SAP faces cloud strategy questions with SuccessFactors buy

In interviews, SAP co-CEO Bill McDermott and SuccessFactors CEO Lars Dalgaard discuss next steps

SAP's US$3.4 billion purchase of SuccessFactors not only gives the company an increasingly popular set of on-demand human resources applications, but could also bring its entire cloud software portfolio into a new focus.

The acquisition was announced Saturday and is set to be completed in the first quarter of next year. After it closes, SuccessFactors CEO Lars Dalgaard will run the company as a separate division. He has also been tapped to lead SAP's overall cloud business.

Over the past several years, SAP hasn't quite been able to settle on a cloud strategy. The Business ByDesign ERP (enterprise resource planning) suite was pulled back and reworked once the company determined it couldn't make money on it at scale in its original form. ByDesign's target audience has also shifted, with SAP now courting both small and mid-sized businesses as well as divisions of larger companies.

Along with ByDesign, SAP has been developing a series of on-demand applications aimed at specific functions within enterprises, including Career OnDemand, an HR application that hasn't been released yet but would seem to have significant overlap with SuccessFactors' portfolio. Another potential point of overlap lies between SAP's StreamWork collaboration software and SuccessFactors' Cubetree offering.

And there's still more for Dalgaard to consider, such as SAP's new River platform for building lightweight cloud extensions to back-end ERP systems; how the cloud strategy will fit into SAP's stated goal of migrating all of its products to the HANA in-memory database platform; and SAP's efforts with partners such as VMWare and Cisco on private cloud infrastructure.

All told, Dalgaard could have his hands full rationalizing this passel of technologies and products into a cohesive story, but he seems to have a good chance.

"It's a big job," said analyst Ray Wang, CEO of Constellation Research. "[But] Lars comes with cloud DNA. Before, the old executives were bridging the old world with the new world. This should help a lot."

Buying SuccessFactors serves as an "adrenaline shot," for SAP's cloud business, co-CEO Bill McDermott said in an interview. "We think Lars is the best leader in the [cloud software] business, by a lot."

SAP made its play in mobility through a large transaction as well, with the purchase of Sybase. It ultimately made sense to do the same with cloud software, McDermott said.

"I really did kind of have a feeling it was going to go down that way," McDermott said. "Not that we don't have fantastic plans of our own, we do. But clearly the know-how around the on-demand business is different. We could have built it on our own but we wanted to get there fast."

SAP was also impressed by SuccessFactors' ability to win and deliver on major projects like its 400,000 seat installation at Siemens, according to Wang. "It's one of those projects where they successfully blocked out SAP. This is still one of the biggest cloud installations."

"You have to keep in mind that this is a system that every employee may use once a month, as opposed to a [sales application] where they're using it on a daily basis," Wang added. "But while it's lower-touch, imagine when 400,000 employees use it all at the same time at the end of the month."

In an interview, Dalgaard echoed the point. "We can handle [major traffic spikes] because of the way we've built the multitenancy," he said, referring to the software architecture style used by many SaaS companies. The "clever" way SuccessFactors has designed its software means big savings on hardware, he added.

Last week, Dalgaard had a meeting with his CIO to discuss expanding the company's data center footprint by 20 racks, he said. But after mulling it over, they determined that just six should work, according to Dalgaard. The point is that cloud application development teams which spend less time on basic issues such as scalability and reliability can focus more on making better software, he said.

While Dalgaard and his team will bring cloud know-how to SAP, he'll have to apply and share it within a much larger and more complex organization. "The biggest challenge is going to be culture," Wang said. "SuccessFactors is very top-down driven, while SAP is very consensus-driven."

Still, it seems that Dalgaard will enter the job with strong support at the highest levels of SAP to execute a vision.

"When Lars gets in there, he'll see what he likes and what he doesn't like, and he'll make the calls," McDermott said. Also, in the press release announcing the deal, SAP noted that company founder Hasso Plattner is recommending Dalgaard for a seat on the company's executive board.

SAP's leadership has shown "an incredibly open mind and willingness to partner," Dalgaard said. "Man, I'm learning. I really don't feel I should get paid. I'm having too much fun."

Chris Kanaracus covers enterprise software and general technology breaking news for The IDG News Service. Chris's e-mail address is Chris_Kanaracus@idg.com

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Tags business issuesLars DalgaardInternet-based applications and servicesSAPsoftwarecloud computinginternetBill McDermottMergers and acquisitionsSuccessFactorspersonnel

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