I was surprised to read in The Australian Financial Review last month that ‘SAP’s move to the cloud spells admin drama for companies,’ in a column that suggested our recently announced global strategy update would require ASX 200 boards to “have a conversation about software risk management”.
It recommended “sound risk analysis of whether or not the alternatives … are cheaper and carry less operational risk”.
It was surprising because SAP already operates a cloud-first business in Australia, a strategy that is driven by customer demand. It was first reported in the Financial Review two years ago that our local cloud revenues exceeded those of on-premise software.
This trend has gathered momentum, to the point where cloud now accounts for 70 per cent of those revenues. So although we announced an accelerated cloud strategy in our global third-quarter earnings at the end of October, this is clearly not a pandemic-inspired pivot.
These large organisations are investing many millions of dollars in SAP and other cloud technologies to help them operate successfully in an increasingly digital world, and boards are deeply involved in decisions of this scale.
To suggest they are approving major technology projects without conducting sound risk analysis does them a disservice.
We’re seeing businesses across markets and industry sectors accelerate their move to the cloud to improve the agility and resilience of their operations. And this trend has continued despite the difficult economic conditions presented by the COVID-19 pandemic. The forward-thinking done by customers during recent years has enabled the digital delivery of many services during the crisis.
Many of Australia’s largest organisations have already moved to SAP cloud solutions and technologies. As reported recently, supermarket giant Woolworths views this as an integral part of its business strategy.
Coles also made the strategic decision to adopt SAP cloud technologies in 2018. It is currently moving its human resources to the cloud and already runs core operations in the cloud including finance on Microsoft Azure and procurement in the SAP cloud.
Our cloud solutions and technologies are also used by major financial institutions, government departments, utilities, mining organisations and the biggest companies in many other industries.
Synergy Research estimates that global spending on cloud infrastructure was up by one-third year on year to almost $US33 billion ($45.3 billion) in the three months ended 30 September. SAP is the world’s second-largest cloud application vendor and we’re growing fast.
In this context, I also take issue with the columnist’s suggestion last month that SAP’s downgrading of future profit margins was “the most worrying aspect of the announcement”.
It is true that profit margins will change as our business becomes more cloud-based, but it is also true that we can’t secure the future of the company, and meet our customers cloud demands, by focusing on short-term profit maximisation.
SAP and our customers will continue to measure success in terms of the value we create. This means focusing on what our customers want from us, not what some in the financial markets would like to see us do.
Despite the sharemarket’s negative reaction to our global update, it is the right long-term strategy for delivering sustainable results to our customers, partners and shareholders. Confidence in our global cloud strategy based on growing customer demand has seen us increase global cloud revenue guidance from €15 billion ($24.4 billion) in 2023 to €22 billion in 2025.
This strategy has since been validated by Deutsche Bank, which issued a report offering fundamental support based on the current position of our company, competition and customers.
Its report noted that “few management teams of established companies are bold enough to accelerate the disruption of their profitable ‘legacy’ business model, sacrificing short-term profitability for long-term gains”.
We’ve already made significant investments to transition our Australian operations into a cloud-first business. Although there is powerful momentum behind this acceleration, let’s remember that these decisions ultimately remain in the hands of our customers.
A large and growing number of these customers are moving to the cloud and I have every reason to feel confident that they will continue to run their businesses on SAP, whatever other technology decisions they make.
This article first appeared in the Australian Financial Review.
To find out more about SAP’s cloud products, visit the SAP Australia Cloud solutions and Services homepage.