Some quick thoughts on SAP's acquisition of SuccessFactors, along with a few things that bothered me.

First, the links: replay link to news conference:
http://www.sap.com/corporate-en/investors/presentations/index.epx?tab=Q4
(click on the 1pm EST link, free registration required)

I've compiled a bunch of noteworthy articles on the jonerpnewsfeed:
http://www.twitter.com/jonerpnewsfeed

It's gonna take time to sort this one out - automatically it makes the upcoming SAP Influencer Summit in Boston a LOT more interesting. Here's some quick hits and issues on my mind:

FACTS
Some facts, many of them quoted by an uber-confident Bill McDermott, who proclaimed that this purchase would (drumroll...) "create a cloud powerhouse":
- Gartner is projecting a $10 billion HCM market, with $4 billion in talent management, 75 percent of that market coming from SaaS
- SuccessFactors has 3,500 customers and 6 million users
- Opportunity: only 14 percent of SuccessFactors' customers are currently running SAP, meaning there are 500 million seats on SAP customer sites that could be a prospect base for SuccessFactors

MY INITIAL REACTION
Largely a good move for SAP. I don't agree with McDermott that this acquisition (paraphrase) "succesfully builds on SAP's cloud momentum" - because I don't think SAP had any cloud momentum. In particular in Line of Business on-demand, SAP's commitment to big market share did not seem to be there. The solutions in progress felt like fascinating design thinking experiments. They were late to market and moving sluggishly at best. So there's no doubt that this purchase gives SAP leadership, market share and momentum in LOB cloud that it did not have before. Yes, this move adds some chaos to SAP's strategy (with some overlapping architectures and functionality), but I'm not sure that chaos is worse than the lack of momentum SAP had with its cloud offerings currently.

SAP America's acquisition of SuccessFactors is notable as others such as +John Appleby have pointed out, because this may free SAP up from the headaches of German employment law that can shackle SAP AG (if SAP AG had acquired them). I have long believed that SAP needed a separate cloud division to ensure freedom from the dominance of the on-premise business model - best case scenario, this acquisition could accomplish that for SAP.

SOME QUICK HITS AND MISCONCEPTIONS

1. Those who assume ByDesign is now dead should rethink. On today's call, Snabe was clear ByD still remained their integrated cloud ERP solution for the midmarket.

2. Those who claim SAP has multiple HR functionality in multiple architectures and apps are right, but this has been the case for a while - with everything from Nakisa for large ERP to B1 to ByD - each with its own functionality and architecture. This problem already existed before this acquisition. The biggest overlap is between Career OnDemand and SuccessFactors, but that will be addressed right away because:

3. Career OnDemand looks like it's gone. On the presser today, Snabe referred to other SAP LOB solutions Sourcing OnDemand and Sales OnDemand, as well as Travel OnDemand (in development). He did not mention Career OnDemand but said that SuccessFactors would be the SAP SaaS LOB HCM solution. Career OnDemand looks to be gone. I would assume some of that talent will be pulled into SuccessFactors. Wonder what +Jarret Pazahanick thinks of this - he's been tracking COD closely.

4. There are different kinds of integration challenges people are lumping together, and not all of them are the same:

a. integration with on-premise solutions - SuccessFactors has a history of integrating with SAP ERP on-premise so that's the easiest going forward.

b. integrating HR/HCM functionality and assets across the board - probably the biggest challenge with SuccessFactors remaining an independently-run unit.

c. integrating with SAP's existing on-demand architecture for development purposes may not be as imposing as it sounds. As Vishal Sikka noted on the call today, SuccessFactors is a Java-based platform, in theory this may fit into SAP's Java-based "Edge on Demand" architecture often referred to as NetWeaver Neo/River (no official name as yet). I will look forward to +Richard Hirsch, aka "the edge guy," wrapping his head around this one.

5. One blogger said that this now gives SAP strong plays in the four major best of breed cloud LOB plays: HCM, procurement, CRM, and collaboration. I don't agree, I think this addresses HCM, and Sourcing OnDemand is a mature cloud procurement solution. Sales OnDemand however is not a mature solution, and neither is collaboration. Of course, the collaboration cloud market is not as mature, with many solutions still looking for traction, not just SAP's.

6. SAP's collaboration play will need some focus now, with SuccessFactors' CubeTree an asset that will jive (pardon the pun) with StreamWork somehow. It seems to me that the two products are largely complementary at first glance, but there will no doubt be some disruption there as SAP sorts out collaboration tools and leadership. I look forward to hearing +Sameer Patel's comments on this.

7. Interesting hearing McDermott cite Siemens as a thriving SuccessFactors customer with 420K seats, as that was such a painful lost HCM customer for SAP at the time. No better revenge I guess than buying out your losses.

8. This fills a major gap in SAP's cloud portfolio, but I still don't think SAP can buy OR build their way to reinvention as a cloud platform. The pain of that last mile cannot be avoided. As I wrote after the TechEd Vegas show, SAP's ultimate challenge is to build an apps store platform and thriving developer community that supports mobile, cloud, and HANA. This purchase does not seem to get SAP closer to that goal, and could pose a distraction towards opening up SDKs and barriers to entry to developers. Here's that piece FYI: http://www.enterpriseirregulars.com/42140/sap-teched-las-vegas-and-beyond-%e2%80%93-sap-at-the-crossroads/.

CONCLUSION

SAP buying SuccessFactors at more than 50% of its book value clearly indicates SAP's willingness to admit the flaws in its existing cloud strategy. Some have called it a panic move, and while there is an expression of urgency in this purchase, I believe that urgency is warranted. Workday was gearing up to eat SAP's lunch in SaaS HR, and while this purchase does not change the threat that Workday poses, if SAP can execute this transition, it should give SAP a far deeper arsenal in terms of cloud leadership, experience, and customer penetration.

A couple times during today's press conference, there was a big clue as to why SAP made this move. Snabe mentioned that the reason SaaS companies have had trouble turning a profit is due to the challenges of scale. SAP feels they can scale SuccessFactors to the point of profitability at appealing margins. This revealing comment also makes clear SAP's own frustration with its cloud strategy to date.

SAP too has struggled to scale its cloud solutions, and with the challenges just getting to 1,000 ByDesign customers, SAP clearly felt that its Line of Business solutions, while very innovative in their design, would be very difficult to scale to the point of profitability. This may explain why those solutions were moving so slowly. I do hope that the baked-in design thinking and socialized aspects of these LOB solutions are not lost in the transitions that follow. The ease of use of these LOB apps, while late to the party, is likely better than anything in the SAP product portfolio, and that lesson should not be lost. SAP was using the right approaches with these new LOB solutions and perhaps Lars Dalgaard of SuccessFactors is the right guy to drive these new LOB products to scale also.

I don't know if this acquisition will pan out to the degree SAP is currently hoping, but this is the last time in a while you will hear me say that SAP is not serious about cloud. Clearly they are serious, to the tune of $3 billion. But: the real work lies ahead.
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