SAP SE CFO Luka Mucic, a 20 year veteran of the company and a member of its executive board, says the pace of the company’s software development cycle is four times faster than it was a few years ago.
“A couple of years ago, SAP would have released a major update to their core business suite modules every two years. Nowadays we are down to half-yearly development cycles,” Mr. Mucic said. The rise of the cloud, the breakdown of massive enterprise applications into smaller components and automation are driving improvements, according to Mr. Mucic.
He made his comments during a recent meeting with Wall Street Journal editors. Here are edited highlights of the wide-ranging conversation:
Do you see smaller companies and startups showing up in a more competitive way when you are trying to win a deal with a customer?
It depends. Customers are looking for as much integrity as possible in their over-arching IT architecture. Therefore we talk to customers in terms of a strategic engagement. They try to drive end-to-end digitization of their entire process chain. These smaller companies really cannot participate in that conversation … If you have a technical decision-making process that is driven by a given line of business and that is squarely going into the niche where some of these smaller competitors are, let’s say, strong, then you might face very credible competition.
We however, try to make our customers see the bigger picture and we have very long-standing relationships with our customers at a strategic C-level. Typically, we try to broaden the conversation about an end-to-end transformation. Then clearly those smaller competitors cannot, let’s say, participate in the conversation.
Even if the customer is looking to build an open system with APIs that are easily integrated?
It is absolutely important to have that .. that is why we have our HANA cloud platform … with an API hub that is built into it, to integrate seamlessly with standard solutions from SAP and (to allow customers to) develop their own scenarios. You are absolutely right, it is key … but within an open system set up, when we are working through a platform approach, it is still important to have a process-level consistency and integration … it does not help you if there was a technical integration through an API, but business process flow has gaps. And that is what we are ensuring through an end-to-end approach.
How has enterprise resource planning software, the foundation of SAP, changed?
In the past, ERP applications were designed like a huge Lego tower, which was glued together. So you have all of these application hierarchies that were really implemented in a hardwired fashion to surmount the restriction of the performance capabilities of the relational database underneath it … Now this is completely broken up and you have all of the data residing kind at the platform level, and … you can build up these hierarchies, these aggregations on the platform. This is a huge, transformational change, especially for larger, more complex enterprises. They can now change hierarchies, segments in their businesses … build up new dimensions more or less on the fly, where previously this would have been a daunting task, of transforming their IT systems landscape.
S4 HANA, the business software suite that runs only on the HANA in-memory database, was launched in 2015. How is adoption, so far?
We have live on the system about 220 customers. A triple-digit number of customers now is in the process of going live… by the end of the year.
We recently spoke to one CIO who said she couldn’t imagine going through another eight-year ERP implementation. How does the software industry respond to such frustration?
That is a very important question to ask and quite frankly we are now working with our customers to dramatically shrink the time for that, because eight-year implementations simply don’t work anymore. It’s very clear. The demand is for quick time to value …. We have created a package of services that are designed to allow our customers to implement S4 as quickly as possible. For example, in the past we would have more or less delivered the software as an empty hull and the customer and their implementation partners would have customized, modified heavily in many cases.
We now come with a so-called model company approach … for many industries we have created best practice templates, content that is built into the software when it is delivered …that we highly recommend the customers simply adopt, and only go for customization, modification in those limited cases where they feel it is indispensable. That can help them get done with their project more quickly than before. They can quickly find out if custom code fits with HANA, so you don’t find out through trial and error. You get a tool-based approach, an insight that is extremely accurate (telling you) whether your modifications will work.
You can do a lot in the services arena to make the actual implementation more digestible. And we are also working with our implementation service partners. Because we want the projects to be quickly done. The average implementation time frame of S4 systems is below one year. Of course for a big company it would still take a little bit longer, but clearly nobody accepts eight years.
Customers are looking for innovation that can be consumed in more digestible chunks. That is true certainly for the cloud. That is driving the attractiveness of the cloud-based deployment model, because there you have a more or less constant drop of functionalities that you can quickly consume. … And on-premise it’s similar. A couple of years ago, SAP would have released a major update to their core business suite modules every two years. Nowadays we are down to half-yearly development cycles.
Looking ahead, what will the impact of currency fluctuations on the company’s financial performance be?
There was a strong currency benefit in 2015 because of the strengthening of the US dollar. In 2016, the effects will be less pronounced. If currency exchange rates stay at end of June levels, we expect, full year, a negative 2 to zero percent impact on cloud and software revenues as well as on operating income, A pretty small amplitude there.
Is the new data transfer framework for Europe and the U.S, Privacy Shield, a significant event for the company?
We did rely on Safe Harbour (the previous data framework). We have always used the so-called Standard Contractual Clauses that were recommended by the European Commission as a basis for data exchanges, and they also continue to be applicable. However, I am glad we came to an arrangement between the EU and the U.S. Let’s hope it will stand.
Do you expect Britain’s referendum calling for its exit from the EU to hurt SAP?
Brexit so far has been a non issue. I think the biggest courtesy politicians could do to companies in the UK but also Europe would be to come together as quickly as possible and formulate a reliable new framework for the relationships between the companies of the UK and Europe.