Two vendors with different products but a common link search for their defining moment.
Will they find it?
In 2007 the world of consumer technology got two big breakthroughs. Netflix started streaming movies and Apple launched the iPhone. These two developments gave us a glimpse into the future and paved the way for the digital revolution in homes and offices around the world.
While the iPhone may seem more defining than a streaming service, Netflix’s decision to deliver services over the internet was an equally important milestone. Not because movies and TV are vital components of life, but because it is the characterizing example of a real-world company betting ahead of the market and demonstrating that the internet (from now referred to as cloud) was the future.
It took several years and a lot of money for Netflix’s gamble to prove-out, but Apple’s bet was an instant hit. At a stroke, Steve Jobs provided a simple and elegant interface that hid the complexity of a decade of application development and presented the user with a clean and unencumbered experience. Anyone who had played Snakes on a Nokia or tried to use Excel on a Blackberry was bowled over by the simplicity, while the iPhone’s touchscreen technology set a new benchmark for user experience that remains the standard today.
These two breakthrough moments in consumer technology share stunning similarities with two vendors in the enterprise tech space – a space that traditionally lags consumer developments by a decade or more. While the average man or woman will not tolerate anything less than a seamless digital experience in their personal lives, the average worker is still subjected to technology that can trace its roots back more than 50 years. ERP systems have improved, but cloud ERP only has about ten percent market penetration and the vast majority of business users still rely on tech that is hosted locally and delivers a very poor experience.
2024, a seminal year for two different vendors
The two vendors in question are SAP and ServiceNow. SAP has been the benchmark for business applications for 50 years and ServiceNow, a relative upstart, is positioning itself to be the control tower for all future business technology. While the two companies are very different, they are both poised for a seminal year in 2024 – one which is likely to define their future for decades to come.
On one side of that line is SAP, S/4HANA and the public cloud. On the other side of the line is the past.
SAP has made a big bet. In fact, I would go as far to say that Christian Klein has pushed all his chips over the line. Klein already held a decent hand, but akin to the card player faced with a stick or twist moment, he has drawn breath, summoned courage and gone for it. The glacial pace with which customers are moving to the cloud (not just within the SAP install base) has forced some radical thinking – and radical statements. Declaring that new innovations are for cloud customers only, Klein and SAP have effectively told their patrons to get on the cloud train or be left behind.
The days of pandering to a narrative that suited everyone are over and SAP has drawn a line. On one side of that line is SAP, S/4HANA and the public cloud. On the other side of the line is the past.
ServiceNow hasn’t made such an overt statement, but it too is positioning itself for a serious acceleration of its phenomenal growth story. A mixture of good timing, expert aligning and a smattering of fairy dust courtesy of its indefatigable CEO has propelled ServiceNow into a unique position in the market. Underpinned by a very solid technical platform, the company has morphed itself from an anonymous IT service desk company into the hottest tech player in the enterprise space.
In less than five years, Bill McDermott has transformed ServiceNow into a powerhouse that has been nibbling at the edges of the ERP space for some time. Now they are poised to make even bigger inroads with workflows for finance, procurement and supply chains that ameliorate the pain of modernizing ERP with a new front end, improved visibility and a sandbox of tools to connect data and people across multiple workstreams. Above all, ServiceNow promises to fix the experience of ERP and that message is a gamechanger for users.
The two vendors are very different and their routes to success are divergent, but I believe 2024 will be the defining year for both. Klein’s bold move will either be a masterstroke that finally drives the SAP install base to the cloud or it will go down in history as a corporate blunder that costs SAP its position as the premier ERP vendor. McDermott’s move, although less obvious and certainly less risky, will be determined by his ability to scale ServiceNow and keep pace with the window of opportunity.
Remember, when Apple launched the iPhone, Blackberry dominated the business mobile space and Nokia was the only serious contender for consumer cell phones. Both those brands saw the future but they missed their window and Apple crushed them. The question is can ServiceNow seize its moment in a repeat of the legendary year that was 2007?
SAP’s Netflix moment
When SAP’s CEO, Christian Klein, announced to investor analysts on 20th July that “SAP’s newest innovations and capabilities will only be delivered in SAP public cloud and SAP private cloud using RISE with SAP as the enabler,” a tidal wave of discontent rippled across the SAP ecosystem.
User groups were quick to stick the knife in with Jens Hungershausen, DSAG board chairman describing the news as, “a major blow” and Thomas Henzler, DSAG board member, stating the announcement was, “a real showstopper and a big disappointment.”
On the back of these formal statements, hundreds of self-proclaimed experts took to LinkedIn and X to vent their frustration at Klein. Some even called for his head and suggested his days as CEO were numbered. The outpouring was similar to when SAP first announced it would end support for ECC6 – that backlash was justified, but this time not so much.
Before we get too deep into exactly what the announcement was, how it has been misinterpreted and where SAP can learn some lessons about communication, let’s just take a pause and consider how a similar big cloud bet paid off for Netflix.
In 2007 Netflix had a very successful DVD mail-order business having delivered more than one billion DVDs to customers in the previous decade. Despite its history and dominant position in the market, it decided to rethink how to best serve its customers. That statement is important because it is at the heart of the story.
Netflix offered a library of more than 70,000 DVDs for rental whereas the new streaming service launched with just 1,000 titles. This limited offering was compounded by average internet speeds of less than 2Mbps and a customer-base yet to discover the aforementioned iPhone. To say that Netflix’s decision was bold and ahead of the curve would be a massive understatement. Yet today, the name and business model are as familiar and ubiquitous as running water.
Netflix’s gamble was made at a time when internet usage was approximately one-sixth of the level it is today and yet the company bet the farm that building a solution for the future would better serve its customers – even if many of those customers still preferred to get a red envelope through the door than download a movie over the internet.
The dilemma that SAP and its customers are facing is almost identical. At present the vast majority of SAP’s customers use either legacy on-premise technology or have adopted the latest flavor of ERP but chose to deploy in a similar environment. As little as two years ago, SAP was encouraging customers to move to S/4HANA and offering on-premise as a comparably suitable solution to public or private cloud. Today, that is not the case and SAP has clearly stated that customers should deploy S/4 in either the public cloud or private cloud, provided it is done so via RISE with SAP.
It’s a bold and unpopular decision but here’s why it is the only decision SAP could take.
Firstly, let’s just look at the economics. SAP is a public company and is judged by the markets on various metrics, chief amongst which are its cloud and subscription revenue numbers. All protagonists in the enterprise tech space only boast about their cloud numbers (even those that don’t really have any cloud numbers) and if SAP is going to be taken seriously as a cloud company it must project that message to the markets.
SAP has been a public company since 1988 – some customers may not like it, but the fact is SAP has to maintain its position, market capitalization and status against some very stiff competition. Imagine if SAP didn’t make a serious cloud play. Imagine it pandered to the user groups and then ran into some unforeseen challenges which would have far greater implications for customers. Klein’s message is as much to customers as it is to shareholders – SAP is a cloud business.
Allied to the above is SAP’s need to future proof its long-term revenue growth. Despite the drama around the 2027 ECC6 deadline, most, if not all, of SAP’s big customers will have committed to S/4 by then. In fact, most already have (albeit not all public cloud). As the volume of large convertible customers decreases, SAP needs to be able to sell its other offerings in order to maintain revenue growth and it can only do that to customers that are in the cloud and can actually take advantage of it. Increasingly the hyperscalers are providing innovations outside of the core ERP capabilities and SAP needs to retain and regain some of that wallet share.
Let’s also consider SAP’s turnaround on S/4HANA on-premise and private cloud outside of RISE. Yes, the position has changed and yes that will be a blow to any customer that deployed S/4 recently in either of those two environments. But is it any surprise that things have changed given the rate of change we all see in every other aspect of our lives? Would it be better for SAP to continue to encourage customers to deploy on-premise when they know it’s impossible to deliver all of the latest innovations outside of the public cloud?
There’s a concept in technology that encourages “fast failure” and although S/4HANA on-premise isn’t a failure, the sentiment is the same. Two years is a long time in tech, four years even longer and SAP has developed so many new innovations in that window that require the power of the public cloud that it is inevitable the landscape had to change.
How would real-time environmental data and analysis work for Green Ledger if all the customers using it had their own private instances of S/4? How would customers use artificial intelligence and GenAI if the compute power those technologies needed was out of their reach? How would the power of the Business Network and cohorts of similar customers make use of shared data if they are segregated from each other? The reality is that any customer, SAP or otherwise, that wants to remain competitive and build a long-term viable business has to be in the cloud.
Some customers may argue “we don’t need to be in the cloud to be successful” and that may be true today, but it won’t be tomorrow. Even the most resistant of businesses must accept that they will not be able to compete with other similar businesses if they are not on an equal technology footing.
The backlash has been severe but a large part of that can be attributed to a poorly communicated message and a bunch of commentators and journalists too eager to jump on the condemnation bandwagon. I commend Klein and the SAP executive team for taking a bold stance and reject the claims that the company is turning its back on loyal customers.
If the last two or three years have shown us anything, it’s that the future is uncertain. Things change quickly and only the most resilient of businesses will prosper. As unpalatable as it may sound, SAP is actually doing its customers a favor. Businesses, people and processes move at a very slow pace unless there is someone or something pushing hard for change. Yet when forced to do so it’s incredible how quickly we can adapt to a new paradigm. Just consider the COVID crisis as one example: if you had told business leaders in late 2019 that they had to plan for 100 percent remote work, most would have said it was a five-year project. It turned out we had less than five weeks, but we all managed.
Sometimes we all need a little gentle persuasion and the hard truth is that any business that doesn’t embrace the cloud and AI will be left behind.
ServiceNow’s iPhone moment
We have been bloating systems with custom code, extensions and workarounds for decades and the user experience has degraded so much that many systems are simply not fit for purpose. I know of medium sized businesses with 20 different HR systems, a dozen finance systems and some larger businesses that are running 10 different ERPs, all from different vendors. In many cases more tech has decreased productivity, not improved it, and most users have grown tired of toggling between disjointed and unmanageable systems. They expect consumer grade at work and for the first time there is a brand that is speaking their language.
ServiceNow is set to be the main beneficiary of this evolution because it speaks to the individual user in a way that no other technology vendor can.
The vast majority of ERP systems were never bought with the user in mind. They were bought by a CIO or CFO who would often have a disposition towards or against a certain brand. The idea of bringing users into the conversation during the selection process is relatively new and even now it happens infrequently. In the 90s and 2000s when ERP proliferation was at its peak, unilateral decisions were taken by execs in ivory towers that foisted solutions on the individual because the individual was not important back then – in any regard.
How times have changed. Today the power of the people is evident across every aspect of business. Companies no longer exclude their people from decision making processes and individuals have a voice – a voice that is listened to. This process of empowerment has evolved gradually but is now a mainstay of most organizations. It’s a process that has shifted the power from the boardroom to the shopfloor and ServiceNow is set to be the main beneficiary of this evolution because it speaks to the individual user in a way that no other technology vendor can.
When Apple launched the iPhone and gave consumers a glimpse into the future it changed the way the average person thought about technology. It showcased a connected future, bound by the internet and available to all in the palm of their hand. This small piece of hardware paved the way for countless technological leaps because it put the tech in the hands of billions. No longer was IT solely in the realm of big business or consigned to a home office. It was being carried around in back pockets and handbags. The iPhone showed the world what was possible and opened the floodgates for the proliferation of connected technology across society and the enterprise. More importantly, it put that technology in easy reach of every man, woman and child on the planet.
Apple harmonized the complexity of technology and presented it to the user through a single pane of glass providing a common experience whether you were booking a cab, ordering food or scrolling through Facebook. That’s essentially what ServiceNow does for business users by creating a new layer that sits above traditional applications and offers the user a unified experience with all the complexity abstracted away.
It’s the iPhone equivalent for a generation of workers that are accustomed to great tech at home and expect the same thing at work.
For the first time, a tech vendor has a product and narrative that speaks to the user just as much as it does to the boardroom. ServiceNow is for doctors, engineers, accountants, project managers and teachers. It’s for finance, procurement, sales and more. It’s the iPhone equivalent for a generation of workers that are accustomed to great tech at home and expect the same thing at work. ServiceNow is becoming the ‘platform for the people’ and in 2024 the peoples’ voices will be heard loud and clear.
Enterprise tech landscapes are a mess and long overdue a clean-up. Putting a new front end on an aging system may not be the ultimate answer to ERP modernization but it certainly allows enterprise leaders to kick that can down the road for several years. Several years that are likely to be critical to their survival as so many organizations jostle for their position in the digital-AI-era.
What to expect in 2024
2024 is set to be the most important year for technology in the last 70 years with the maturation of artificial intelligence into a primary business tool driving much of the impetus for change. Since cloud emerged a decade or more ago and AI became a popular buzzword, we have been waiting for a tipping point. And 2024 is going to be that moment.
SAP provides the backbone for global commerce to flourish and the world’s biggest companies trust SAP to run their operations. That’s not going to change any time soon, if ever.
A rapid escalation of new technologies will emerge, driven by generative artificial intelligence and powered by the extraordinary compute of the public cloud. We will see a huge rise in the number of applications for GenAI that pervade industries and lines of business alike and we will all be using it in one form or another to ideate, simplify and innovate.
As for the two vendors at the center of this article, I see a very clear path for both of them.
SAP has been the market leader in ERP since the term was first used and it will continue to be so. SAP provides the backbone for global commerce to flourish and the world’s biggest companies trust SAP to run their operations. That’s not going to change any time soon, if ever.
SAP’s challenge isn’t to convince its biggest customers to move to the cloud, it’s to find a way to bring the tens of thousands of smaller SAP customers along for the ride. It has tried a variety of methods so far with limited success and its latest push is pretty much its last hope of doing so. Will all legacy SAP customers sign up to S/4HANA public cloud? Of course not, and SAP knows that. But enough will and over time the majority will, whether they do so because SAP told them to or out of self-preservation. I’ll admit the messaging has been a bit clumsy but the irony is that customers will thank SAP in the long run, they may just find it hard to swallow right now.
As for ServiceNow, I only see one outcome… if the company doesn’t double its revenues in the next two years I will be amazed.
As for ServiceNow, I only see one outcome. There is a window of two or three years in which businesses must make a critical decision around their IT landscape and investments. Do they follow a well-trodden path and pour money into a new ERP or do they breathe fresh life into what they have while simplifying and redesigning their process and data? My bet is that a very big percentage of customers will choose the latter and go with ServiceNow. If the company doesn’t double its revenues in the next two years I will be amazed. This is only my prediction and not by any means taken from a statement by the company, but I am almost certain that ServiceNow will soon be as unifying as the iPhone.
You may think these two statements are at odds with each other, but they really aren’t. SAP and ServiceNow are largely non-competitive although there is overlap in their customer base. But one doesn’t have to lose for the other to win and I see 2024 being the best year ever for both brands, almost as good as 2007 was for Netflix and Apple.