Will SAP Miss Bill McDermott or Is It Better This Way?

SAP CEO Bill McDermott stepped down after nearly a decade of building the company as the world’s leading enterprise software. The news which came out last Friday has not only shocked the technology fraternity, but also brought to mind the adage that the only constant in the technology industry is change!

According to an Equilar study, the median tenure for CEOs at large-cap (S&P 500) companies was 5.0 years at the end of 2017, that figure has fallen from 6.0 since 2013. Taking that into account, McDermott’s nine years at the helm of Europe’s tech giant (5 years as sole CEO), was impressive no doubt, though not without frustration. He struck a string of multi-billion-dollar deals and placed SAP firmly in the cloud market. However, it’s interesting to understand why the SAP CEO’s time was over.

Deal Maker (or Deal Breaker?)

McDermott was clearly a deal maker as he was known in the industry. Through $31 billion of deals, SAP entered a string of new businesses and generated good value for shareholders. Annual returns averaged 15% under his leadership, compared to the 12% average of European technology firms. Since he took sole control in 2014, the market capitalization has doubled to almost $155 billion.

However, analysts note McDermott’s operational shortcomings was his failure to integrate many of the acquisitions effectively and to get customers to buy into SAP’s cloud products fast enough.

The 58-year-old American, joined as head of the company’s North American business in 2002 when SAP struggled to compete with rivals like Oracle and struggled with dip in sales of its software licenses. McDermott’s headed a new management team, changed the way the sales department targeted customers, and ultimately boosted sales growth. And just when CEO Leo Apotheker unexpectedly resigned in 2010, McDermott replaced him as co-CEO along with product-development head Jim Snabe.

Since 2011, McDermott spent $26 billion on six key cloud acquisitions, and spearheaded the $8 billion acquisition of Qualtrics International, the company’s biggest deal. Analysts however criticized the purchase as too expensive.

In recent years, SAP’s clients have reportedly felt they are at a disadvantage in their digital transformation efforts to competitors who use products from SAP’s rivals, according to DSAG, an industry body called representing SAP users in the German-speaking world. One major complaint is a failure of SAP to get its new offerings in the same coding language, creating additional work for their clients to get it all working together.

The Signs Were Clear

In April this year, SAP saw some high profile exits, raising questions about its future growth and credibility in the tech industry. The departure of 27-year SAP veteran Rob Enslin who left as president of SAP’s cloud business group (CBG), followed by Bjoern Goerke, a 30-year SAP veteran, who left his position as CTO in April, caused more than a few flutters.

This departure comes in the wake of numerous other high-profile changes and departures, such as those of Bernd Leukert, Barry Padgett, Rich Heilman, and Thomas Jung in recent months.

SAP is still under major pressure in both its shift to the cloud and the move to S/4 HANA, both of which have had mixed success to date. The software giant is potentially under additional financial pressure due to notable activist investor Elliott Capital taking a stake in the company earlier this year.

Jon Reed, analyst and co-founder of Diginomica, cautioned that with a slew of leadership change in less than a year, including the exit of its top boss, SAP will have to prove it has a sound strategy going forward.

Leader Par Excellence

The news of McDermott’s departure has come as a disappointment for many in the industry, particularly those who found his ambition and enthusiasm to be refreshing. He was often viewed as a key figure in SAP’s own digital transformation from old world ERP Company towards becoming a next-generation software company that is AI-powered, cloud-based, and customer oriented.

Under his leadership, the company focused on CRM, Commerce, CX, Cloud, and design thinking – elements that customers believe are necessary for a next-generation enterprise software company.

“SAP would not be what it is today without Bill McDermott,” Hasso Plattner, a co-founder of SAP who chairs the company’s supervisory board said in a statement. “Bill made invaluable contributions to this company and he was a main driver of SAP’s transition to the cloud, which will fuel our growth for many years to come.”

But despite ambitious business goals, its dwindling digital business and an activist investor knocking at the door, one thing was clear – the SAP CEO’s time was over! A reality almost every tech giant faces at some stage of its existence and the future may hold something new and exciting for him.

What Now for SAP?

Of course, the change could be an opportunity for SAP to start fresh and become more customer-centric with a key focus on sales and customer support. It could also be an opportunity for SAP to return to the more product and engineering-centric focus that defined the company for a long time.

McDermott’s resignation was announced alongside ‘better-than-expected’ preliminary third-quarter earnings results. Cloud is the company’s clear growth engine, with revenue increasing about 32% last year. On the other hand, sales from its largest business, which helps clients set up and implement SAP’s software, grew less than 1% in 2019, indicating there is room for growth.

Thomas Fitzgerald, fund manager at SAP shareholder Edentree Investment Management, told Bloomberg, “While it is a shock to see Mr. McDermott stepping down, he is clearly handing over the reins of the business from a position of strength and we are encouraged to see that his replacements are long-term members of the SAP executive team.”

His successors, the co-CEOs’- Christian Klein, the company’s COO and cloud chief Jennifer Morgan – look well suited to meeting the challenges of serving a market demanding more digital technology.

Christian Klein, 39, spent the past 20 years at SAP, after joining as a student in 1999. Jennifer Morgan, 48, arrived in 2004 and was the first American woman on the company’s executive board. According to sources, both were seen as working closely with McDermott, working on its succession plan for months.

Nonetheless, analysts believe, Klein and Morgan will have to find new ways to compete with younger companies like Salesforce.com and Workday Inc. while also moving ahead with its core enterprise software business. Indeed, a tough challenge ahead, unless the company responds to customer needs with a stronger and perhaps a renewed focus on digital transformation. Only time will prove how SAP can steer ahead its goals in the coming months!