SE, the company’s shares had their worst performance in 12 years. The pandemic damaged sales. And he lost his co-CEO in a high-profile ouster that eliminated the only woman running a large, publicly traded German company.
Klein has a bold plan to turn things around. It hinges on getting customers to adopt a suite of new cloud-based products that work faster and cost less to distribute and maintain. The aim is to put Europe’s largest software company on par with a generation of nimbler upstarts, such as Salesforce.com Inc. He’ll also need to find investor support for the expensive program in the middle of an economic slump.
“If I had one wish for 2021, it would be that we can see a year where we can consistently execute our strategy and prove that it is the right one," Klein said in an interview. Weaning users off older products carries risks. SAP works with large enterprises with a low tolerance for disruptions. And the switchover is cutting into profit, trading big upfront payments for smaller subscription installments. Though Klein knew the decision wouldn’t necessarily win applause from investors, they were initially supportive, he said.
But as the company put the strategy into motion, customers radically scaled back their software purchases as they grappled with fallout from the Covid-19 pandemic. In an unscheduled announcement late on a Sunday night in October, SAP slashed its sales outlook and said growth and margin improvement would be limited for the next two years. Shares collapsed 22% the next day, wiping more than 30 billion euros ($37 billion) from the company’s market value. A January update showed signs of success in moving customers to the cloud, though the company warned the pandemic will continue hurting sales.
Klein – a 40-year-old who’s spent his entire adult life at the Walldorf, Germany-based company after joining as a student in 1999 – has pushed forward during the first month of the new year. The company’s announced high-profile management changes, chief among them naming Julia White, a nearly 20-year Microsoft Corp. veteran, head of marketing.
The company also expanded its partnership with Microsoft and will integrate some of their products, including adding Teams to SAP’s software. And SAP is moving ahead with plans to raise as much as $1.28 billion from listing a stake in its Qualtrics International Inc. unit.
Still, Klein will have to convince investors to go along for the ride in a transition that could ultimately take years, in the middle of a pandemic that’s continuing to hammer customers.
AXA Investment Managers, which has held a stake in SAP for 20 years, cut its European funds’ holding in the company by a third in November “to acknowledge the fact that on a short-term basis we have lost some momentum," said Gilles Guibout, a portfolio manager. Though Guibout agrees a faster move to the cloud is necessary, SAP’s course correction is likely to mean the company has to “over invest" for the next three years, he said.
With a market value of more than 128 billion euros, SAP is Europe’s sole contender to rival U.S. enterprise software giants such as Salesforce and Oracle Corp. Its founders, Hasso Plattner and Dietmar Hopp, are Europe’s two richest tech billionaires with a combined net worth of just over $24 billion, according to data compiled by Bloomberg.
Plattner, who remains at the company as its chairman and largest shareholder, backed Klein after the shares dropped in October, buying an additional 249 million euros in stock in a show of support.
“When one of the largest shareholders buys more shares it gives me confidence," Klein said. “I got that feedback from the whole supervisory board."
It wasn’t the first time Plattner had taken Klein’s side. Klein had initially shared the CEO role with Jennifer Morgan in the U.S. She was an outgoing, American marketing guru with experience running the company’s most crucial business, the cloud division. He was the workhorse and former chief operating officer, more comfortable behind the scenes. The two were initially seen as complements.
But the pandemic frayed the relationship as different time zones and outlooks slowed decision making and caused clashes.
Klein got the news that the supervisory board had voted Morgan out on April 20, the same day his second child was born. Plattner told employees in a memo at the time that it was “crucial to have one sole CEO navigate us through this unprecedented change." Klein has said the pair disagreed on several decisions, and his last few conversations with Morgan were “pretty emotional," but declined to say more. Morgan has since taken a job at Blackstone Group Inc. and declined to comment for this story.
Now on his own, Klein also had to confront the legacy of his predecessor Bill McDermott.
For Klein’s plan to work, SAP has to be able to offer customers a suite of products that work together seamlessly. But McDermott liked to buy his way into new technologies, spending more than $30 billion on acquisitions during his approximately 10-year tenure, according to data compiled by Bloomberg. The shopping spree put together a collection of businesses that may have helped modernize SAP’s offerings, but weren’t necessarily well integrated.
McDermott’s strategy showed mixed results, and SAP attracted the attention of notorious activist Elliott Management Corp., which built up a stake and demanded the company focus on its profit and share price. The company announced changes in 2019 that appeased the group, though McDermott resigned months later saying that a decade was “a long time" to be CEO. The Qualtrics IPO later this year will represent a high profile break with the past as the company sells a stake in McDermott’s biggest deal. The U.S. business, which makes software for conducting customer surveys, cost SAP $8 billion about two years ago.
This year is set to be crucial for SAP, when the nearly half-century old German software giant must prove to investors and customers that it can put past missteps behind it keep up with its larger U.S. rivals.
“SAP is really at a turning point right now because we think there’s this once-in-a-lifetime vulnerability happening," said Julie Bhusal Sharma, an analyst for Morningstar Inc. “What he’ll have to deal with is making this migration a much smoother process for its existing customer base, I think that thus far it’s been ruffling a lot of feathers."
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