Updated: Mar 30, 2021
In SAP’s recent Q3 earnings announcement, the vendor adjusted downward its full-year profit and revenue outlook, abandoned its 2023 goals, and said it’s setting new targets for 2025. The news caused the market value of the German software giant to plummet by $41B in minutes. Why did this happen, and why should customers care?
SAP has been moving its software to the cloud, but this has not been a smooth road for the vendor or its customers:
Cloud subscriptions spread revenue over the duration of a term rather than the traditional way of collecting and recognizing revenue upfront.
It is very costly to have customers migrate to the cloud. The initial setup fees have significantly cut into SAP’s profits.
SAPs former CEO invested $31B in acquisitions to expand offerings in recent years but did little to ensure all the new products could be integrated together. As a result, some SAP customers are running as many as 25 different software architectures, according to Bloomberg.
What this Means for Customers
In the weeks and months ahead, SAP will move quickly to capture revenue wherever possible and reassure Wall Street. Customers should be prepared for:
Aggressive sales behavior: SAP sales reps are showing a sense of urgency to stem the tide of red ink. They are engaging at the executive level (even using their own board members) to help close deals this quarter, which is highly unusual.
Audit threats: We have observed SAP “fishing expeditions” for noncompliance instances, in hopes unlocking financial opportunities. When customers aren’t buying, audits are the fastest and easiest way for software publishers to generate new revenue.
How Customers Can Leverage SAP’s Situation
If you are currently engaged in negotiations, create uncertainty about signing the deal before year end. Make SAP fight for your business, and if they do not, push it into next year.
Develop a viable Plan B. SAP cannot risk losing you to Oracle or another competitor. The more options you have, the more aggressively SAP will pursue your business.
Keep SAP in the dark. Clients are advised to keep the vendor guessing about your plans, especially if they are trolling around compliance issues. We recently we had a client contact us because SAP was asking questions outside of the realm of a basic annual audit. We advised them to refrain from providing the vendor anything other than what was contractually required.
For more information about what’s happening at SAP, download our recent webinar about COVID-19’s impact on the software industry, or contact your ClearEdge representative.
Brady Carlson is an Analyst at ClearEdge Partners.