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How Christian Klein’s reboot of SAP’s strategy is working out

The pandemic wasn't kind to the company. But the way it's working with the major COVID-19 vaccine makers is a model for what comes next.

How Christian Klein’s reboot of SAP’s strategy is working out

Christian Klein became SAP's sole CEO in April.

Photo: Picture Alliance/Getty Images

Christian Klein took over as SAP's sole CEO in April. It wasn't an ideal time to take the helm of an organization that sells expensive enterprise software.

As the spread of COVID-19 forced corporations everywhere to cut costs, one of the first places they looked was IT budgets. Specifically, companies around the world trimmed spending on back-end products, such as those offered by SAP, many of which still run via on-premise data centers.

But now, with an end to the pandemic in sight, Klein is charting a path toward recovery. Central to his strategy is for SAP to become even more of a key tech vendor for the world's most complex companies, analysts say. That means doubling down on industries that are already robust SAP customers, such as manufacturing and automotive, as well as convincing them to pivot to use SAP products in the cloud.

"We have always been the leading on-premise application platform," Klein told Wall Street analysts earlier this year. "Our intention is to repeat that for the cloud."

Those sorts of sectors would be ideal clients for SAP because they run very data-heavy operations. SAP's enterprise resource planning software helps track those processes and, perhaps more importantly, allows the stored information to be more easily accessible across the enterprise.

And by transitioning to the cloud-based products, SAP has the opportunity to deepen its relationships with existing customers. For one, clients switch from paying large upfront costs to monthly installments. That's an increasingly attractive model for organizations because it becomes easier to scale up or down based on demand. As that adoption grows, it could also increase the likelihood that corporations will pile on additional cloud-based SAP applications, ultimately helping the provider achieve its vision of underpinning all operations across the enterprise.

"[With] asset-intensive organizations, it's important to be able to manage the end-to-end processes. And that is something that SAP has focused on," said Paul Saunders, a senior research director at Gartner.

That strategy is apparent in the company's work with the life sciences industry. Moderna, which hopes to start distributing its COVID-19 vaccine this year, uses SAP's ERP software known as S/4HANA. That's enabled Moderna to "improve the quality of drugs being produced," according to a synopsis of the partnership from SAP. And Moderna is deploying other solutions on top of the core ERP, like a program that will help the company prevent counterfeit vaccines. Similar tools are in use at AstraZeneca, Johnson & Johnson, Sanofi, GlaxoSmithKline and Pfizer — pharmaceutical companies working on COVID-19 vaccines — according to publicly available information.

"When you look at what is just happening out there on the vaccine side, there we are almost supporting every manufacturing, every logistic provider," Klein said at a recent Wells Fargo conference.

That all serves to demonstrate how, despite its most recent struggles, SAP remains a powerhouse in the enterprise software industry.

But it's not to say Klein's onto a sure thing: For many of these companies and others, SAP is just one of a slew of vendors currently in use. Enterprises are also reimagining how they use their ERP systems, according to Deloitte, and shifting more non-critical business functions to other third-party applications to reduce legacy IT debt — a phenomenon that could ding SAP in the long run. Some companies, for example, may seek to take software that helps manage the human resource function off of the ERP and run it separately.

And despite being a market leader in ERP software, SAP isn't without competition. Oracle remains a key rival, and its founder Larry Ellison has alluded to a more fierce competition ahead in the cloud. He even told analysts during a recent earnings call that Oracle would soon announce a slate of large-scale customers it stole from SAP.

"Oracle is the clear market leader in cloud ERP," Ellison declared on a call with Wall Street analysts earlier this month. That "will become even more obvious when we announce that several major large-scale SAP ERP customers are leaving," he added. Still, that's a promise Ellison also made last year, and one which has yet to materialize — at least publicly. An Oracle spokesperson declined to comment.

Despite the challenges, SAP's overall sales grew slightly to nearly $20 billion In the first nine months of 2020. But while for Klein the recovery is a long-term vision, his plan hasn't exactly been embraced by investors. Following a statement in late October that outlined a two-year delay in reaching prior revenue targets, SAP's stock dropped 22% — a fall it has yet to recover from.

Underpinning vaccine development

Even so, a deeper look at how SAP is deployed across top vaccine-makers shows why it's hard to count the software giant and its CEO's vision out entirely.

Companies typically want to remain quiet when it pertains to an ongoing initiative as critical as eradicating a virus that led to a global pandemic. True to form, spokespersons for Moderna, AstraZeneca, J&J, Pfizer, GSK and Sanofi did not respond to a request for comment about how they use SAP products for this article. But many of the objectives previously outlined by executives at those firms in adopting the company's technology align with the goal of now quickly developing and producing a vaccine.

GSK, for example, has over 90% of its pharmaceutical and vaccine businesses running on SAP's ERP system. The global deployment enables the UK-based manufacturer to better "leverage the significant amounts of data" it collects and develop insights from that information to improve operations, former technology product manager Jonny Dent said during a February webinar.

On top of that software, GSK also uses Ariba, SAP's procurement manager, to improve how the company works with its many suppliers and contract manufacturers — the same ones that could be tasked with helping to mass-produce a vaccine.

"We're a SAP house through-and-through," Dent told participants at the time.

At Sanofi, the French drugmaker opted to implement S/4HANA in 2017. The software initially went live in several pilot countries in 2018 in Europe before the company deployed it more broadly earlier this year. One of the goals of the pivot was to consolidate the 10 disparate ERP platforms that Sanofi had as a result of over 300 acquisitions since its founding in 1999, according to a promotional video posted by SAP. Now, the company says information can be more easily accessed by individuals across different business units.

AstraZeneca uses SAP's Work Manager software to better oversee its manufacturing equipment. The tool effectively allows factory workers to more closely track their performance on the floor to help managers determine when machines may be close to breaking down. One exec previously said it led to a "6[%] to 8% increase in efficiency." Such an application could play a role in ensuring the production of a vaccine doesn't run into any major hiccups.

And J&J employs Ariba to help it partner with more diverse suppliers. Overall, roughly 80% of J&J's spend runs through Ariba, totaling more than 250,000 purchase orders as of February 2018.

So as SAP aims to become an end-to-end partner for key industries, its work with Moderna, GSK and other pharmaceutical companies will serve as a model for how it should try to insert itself in other sectors. Now Klein just needs to make sure that happens.

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