Inside Christian Klein’s determined bid to remake SAP
The 40-year-old, first-time CEO has a tough road ahead of him in turning around the nearly 50-year-old vendor.
On April 19, the day before SAP announced that Christian Klein would take over as sole CEO of the German software giant, his wife joked that she was going into labor with their second child.
That joke became a reality at 2 a.m. the next day.
After rushing to the hospital, Klein left his wife at 7 a.m. to go to the press conference for the announcement, then answered press questions at SAP's headquarters. He returned to the hospital and missed the birth of his daughter by just 10 minutes.
It's a story that will surely be recounted for years to come, not least because it showed Klein's dedication to the company — perhaps unsurprising, given his 20-year tenure at SAP — but because it displayed just how consequential the announcement was. Klein is in the midst of one of SAP's biggest transformations in its nearly 50-year history, one that could someday draw comparisons to Satya Nadella's turnaround of Microsoft or Shantanu Narayen's pivot at Adobe.
Whether it will be as successful as those two efforts remains to be seen. But Klein is banking his legacy on turning SAP into a power player in the cloud industry, with the ultimate goal of its tech underpinning all operations within an enterprise, with the data from each flowing seamlessly between applications and AI-backed tools layered over the top.
It's a major about-face for one of the hallmark providers of on-premise enterprise software. And he faces no shortage of critics who doubt whether a 40-year-old, first-time CEO can turn around such a large organization at the necessary speed.
"When you are doing something for many, many years … people, of course, ask: Why do we now need to change," Klein told Protocol. "The technology and the products, we will get that done. The mindset, to have a sense of urgency and need for change, that's key … but there are still parts of the company that need to get better."
That may be an understatement: Achieving his goal likely requires a revamp of the entire organization, from the way its employees are incentivized to the way its divisions work with one another.
Take, for instance, its sales team, perhaps the most visible part of the transformation underway at SAP. In the past, it tended to work alone, and relied on sometimes weeks-long HQ visits to pressure clients to sign multi-year, multi-million contracts. But that strategy was rocked by both the pandemic and the broader desire within corporate America to deploy cloud-based offerings.
Now, Klein is overhauling the sales team's incentives: It used to receive 20% of its commission based upon how many other add-on services a client purchased, but he says that 20% is set to rise substantially as the company prioritizes selling existing clients on the broader SAP suite of products, a model often referred to as "land and expand." And the CEO says that the shift will involve the sales team working far more closely with the deployment teams.
In a sign of just how critical a revised sales strategy will be to Klein's vision, he recently remade the board to appoint Scott Russell as the new chief customer success officer. The organizational shift also extends to the product team, which is slated to work more closely with the sales team under newly-appointed Chief Marketing Officer Julia White, who led efforts to promote Azure at Microsoft.
"It's the final piece of the puzzle," Klein told reporters recently.
While still early, there are glimmers that show Klein's strategy — including changes like these, as well as others happening quietly behind closed doors — is beginning to work. In SAP's most recent earnings statement, for the three months through December, cloud revenue grew to $2 billion, while its cloud backlog increased to $7 billion. As to be expected in the pivot to cloud-based offerings — which are typically based on a three-year subscription model versus the large, up-front payments that SAP used to rely on — software licenses dropped 11%.
Outside of earnings, Klein is working quickly to shore up support from other industry giants. The company, for example, is slated to announce later this month a closer partnership with Microsoft to help SAP's on-premise customers move to the cloud. "The leading business capabilities of Microsoft are coming together with SAP," Klein teased.
And behind the scenes, customers appear to be noticing: Last year was the first time since 2017 that the firm's customer satisfaction score was positive, per Klein.
The full 360?
In the meantime, SAP isn't without its doubters.
When Klein announced in October that SAP would rescind its prior financial guidance, a decision that came about after internal financial projections estimated as much as a 4% decline in profit margins if external factors stayed constant, the company's stock plummeted. It was a major move for the newly-appointed CEO, one that signaled a desire to focus on the long-term transformation versus short-term margin optimization — basically the opposite of what many shareholders are seeking — and just how seriously he was taking the task ahead.
"It was clear to me that the market would not applause for that because we just told them, 12 months ago, a different kind of story," said Klein. But, he added, "in that moment, you should not care so much about how much trouble you are in."
The lambasting extends beyond just investors. In early 2020, for example, Marc Benioff opined about the difficulty SAP was having in transitioning from former CEO Bill McDermott to co-CEOs Klein and Jennifer Morgan. (Morgan left in April and eventually joined private equity firm Blackstone.) And at key competitor Oracle, co-founder Larry Ellison keeps claiming without evidence that the company is stealing major customers from SAP, a nod to its struggles in transitioning clients to the cloud.
Klein ignores much of the criticism and instead is banking on the results speaking for themselves. SAP, for example, is now replacing Oracle at biotech giant Gilead, the type of proof of "customer wins" that Ellison has yet to provide — at least publicly.
Now, as Klein presses on with his vision of making SAP an end-to-end provider for customers, able to provide software across all of a corporation's various business units, one can start to see the influence it could give the company in the modern IT stack. If he gets it right, it's not hard to imagine SAP outperforming Salesforce's penetration within enterprises.
Salesforce, for example, regularly touts its Customer 360 offering, a platform designed to oversee all client information stored within an enterprise. But the data available to Salesforce is limited by its own offerings, the bread-and-butter of which is customer relationship management software, a front-end tool that was historically catered to a company's sales team (though that is changing as Salesforce expands to other industry verticals).
As customers wade deeper into the SAP ecosystem, though, tapping its tools to support operations such as supply chain, procurement and human resources, there's the potential to link back-office tools like an enterprise resource planning system with front-office applications such as a CRM platform. In theory, that could mean when a customer purchases Dell laptops from an online marketplace such as, say, Ariba, the order is automatically sent to SAP to fulfill and a tracking notice is immediately provided to the customer so they know where the product is — something SAP refers to as a "procure-to-pay" system.
"This is really a secret sauce where SAP can come back really strong," said Klein. "With us, you really have the 360 [degree view]."
That position becomes even more powerful if the data is unified, which would give customers the opportunity to deploy powerful analytics capabilities across entire operations and enable SAP to layer on AI to help automate some processes. Right now, such an application is not feasible in many organizations because information is often stored within the different pockets of an enterprise. And the reality is that companies are going to use many vendors, so while they may tap SAP as an ERP provider, they might still use Workday for HR or Coupa for corporate spending.
10% integration, 90% innovation
Still, SAP's work with the automotive industry is an early signal of what's to come.
In September, it launched an alliance with Bosch, BMW and other industry players to share more data among the cohort's participants. The venture, which was likely only feasible given SAP's dominance in the sector as an ERP provider — it counts companies like Mercedes, Porsche, Toyota, Ford and others as customers — is bringing together what is often disparately stored information between suppliers and manufacturers with an ultimate goal of improving production capabilities, from procurement of raw materials to the building of the actual car. Such a partnership could theoretically be broadened to other industries, like pharmaceutical manufacturers.
But the work to achieve such a vision will have to extend far beyond just pivoting to new cloud-based offerings. Right now, for example, SAP has many applications running independently, which immensely complicates the task of unifying the data. A key hurdle is integrating the various companies that Klein's predecessor McDermott purchased during his tenure, including Callidus, Concur and Qualtrics, the latter of which is being spun out via an IPO.
Previously, if an HR department wanted to use both Concur and SuccessFactors, it would have to run the applications separately, meaning data from one would need to be manually entered in another. In Klein's vision, the two would operate together, where the information in one would instantly flow to the other. Now extend that to all the other verticals that SAP works in, and you're thinking on the same scale as Klein.
"Over the last 10 years, we acquired products but we really didn't stitch it together," he said. "Everything needs to be connected."
That, however, is an incredibly difficult engineering process, which requires reworking the core code of those applications. To get there, Klein says he's devoting 10% of the company's entire development budget on the task, with the other 90% going towards new initiatives.
In a sign of this closer coordination between the acquired firms, Concur, which is undergoing a leadership change, was "functionally" aligned into SAP on Jan. 1. A spokesperson declined to elaborate on what that means, but stated that "customers should not experience any disruption to their business as part of this organizational alignment within SAP." It's unclear whether other business units are undergoing a similar change.
At the same time, SAP is also focusing on revamping its product offerings and investing in new, industry-specific applications. One example of this is SAP's work with the oil and gas sector to build catered cloud-based products to run on the core ERP system.
But as the integration effort becomes a priority, Klein says he is putting the brakes on any other major acquisitions — though he didn't rule out smaller purchases that help fill a gap in its offerings. For example, SAP bought customer analytics firm Emarsys in October, an acquisition that will help the company compete against rivals like Salesforce. Conversely, Klein also didn't rule out future divestitures of its vast product portfolio.
Clearly, Klein doesn't appear to be ruling much out in his quest to turn around the software behemoth. And with major technical challenges, an internal cultural shift and an external marketing overhaul all underway, he'll need to hold his nerve and commit to SAP like never before if he's going to pull it off. But as his wife would probably tell you, that doesn't look to be a problem.
Update: This article previously stated, based on information from SAP, that 2020 was the first year ever that the company received a positive customer satisfaction score. It last received a positive score in 2017. Updated: 1/22/21