One of the world’s largest enterprise service companies is the German-headquartered SAP with annual revenues close to $30 billion. A leader in ERP (enterprise resource planning) software, SAP also sells database software and related technologies. However, it had to move from selling licenses for mostly on-premise software to cloud, temporarily, impacting its margins.
At 15,000 employees, a seventh of the firm’s global headcount is based in India, making it a key market for the company both in terms of selling its products and also for sourcing resources. SAP’s India R&D team is its second largest in the world.
With the pandemic-induced shift to cloud technology, the Indian market has been red-hot for SAP as it recorded triple-digit growth rates for a continuous six quarters. Kulmeet Bawa, President & MD, SAP India spoke to BusinessLine on the opportunities and challenges the firm faces. Edited Excerpts:
From selling enterprise licenses to providing cloud services, how has the transition been for SAP?
There’s a massive cloud momentum in India, with or without SAP, which of course got propelled by the pandemic and today has taken on its own escape velocity. The impact is being felt at such a fast pace because of the young and growing digital population that we see investments coming in. Combined with the massive consumer market we have, favourable government policies and the pace at which organisations are wanting to digitise across the spectrum enterprise is helping us harness cloud growth.
Globally, we serve almost half a million customers (including about 15,000 in India). SAP has the agility as an organisation to change with times, reinvent, get back to the drawing board, disrupt, and stay relevant. During the pandemic, we listened to our customers and it helped us innovate at a faster pace and become a cloud company.
In January 2021, we launched the RISE With SAP, which is moving the digital core of organisations, the mission-critical systems, and the ERP systems onto the cloud. We have clearly been at an inflection point in our journey from a global standpoint because our cloud revenues grew 34 per cent and became the largest revenue stream.
Although cloud has been the largest revenue stream lately for SAP, the underlying worry has been that this impacted your profitability because you are moving from a CapEx to an OpEx model.
I firmly believe that it will take time when we make a transformation or a transition like this. We had clearly called out that in the next three years, we would be making this transition where bottom lines and margins would get impacted. It’s very natural and it’s not that we were caught too much by surprise.
The lower operating margins were more of a result of this whole overhaul of the strategy. In my view, this impact is not going to last. There will be a turnaround by sometime next year when we will see the whole thing shifting and starting to get a stable cloud margin. But yes, we are under margin pressure, but it’s purely part of the transition.
The global leadership particularly called out India ops performance for the positive up-side. Were you surprised at the pace of the shift in the Indian market?
No. We are one of the most attractive markets in the world. When I look at the headroom available, the upsides available to us as a nation, the pace of growth is humongous. India continues to be a very strategic market both on business and R&D. We’ve had triple-digit growth almost every quarter for the last six or seven quarters and that’s constant year-on-year growth coming.
We are seeing growth across different sizes of organisations, whether it’s enterprise or mid-market. And we are also seeing growth coming in digital native segments or the internet companies, which is not something we typically used to go after as SAP. Although we are segment agnostic, growth is everywhere — life sciences, pharma manufacturing, BFSI and others.
Traditionally, you have been very strong in large enterprises, the ones for whom the transition is the hardest due to legacy investments already made. What are you doing to address those concerns?
The way that we positioned RISE With SAP was as a business transformation as a service. We would help organisations not just transform, and move to the cloud, but also relook at their business processes because for a lot of our decade-old customers, there are complex implementations.
We are seeing a lot of success. Along with the lift and shift, we help customers with best practices, given that you’re on an old system and the world has moved and with cloud, upgrades, and updates come in.
In addition to that, we started pushing in our business technology platform, the platform piece, which is important for API integrations and extensions. We said, irrespective of whichever cloud you want to work on, we will be here as your single concierge and I think that has fructified. We have seen a lot of success in the last year, some of the largest implementations like HCL, Wipro, Mahindra Frist Choice, BPCL, and others are complex, but we have got them up and running in record time.
The mid-size enterprise market cloud penetration has been minimal because of budget constraints. How are helping them?
We have made huge progress as more than 80 per cent of our business is in the mid-size market segment. The intent of mid-size customers, to get closer to their customers and suppliers has gone up at a swift pace, through the pandemic. They want to serve their customers digitally, and we are seeing a higher trend in the tier-II and -III cities.
They struggled with managing their infrastructure or applications since they lacked adequate technological expertise. But now with the cloud coming in, they’re clearly harnessing the cloud technology as a choice, because given the subscription operating expenditure, it definitely lends more affordability to it.
SAP is very clear that we need to empower the mid-market in India and make them more globally competitive with our solutions. We have made investments to localise our multi-cloud strategy a couple of years back so that they can enjoy our services.
Most Indian IT services companies like TCS, Infosys, Wipro and others have had large SAP implementation verticals with thousands of employees. With a shift to cloud, how has your relationship with global and Indian SIs shifted?
They got stronger than ever. There are thousands of people with billions of dollars in SAP practices. A lot of these Indian Sis (system integrators) have themselves adopted RISE very quickly and are now taking it to market with customers, not just in India but globally.
This whole shift to the cloud has brought on a lot more opportunity for our ecosystem of partners. This is because while we do one piece of it, a lot of the whole servicing, the best practice, the business process transformation falls on them. So, it’s a massive opportunity for our ecosystem.