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At 50, SAP finds itself at another crossroads

Over its 50-year history, SAP rode business and technology trends to the top of the ERP industry, but it now is at a crossroads and will need to continue to innovate to thrive.

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Like many middle-agers, SAP is staring down a midlife crisis, faced with youthful competitors and challenged by a changing world.

As SAP uses its golden anniversary to take account of its accomplishments, the real work lies in dealing with the next 50 years, according to longtime enterprise industry watchers.

Change has been a constant during its 50-year history, and SAP has been both a driver of that change in enterprise computing as well as the beneficiary, as companies became customers to help deal with changing conditions.

Several observers, for example, credit the late 1990s Y2K scare with helping to expand the customer base for SAP R/3, the ERP product that preceded the mainstay SAP ERP Central Component (ECC) system. On the other hand, SAP is considered to have misjudged the initial internet boom and has been slow to adopt multi-tenant cloud computing models.

However, SAP also pioneered the in-memory database with HANA, leading to the development of S/4HANA, which was released in 2015. Then-CEO Bill McDermott called it the "most important product" in the company's history.

"Like all 50-year working professionals, SAP can look back at a very successful career, although that has somewhat slowed down a bit in the last 15," said Holger Mueller, vice president and analyst at Constellation Research.

A new generation is now taking SAP into its next decade, and the leadership is faced with huge challenges and opportunities, he said.

It is most likely the most critical time that SAP has faced in its existence, as it needs to define the future of ERP in the 21st century.
Holger MuellerVice president and analyst, Constellation Research

"It is most likely the most critical time that SAP has faced in its existence, as it needs to define the future of ERP in the 21st century," Mueller said. "For that it needs the right mix between legacy, differentiators and innovation, a trifecta that has eluded many enterprise software vendors, even [relatively younger ones]."

A history of disrupting itself

Disruption has been a ubiquitous term in IT tech lately, but it encompasses the history of SAP, said George Lawrie, analyst at Forrester Research.

Once the small startup -- launched in Weinheim, Germany, in 1972 by a group of ex-IBM software engineers -- had grown into a global enterprise behemoth, it became vulnerable to the innovator's dilemma, where companies fall prey to newer, more innovative competitors, Lawrie said. SAP has largely been successful by staying in front of the disruptors -- and has been held back to a certain extent by its own customer base.

"SAP is a curious company, and it's not afraid to disrupt itself. It has that all through its history," he said. "Everybody says it's very staid and can be very rigid, but they're confusing it with the companies that buy from SAP."

Companies with large IT departments can be hidebound and process-oriented, and can't make changes to major systems like ERP on the fly, Lawrie said. The conservative nature of its customers forced SAP to invent new ways of doing things to convince them to make major shifts, like going from the mainframe-based R/2 to R/3, which used a client-server computing model that was then cutting-edge.

"At the time when people moved from R/2 to R/3, there was a lot of complaining, and people asked what this client-server thing was all about," he said. "So SAP had to invent a new way of doing things and came up with a three-tier architecture, which was an engineering way of making client-server work."

Today, SAP faces a similar challenge as it encourages customers to migrate from ECC, which it launched in 2004, to S/4HANA, which requires customers to radically rethink and redevelop business processes in order to fully take advantage of S/4HANA, Lawrie said. However, the necessary disruption has also made SAP vulnerable to competitors, as customers tend to evaluate other options when a vendor moves to a next-generation platform.

SAP 50th anniversary gala in Mannheim, Germany
The SAP 50th anniversary gala drew 850 invited guests to the SAP Arena in Mannheim, Germany, on July 29, 2022.

Consistently reliable software

SAP's run of the last 50 years has been "fairly remarkable" because of these major transitions, according to analyst Vinnie Mirchandani, founder of the enterprise computing blog Deal Architect. SAP has transitioned from mainframe to client-server, client-server to cloud and relational database to in-memory columnar database, and is now moving into networked services.

The consistent reliability of SAP's software is a main reason why the company has been able to manage these transitions and build a customer base of around 400,000 across industries and geographies, Mirchandani said.

"A lot of companies have big mishaps or they have a bad release, but it's hard to find any SAP release that's been really awful," he said.

SAP has not always been quick to release products, and it has taken time to migrate its customers because the projects are major undertakings, Mirchandani said. However, the technology it makes has been dependable, which counts in the enterprise software industry.

"It's a backbone for large companies, and the last thing they want is for that to be unstable or unreliable," he said.

In some ways, SAP hit the jackpot in the mid-1990s with the timing of the transition from mainframe to client-server computing, as it coincided with the trend of business process reengineering (BPR), the start of the dot-com boom and concerns around Y2K, according to Jon Reed, co-founder of Diginomica, an enterprise computing industry analysis firm.

Any software company that can last 50 years has earned a respect for longevity, Reed said, noting that much of SAP's software is still written in ABAP, SAP's primary programming language.

"You have to respect the sturdiness of that language," he said. "It speaks to the fact that large enterprises have been able to run mission-critical systems on that software for so long."

Still, while SAP has been able to both drive the enterprise computing industry and adapt to changing business and technology conditions, observers like Reed believe the company is now at a crossroads -- and that similar success in the next 50 years is by no means assured.

To Reed, in some ways SAP resembles IBM, a vendor that once dominated the computing world, but now struggles for relevance despite the amount of IBM products and services in the market.

"If you fast-forward 20 years, you're still going to have a lot of IBM out there, and it's the same thing with SAP -- that software is not going away, but there is a question of relevance," Reed said. "Are they going to be a truly cutting-edge provider in the same conversations as Microsoft Azure and AWS? Or are they going to be perceived as something that powers some back-office processes, but doesn't have a seat at the table of the really transformative conversations?"

50 years of SAP timeline

Changing perceptions of innovation

SAP's future success depends on its ability to convince customers that it remains an innovation hub that can meet modern business and technology challenges. For example, SAP was able to grow on the momentum of trends like BPR and is positioned to similarly take advantage of trends like digital transformation and environmental sustainability as drivers for the next 50 years, according to Joshua Greenbaum, principal at Enterprise Applications Consulting.

However, SAP will struggle with the current definition of innovation, he said, which often focuses more on "cool gadgets" or one-click features on a website instead of stodgy backroom technology.

"The current perception of ERP is that it's old-school -- it's the thing that you used to innovate on, but don't innovate on it anymore," Greenbaum said.

But SAP is doing just that, he said, and pointed to its stance on sustainability and the introduction of new services like the SAP Business Network, which could revolutionize B2B business collaboration.

"The SAP Business Network is hugely innovative and a potentially lucrative bet for SAP," Greenbaum said. "You can't do that with an old-school ERP system, and SAP needs to get credit for that to beat that innovation perception problem."

Still, there are changes SAP needs to make to stay relevant, such as the way it markets and sells products, he said.

"SAP needs to talk about selling big-picture things like success and productivity," Greenbaum said. "They're still stuck in that classic enterprise software trap of selling products the way they built them, not the way the customer wants to consume them."

Keep up with changing business models

Deal Architect's Mirchandani also focused on sustainability and the SAP Business Network as two initiatives that are driving the company forward. But business models are changing to be more services-oriented and outcomes-based, he said, and SAP will need to keep pace with the changes.

"Every SAP customer is being forced by their customers to move to a more outcomes-based model," he said. "SAP will have to evolve its business models to become more responsive to customer business models."

Like Greenbaum, Mirchandani believes sustainability could be a key growth and innovation driver for the decades ahead, if SAP can convince businesses of the economic value. The company has been ahead of the curve compared with its ERP counterparts, and it is poised to take advantage as sustainability has become a board-level conversation for businesses, he said.

"Every industry is preparing for a [carbon-alternative world]. SAP tends to do better with the regulatory and compliance aspects, but they have to find a way to show people how to make money with sustainability," Mirchandani said. "[Sustainability adoption] won't just happen because the government wants you to do it. If you can show companies ways to make money and why it makes good business sense, the adoption will be much higher."

Diginomica's Reed believes sustainability can be a future growth driver if SAP can frame it around the innovation message for the SAP Business Network.

"They struggle with some of the messaging around the Business Network, but they'll do better if they can fuse that more with their sustainability messaging, and how companies can create sustainable supply chains and manage their carbon footprints better," he said.

SAP executive board members and top political leaders of Germany at the SAP 50th anniversary gala
Left to right: Luka Mucic, SAP CFO; Sabine Bendiek, SAP chief people and operating officer; Juergen Mueller, SAP CTO; Christian Klein, SAP CEO; Winfried Kretschmann, minister-president of Baden-Württemberg, Germany; Olaf Scholz, chancellor of Germany; Julia White, SAP chief marketing and solutions officer; Thomas Saueressig, SAP head of product engineering; and Scott Russell, SAP head of customer success, at SAP's 50th anniversary gala on July 29, 2022.

Leadership will be vital

SAP will need to develop and put into place the types of leaders who can successfully facilitate and explain these innovations, Reed said.

"They do have a talented, young, energetic leadership team as a whole, so they're not really in a bad way with this, and they probably don't have serious leadership questions for the next few years," he said. "But going forward five to 10 years, will a compelling and visionary leader emerge from SAP? Or will they bring someone in from the outside to advance their message?"

The fact that SAP's current leadership team -- headed by CEO Christian Klein, who assumed the sole CEO role in 2020 -- is relatively young could be an advantage going forward, Mirchandani said. At 42, Klein is almost a full decade younger than the company he leads.

"It's probably the youngest management team in the enterprise space at this point, and customers have told me that it's different to see a millennial CEO and is refreshing to get that point of view," Mirchandani said. "But you have [other SAP executives] who have a lot of industry experience, so it's a nice balance."

But for SAP to continue to thrive, it will need to maintain a "culture of curiosity and the willingness to disrupt themselves," Forrester's Lawrie said. It's showing that it has an ability to anticipate coming trends and adapt its products to them.

For example, SAP has made efforts to consider different types of users -- such as manufacturing shop floor or retail workers -- and how they can benefit from its software, he said.

"It's interesting what they've done in retail where the SAP MM [Materials Management inventory system] is deployed on mobile devices so people can receive fresh produce in the store," Lawrie said. "It's very good for SAP to get it embedded not just with accountants, but also with people doing real work. That thinking will drive them forward."

Jim O'Donnell is a TechTarget senior news writer who covers ERP and other enterprise applications for SearchSAP and SearchERP.

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