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SAP puts the focus on AI, but cloud is still the key

ERP giant wants to boost its AI capabilities, but there remains work to be done persuading customers to shift to its cloud offerings

SAP has put the spotlight on its artificial intelligence (AI) plans in its latest results, but persuading customers to move to the cloud is still the most important part of its strategy.

SAP said the full-year revenue stood at €31bn, up 6%. Cloud revenue grew by 20% to €13.66bn, and the firm said this surge was primarily due to “strong” double-digit growth in its software-as-a-service (SaaS) and platform-as-a-service (PaaS) offerings. SAP S/4HANA Cloud revenue jumped by 67% to €3.49bn.

For 2024, SAP expects €17bn to €17.3bn cloud revenue, somewhere between €29bn and €29.5bn cloud and software revenue and €7.6bn to €7.9bn operating profit.

SAP listed companies such as Boots, Christchurch City Council and Daimler Truck as choosing its RISE with SAP cloud business transformation offering, and said companies including Zurich Insurance Company had implemented SAP S/4HANA Cloud.

Beyond the financial update, probably the most eye-catching element was that SAP said it would focus more on AI as an area of “key strategic growth”. That will mean bringing more AI to its products, but also using AI for its own internal cost saving.

SAP will run a company-wide restructuring programme this year that is likely to affect as many as 8,000 jobs. The company said the “majority” of this would be covered by voluntary redundancy programmes and internal retraining, and said it expected to have a similar headcount at the end of the year as it started with. The company has around 100,000 staff, and the programme is likely to cost the company around €2bn.

SAP CEO Christian Klein said the results showed it is meeting or exceeding the outlook on all of the key metrics. “To turn around such a tanker like SAP in over 180 countries, that’s not a given,” he said. “This is a remarkable result,” he said, further highlighting SAP’s plans to move further with adding AI into its products – investing €1bn in AI – which he said would allow its customers to optimise supply chains and hiring.

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But for all the talk of AI, the top priorities for SAP are still to persuade customers to shift to its newer S4/Hana offering, and to migrate away from their on-premise installations and into the cloud.

“Those to me are the more important part of the story,” said Liz Herbert, vice-president and principal analyst at Forrester. “All software vendors are moving to AI, but with SAP in particular they were pretty late to move to the cloud versus other ERP competitors, particularly their number one global competitor Oracle, who made a push similar to this more than a decade ago,” she told Computer Weekly.

Software suppliers are often keen to move customers to the cloud because it can make it much easier to introduce new features when all the customers are running the same code base. It also means the vendors do not have to support too many different similar products which can push up their costs.

However, getting customers to move is not always easy. Customers may have spent a lot of time and a lot of money already: for the largest customers perhaps as much as a billion dollars rolling out their ERP system and optimising it to work just right for their organisation.

As a result, they may not feel in much of a rush to move as they are happy with what they have – or may just have other priorities. “For many large global companies, moving to SAP’s next product of S4/Hana is a hundreds of millions of dollars, or even billion dollar project, so it is a giant undertaking,” said Herbert, adding that SAP’s ability to continue to move its core base to the cloud and to do that with good customer experience “remains an area of challenge that we see”.

SAP’s AI plans also feed into its cloud strategy: last year, SAP said that some AI enhancements would in future only be available via its RISE or cloud products – something that not all customers are happy about.

Additional functionality

Beyond this, there are some customers still waiting for additional functionality in the cloud products, said Herbert.

“There are also customers who don’t feel the cloud version is ready, particularly in some of the deep, industry-specific areas where SAP was very strong in the last version of the product we continue to hear that,” she said. “They need to continue to deepen the industry piece. Industry has always been one of the key ways SAP differentiates, and in this overall shift to cloud that hasn’t come through as strongly as historically.”

Christian Hestermann, senior director and analyst at Gartner, told Computer Weekly: “The move to cloud makes perfect sense in some areas, especially in what we would call administrative ERP, the more horizontal functions in a company: financials, HR, indirect procurement and those types of things. Customer experience, CRM, those are done deals when it come to public cloud.”

However, SAP’s customer base is wider than this, which means the one-size-fits-all approach that is often seen as one of the hallmarks of the cloud might not suit everyone.

“SAP also supports a different area of operational ERP, core ERP, especially for product-centric companies – think manufacturing companies,” he said. “SAP has been able to deliver deeply integrated solutions that support companies’ end-to-end processes. In those end-to-end processes, that’s where the diversity in the customer base shows.”

These customers in sectors such as manufacturing, retail and distribution have built special ways of running their business which differentiates them from their competitors. Their differentiation is their competitive advantage, and is the only reason why they can survive in a competitive market.

“Gartner’s research shows that two-thirds of SAP’s customer base has not yet started a migration to SAP S4/Hana,” said Hestermann. “One of the reasons is cost and value for some of those customers who find it difficult to build a positive business case, and some others are not convinced that this general strategy in terms of standardisation and public cloud is right for them.”

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