The Ultimate Enterprise Software Alliance: How SAP and Microsoft Plan to Take over the Enterprise Software Market

Every once in a while there’s an event, or series of events, in our industry that can only be described as monumental. Oracle’s hostile bid for PeopleSoft way back in 2004 was definitely one of the major events that changed the industry. The recent barrage of news involving new jobs for the CEOs of SAP and ServiceNow, and the unprecedented deal between SAP and Microsoft to make Azure the go-to cloud for SAP is another such moment.

Here’s my take on what’s really going on. And hold on to your hats, I’m going out a limb, so if you’re with me there’s a good chance the branch will break and we’ll all take a fall. But if I’m even partially right, we’re going to see a combined Microsoft+SAP (with ServiceNow playing the role of junior partner) become a formidable force in enterprise software, positioned to sweep aside the likes of Amazon’s AWS, Google’s GCP, Salesforce.com, and Oracle and, as a bonus, appeasing the activist investors that have targeted SAP, Microsoft, and ServiceNow.

First, the cast of companies and characters:

Elliot Management, an activist investor that has taken a stake in SAP

SAP, which is under pressure to blunt Elliot’s attack and live to tell the tale

Microsoft, which is SAP’s newly upgraded partner in the cloud under the auspices of the Embrace program

ServiceNow, a company mostly known for its IT services line of business, but which has been branching out into CRM, HR, and other LOBs

Corvex Management, an activist investor that has targeted Microsoft and Service Now

Energen: a former SAP customer that was targeted jointly by Corvex and Elliot, among other activist investors, and is no longer.

Bill McDermott: outgoing CEO of SAP, incoming CEO at ServiceNow. Also a board member of troubled apparel company Under Armour

John Donahoe, outgoing CEO of ServiceNow, incoming CEO of Nike

Bob Stutz, leader of SAP’s initial on-prem CRM efforts, former head of CRM for Microsoft, former head of Marketing Cloud for Salesforce.com, incoming head of CRM for SAP

Our story nominally starts last spring with the announcement that Elliot had made an investment in SAP, but in reality we need to dial back even further, to the August, 2018 acquisition of Energen by Diamondback and the September 2018 announcement of the Open Data Initiative to synchronize the CRM data models of Microsoft, SAP, and Adobe. While I don’t have any evidence of a direct correlation, there’s enough consanguinity that it’s important to note these two earlier milestones.

The Energen acquisition was a classic, and largely successful, activist investor move undertaken in collaboration by Corvex and Elliot, and others, that couldn’t have gone unnoticed by SAP. Energen was a well-known SAP customer, while Diamondback (which has the deliciously curious ticker symbol Fang) doesn’t show up on any SAP customer lists. So the end of Energen represented a double-whammy for SAP: the sale and subsequent market oblivion of an important SAP customer that came after being ridden hard by activist investors.  

It’s hard to imagine Energen’s fate wasn’t noticed in the upper echelons of SAP, even before the Elliott investment in SAP started making Energen’s fate look like SAP could be next on the chopping block. It’s also likely that the upper echelons at Microsoft and ServiceNow were watching Energen as well: with Corvex having invested in both tech companies that year, I would be surprised that at least Microsoft wasn’t taking a careful look at the unfolding Energen saga to watch how Corvex played its game. (I was told but can’t confirm that Energen was a major Microsoft customer as well, still working on that one.)

Coincidently – most likely anyway – the ODI announcement surfaced shortly after the Energen acquisition. While I doubt they were related directly, the ODI announcement is important to our story mostly because of what wasn’t said out loud at the time. The first unspoken statement was that this deal was about launching a multi-prong attack on Salesforce.com. That one was pretty obvious. The less obvious side was that only one company’s CRM data model was really going to emerge dominant in the ODI, and that was Microsoft’s model. While SAP had been floundering around for years doing and redoing CRM, Microsoft’s only home-grown enterprise software product (until the cloud upgrades that resulted in the Dynamics 365 family) has matured to be a market-leading product running on a market-leading cloud platform. ODI isn’t necessarily about SAP adopting Microsoft’s CRM data model per se as much as it’s about Microsoft’s CRM data model being the first among equals in ODI. SAP would still be a major contributor, mostly in the role of adding its deep industry-specific knowledge to the core Microsoft CRM model, which would be clearly a net positive for Microsoft as well. ODI won’t require any eventual customer to adopt any particular CRM to be useful, but the design of ODI will leave clear signposts that point in Microsoft’s direction.

So the year 2018 ended with Microsoft and SAP coming closer than ever before on CRM and both indirectly impacted by a significant action on the part of the activist investor community. The year also ended with SAP’s new C/4HANA, announced in spring of 2018, struggling to get settled into a sales and marketing groove, considering the plethora of unintegrated products that constitute C/4.

The next event of note was Elliot’s move on SAP last spring. The Elliot investment in SAP was a bombshell dropped right into the middle of a company already struggling to solidify a complex and costly move to the cloud and in the midst of a multi-month restructuring of the leadership at the company. And while I would be the last person to applaud the arrival of an Elliot in a software company that should, in my opinion, value customer success far more than shareholder value, the fact remains that several aspects of SAP’s business weren’t going as well as they could have been, the relatively new C/4 HANA being one of the biggest.

Meanwhile, up in Redmond, as Microsoft was going “all in” on Azure, the competitive threat from AWS was undiminished, and Google Cloud Platform started looking like a serious threat. In addition to nabbing Thomas Kurian from Oracle, SAP’s cloud chief Rob Enslin defected to GCP, (SAP HR leader Brigette McInnis-Day recently did the same.) It was clear that Google’s goal was to go “all in” on becoming an effective cloud player against number two Microsoft, and, quite possibly, considering the caliber of the people being poached from Oracle and SAP, it was starting to look like GCP was going straight after SAP as well.

At the same time, AWS started to face serious headwinds as the retail side of Amazon started looking more and more competitive to other retail AWS customers and as the Amazon mothership started entering other lines of business, such as logistics and shipping, that further competed with prospective AWS customers, particularly those of SAP. Other hyperscalers – Azure in particular – started tapping into a growing concern that running on AWS would mean handing the keys to kingdom to a company determined to complete in any and all industries. Just to emphasize the point, Microsoft’s top Azure exec, Julia White, tossed off a comment during her keynote at the company’s Ignite conference this week to the effect that Azure wasn’t in the business of competing with its customers’ business.

Just sayin’…

This was the background to the extraordinary series of events that started with Bill McDermott’s departure from SAP and the ascendency of Jen Morgan and Christian Klein to the role of co-CEOs of SAP. The news cycle quickly continued with the news that McDermott was heading to ServiceNow, and Bob Stutz was taking over CRM at SAP (again.) This didn’t just happen serendipitously, I believe it was planned very carefully, and here’s the plan, as far as I can tell.

SAP and Microsoft, with junior partner ServiceNow in tow, are in the process of effecting a double end run around the enterprise software market. The exclusivity promised to Azure by SAP wasn’t just about Microsoft paying SAP $75 million over three years to make Azure the preferred platform for SAP: exclusivity doesn’t ever come that cheap or that simply.

The deal was about much much more, and it starts with CRM: SAP, I believe, is going to effectively adopt Dynamics CRM as its core CRM and put to bed its overly ambitious plans to take Salesforce.com head-on. The parts of C/4HANA that still make sense as adjacencies to core CRM – Callidus, hybris commerce cloud, Gigya – will stay on and quite possibly thrive under Stutz’s leadership. But the strategy of building out a core CRM capability to compete head to head with Salesforce.com will shift to an embrace and surround strategy that has Dynamics CRM at the center and the rest of the C/4 family, and SAP’s other cloud properties, filling in the gaps for customers as needed.

This is, I believe, what Bob Stutz is doing at SAP. His credentials – Siebel, SAP, Microsoft, and Salesforce.com – make him the most formidable cleanup hitter in the business. The fact that he and SAP co-CEO Jen Morgan met at Siebel is just one of many reasons why Stutz is being given the job and why I believe that Morgan knows she needs a new take on what to do about Salesforce.com’s success, particularly among SAP customers.

This arrangement would allow SAP to do two things: seriously blunt the impact of Salesforce.com in its installed base, and open up an avenue for selling to a Salesforce.com customer base that needs more enterprise-wide innovation than Salesforce.com can offer. It’s important to note that Salesforce.com is suffering from a similar problem in CRM that most ERP vendors are suffering from (et tu, Oracle, Infor, etc.): its legacy customers aren’t upgrading to the new products – the Lightning UX, Einstein and others – as fast as Salesforce.com would like. That’s ok in the short run – as long as the licenses are renewed, the revenue stream is solid. In the long run, however, something will eventually have to give. These tens of thousands of companies across the industry will eventually upgrade their core systems of record, and whoever is left standing to take the orders will be in the cat bird’s seat.

In CRM, when it comes time to innovate, moving Salesforce.com’s customers to the latest offering from Salesforce.com doesn’t have to be the only alternative, something SAP and Microsoft are counting on. Dynamics CRM is a highly advanced CRM that costs significantly less than Salesforce.com, and it comes with a huge number of tools, services, software, and even hardware that Microsoft has been adding to its enterprise offerings over the years.

The breadth of this playpen full of amazing tools and products was on display this week at Microsoft Ignite. Satya Nadella’s keynote was basically a guided tour through the Microsoft stack and constituted the most enterprisey keynote I’ve ever seen from a Microsoft CEO. The fact that there were a decent number of joint SAP customers in attendance – one session on Azure and S/4HANA I sat it on probably had 100, makes for an interesting sidebar to my thesis. In sum, Microsoft’s blend of offerings across the Azure cloud, the enterprise software stack, and hardware are truly extraordinary, and will bring a lot of value to the alliance’s joint customers. (They even have a ruggedized, portable Azure server you can put in a backpack and lug up a mountain to support a search and rescue operation.)

This alliance is of course not just about Microsoft. SAP brings its own considerable attributes to the table – S/4HANA, obviously, the HANA database itself, deep vertical industry expertise, market leading HRMS (SuccessFactors, which counts Microsoft’s global instance – running on Azure – among its major customers), its own dev tools, myriad partners, and on and on. And most important for Microsoft, SAP brings to Azure customers with massive workloads that need a cloud platform, like Azure, that has been optimized to run SAP software.

What happens if these two companies can pull this alliance off is simple: SAP and Microsoft start a growth spurt that could potentially devastate their respective competitors and, in the process, push their respective stock prices up as the competitors’ stock begins to teeter. The two partners’ market share will go up, their profit margins will improve, and, best of all, the activist investors will have been at least partially mollified by the results and the fact that SAP is able to unwind an expensive failure in C/4HANA, while rationalizing what’s left over.

Of course, if Elliot still needs some red meat, SAP could – though I’m not sure its internal politics would let it – sell off Business ByDesign and BusinessOne, its two midmarket products, to Microsoft. I’m guessing they’d get a good price for the deal, and I think those customers would, in the long run, find it a positive move. That’s even more speculative than the rest of this post, and may never happen. But it would make sense, a lot of sense in my opinion.

Where does this leave Microsoft’s Dynamics product line? If this fantasy comes to fruition I think there’s still going to be competition between SAP and Dynamics, which has been having a banner year migrating its on-premise customers to its new Azure-based products. If Dynamics can also become the home of the rest of the SAP portfolio, then it would own the market of companies below $1 billion in sales while still competing with SAP in the upper mid-market. Regardless, this market segment is so ripe for new cloud ERP and other enterprise software that Dynamics won’t have too much trouble continuing its rapid growth despite any eventual coopetition with SAP in the upper mid-market.

I confess I give myself about a 50/50 chance that the majority of what’s in this blog will come to pass, it’s definitely based on a lot of speculation and an honest attempt to tie together a set of actions and circumstances that could definitely be interpreted in other ways. Time will tell, and I promise I’ll update this blog as the facts become better known. But one thing is certain: SAP and Microsoft are going to make a helluva strong partnership that is, for good reason, already striking fear into the hearts of its competitors. Sit back, stay tuned, and be sure to stock up on the popcorn: you won’t be disappointed.