On Cloud Transformation vs. Disruption

Originally posted on Oct 22, 2013 at SAPHANA.com…

In Silicon Valley, many of the start-ups birthed or relocated here are out to replace incumbent technology companies and disrupt entire industries. Venture capitalists only invest when they think they’ve found those new companies who have the chance to shoot for the moon, even if it’s a big challenge. They mitigate their risk by betting on several companies at the same time.

“Disruption” isn’t the kind of conversation that SAP has with it’s customers. Instead, SAP speaks of “non-disruptive evolution” in terms of lower order change and “business transformation” in the case of higher order change.

metamorphosis

Business transformation is a high-value retooling of existing business models allowing companies to realize new opportunities.
[SOURCE] © Elvert Barnes, used according to Creative Commons License

A business transformation is a high-value retooling of a company’s business model that allows it to extend the life of its revenue streams and move into new opportunities.Many of these stories share a common theme of “providing your customer the benefit of a product, not just the product.” In such a transformation, a company becomes a service provider as opposed to just being a manufacturer. There are many such transformations that SAP has helped its customers achieve over the years. One such story I helped document is Kaiser Kompressoren. They radically transformed themselves from being an air compressor manufacturer to a value-added service leasing and maintenance company for their air compressors. This allows Kaeser to differentiate themselves from cheaper foreign manufacturers and charge higher margins while increasing satisfaction among their customers that need compressed air.

Many venerable software companies are undergoing their own similar transformation from being on-premise software vendors to providers of digital services. In many cases, these are net-new lines of business built organically or acquired, such as when SAP purchased SuccessFactors and Ariba. However, some of these are actual business transformation initiatives where successful on-premise software traditionally sold with perpetual licenses become subscription-based digital services.

In addition to SAP, the top 3 software companies: Microsoft, Oracle, and IBM all have significant cloud transformation initiatives to revitalize their traditional on-premise products portfolios. However, I think two software companies deserve special accolades in their business transformation into cloud providers:

Adobe Creative Cloud – Adobe actually has two notable cloud lines of business. First is their Adobe Marketing Cloud which started through the acquisition of Omniture. More interesting is their Creative Cloud where they replaced their retail packaged software for a subscription cloud service. I personally know a few of their customers who are thrilled to have easy access to upgrades, excellent sharing and collaboration features that cloud computing is especially suitable for, and a lower subscription price. Adobe gets happier customers, more adoption of newest features and clear data about who is using them, and a predictable revenue stream.

Autodesk 360 Cloud Services – While maybe not the same total transformation the same as Adobe Creative Cloud, Autodesk 360 Cloud Services is a powerful example of organically grown value-added cloud services that integrate into their existing on premise software.

Finally we come to SAP. SAP is well along its way in transforming into a cloud services company. This is more than simply acquiring SaaS companies and organically growing other application services. This is about SAP remaking it’s core business models. As announced in our recent earnings statement, cloud revenue growth is growing faster than the decline of SAP’s traditional business.

I’m sure more will be written about this in the future when the transformation is closer to complete. A years’ worth of announcements around SAP HANA in the cloud reveals the direction SAP is heading:

  • SAP TechEd 2012: the announcement of SAP HANA One introducing hourly pricing of SAP HANA licenses on AWS for productive smaller application sizes.
  • Just prior to Sapphire 2013, the announcement of SAP HANA Enterprise Cloud covering mission critical, and high-scale applications of SAP HANA such as running SAP Business Suite and SAP NetWeaver BW on SAP HANA. These are available in a variety of models including a multi year subscription.
  • Today’s dual announcement of SAP HANA infrastructure services available hosted by SAP and AWS for instance sizes ranging from 128 GB to 1.2 TB in month-to-month no commitment subscriptions. In this case, we are focusing on just providing infrastructure as a service, with a “bring your perpetual license” only.
  • The beta introduction of SAP HANA native application development in SAP HANA Cloud Platform. While the commercial terms of this feature are unknown to me at the time that I’m writing this blog, I’m expecting this to provide subscription access to SAP HANA licenses for these kind of applications once it becomes generally available.

Transforming traditional on premise business models into cloud distribution models is a lot more than simply hosting software, whether as single or multi-tenant applications. It involves a number of items including:

  1. Setting up line of service operations focused on service quality governed by service level agreements with customers.
  2. Transforming sales models and sales force compensation whether working through traditional sales, creating overlay teams, or creating new indirect channels.
  3. Developing flexible licensing models and billing practices typical for cloud services such as metered usage, short term subscriptions, and longer term contracts with monthly payments
  4. Accounting for these changes in back-end ERP systems such as amortizing software licenses and hardware over a traditional lifespan, and understanding how to recognize amortized revenue in the case of shorter term commitments.

There’s a lot more to this kind of transformation than the above, but I think this will help you get a flavor.

This is a very exciting time here at SAP.  SAP customers are enjoying a renewal of their traditional SAP software as SAP HANA becomes more ingrained. Now customers will be seeing more renewal through transformation of existing business models to cloud business models. I can’t speak for the roadmap here, but I hope we soon begin seeing the kinds of features that Adobe and Autodesk customers are enjoying from the transformation of these companies into cloud providers.

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