SAP’S Bill McDermott: The Overdog Who Thinks He’s an Underdog

As he told his employees in its suburban Philadelphia headquarters, “Things at SAP are too complex, too hard.” This was not news to anyone. “Inefficient internal processes were one of the top complaints on our latest employee survey,” he observed.

Headquartered in Walldorf, Germany, with locations in more than 130 countries, SAP has a dominant worldwide share in enterprise resource planning (ERP) software and software-related services.

All major companies, along with most mid-market companies, use some form of ERP software. It’s the DNA that knits all operations within a company—productions, sales, accounting, payroll, you name it—into a seamless whole. The problem is that it can get really complicated; and if installed with too many adaptations, it can get messy.

Since the board named him sole CEO early in 2014 (he had been co-CEO with Jim Hagemann Snabe since 2010), the former Amityville, Long Island deli owner and youngest executive officer at Xerox has taken major steps to transform SAP. “We’ve got to simplify how we give our customers our innovation and our technology. CEOs around the world want to get complexity out of their organizations so they can grow,” he says.

“CEOs around the world want to get complexity out of their organizations so they can grow.”

This partly explains why SAP saw continued, broad market adoption of SAP HANA, the real-time, cloud-based business platform. HANA is at the core of the company’s “Run Simple” strategy: integrating all SAP solutions on a single business platform in the cloud. SAP now has more than 4,100 SAP HANA customers and more than 1,450 customers for its HANA business suite. SAP’s HANA is also evolving into the leading development platform with more than 1,600 startup companies’ building applications on SAP.

The corporate-software industry is undergoing a rapid shift from packaged software that customers run on their computer systems to software run over the Internet in remote data centers, making data easier to manage, analyze and use on mobile phones. SAP specializes in providing a mix of business applications for companies, from accounting and human resources to supply-chain software, but it has come under pressure from rivals that offer cheaper services over the Internet or in the ”cloud.” SAP, as Europe’s largest software firm, aims to boost the proportion of its software sold via the cloud to compete with arch-rival, U.S.-based Oracle and purely cloud-based competitors, such as Salesforce.com. But there is a slight downside.

Analysts say the accelerating switch from packaged software to so-called “cloud” software would shave about 200 million euros off a previous profit forecast. Packaged software sales are recognized immediately, while cloud orders are booked as sales over the life of a multi-year contract. McDermott insists the transition is both necessary and, in the longer term, more profitable for SAP, whose revenues approach 17 billion euros.

A natural-born salesman, McDermott nonetheless considers himself an “underdog.” In explaining why he wrote his book, he says, “I never forgot where I came from. I want to give people a blueprint toward being a winner through having an original dream. That dream sustained me through good and bad times, and my working life actually became my life’s work because I had the dream. I want everybody to have the dream.”

Q: In your book, you write, “Historically, SAP software was not known for being user-friendly but instead, for its somewhat clunky interfaces.” That seems to resonate with a number of CEOs we’ve talked to about SAP. So, what have you done to address this issue?

Bill McDermott: We have focused on the “consumerization” of software so that user experience is our most important priority. We’ve always been good at mission-critical business processes. But we weren’t as good as that individual user’s looking at the screen and saying, ‘wow, this is as pretty as Facebook.’ That’s what we’re doing now. It’s a major change, a major transformation. Our new user-interface technology is called Fiori. It is the same user interface whether you’re running a cloud or an enterprise application.

Because most of the Fortune 1000 companies already use some form of SAP software, you are migrating to the middle market for future growth. This must represent some challenges, because mid-market firms can’t afford the same total suite of enterprise software that big companies can, plus the fact that the complexity with which your software has historically been associated might put a few people off. How do you overcome that?

BM: I couldn’t agree with you more. That’s why we have become the cloud company, powered by HANA. In 2010, none of our revenues came from the cloud. In 2014, we’ve become the No. 2 company in the world in the cloud. We’re No. 1 in the world based upon the number of users that consume our software through the cloud. So we’ve transformed the company to be the cloud company, powered by HANA. A small, midsized company today can procure our software in the cloud without investing in the hardware, the infrastructure and the expensive consultants to install it. They can simply consume it out of the cloud, pay a service fee on a monthly basis and pay as they go. So you are radically reducing the complexity that stands between the company that you’re trying to serve, which is consuming your software, and SAP’s provisioning that software to as many customers around the world as possible. The company we are today is very different from the company we were five years ago.

Going back over your career, Xerox, Siebel, Gartner, the Amityville delicatessen—what was the biggest learning for you, as a leader?

BM: I’ve learned so much from all of them. But I have to say my first lesson at age 16 was the most important: If I don’t get the customers to come through that door and I don’t understand who my base is, I don’t make payroll and I go out of business. At that time, I had a deal. I had a $5,500 note on the business, I either paid it back—$7,000, with interest— in 12 months or less, or I would lose everything I put into the business. So, for my first venture, that was really, truly a character-making experience, and that’s where I got my whole focus on the customer.

But I must say, Xerox was quite amazing, also. I always wanted to come into Manhattan, this big beautiful city, and take on the world. For a kid from modest means from Amityville, Long Island, this was the dream. When I was 21, I went to the Top of the Sixes for an interview and lined up against these kids in gorgeous suits and fantastic degrees from the best schools. I was there in my $99 suit from the mall that I charged on a credit card, and I was wondering, ‘Man, how do I pull this thing out?’ I did what I was good at, which was talking to people. I knew exactly why I was there. I was there because I was going to get my dream job that day, and I wanted it more. And that passion of wanting it more is every bit in my heart and my soul today as it was then. I felt like my life was on the line, because if I didn’t get that dream job on that day, then maybe none of this would have happened.

The other lesson I’ve learned is to always remain humble. I am more humble today, on the launch of this book, than I might have been when I was 16 or even 21 years old. But I also have to stay immensely hungry. I’m constantly looking around the corners for the next big thing. We just conducted an acquisition of Concur, because I believe that the business network is even bigger than the social network. The idea of helping companies manage their business within the company is super-important. But managing business between companies is even more important.

“I tell them it’s fair to be a skeptic; but if you choose to be a cynic, you have to be better than the facts.”

Explain.
BM: For example, I left a large manufacturer just yesterday who’s building huge engines. And these engines serve the global economy in many, many ways. But they don’t make much money on the hardware; they make all their money on the services. So, think of a world where you’re running on the HANA data platform from SAP. And everything is in real time, including all the equipment that you have and the performance of the hardware that you sell to your customers.

What if you could predict through simulation technology when you were likely to have a breakdown of a key part within a key engine? And what if, in a frictionless way, that part could be ordered by the business network and [if you could put] that order bid out to the global competition to get the best possible price?

And what if, once it’s procured, seamlessly, totally digitally, with no paper, it could be delivered to the customer site and matched with the perfect technician who has the precise skills for that part and that particular engine? That particular company could improve its profitability by more than 50 percent on that one idea of leveraging a business network. That is doing business between companies. That’s the big idea.

A cynic might say that what you’re describing is still a fantasy. What do you tell skeptics?

BM: I tell them it’s fair to be a skeptic; but if you choose to be a cynic, you have to be better than the facts. Today, $600 billion in commerce is getting done on that particular business the U.S. and in Europe. In addition, consider the travel
and expense move that we made with our acquisition of Concur. What do business travelers hate to do? I can’t stand filling out expense reports or even keeping track of this junk—because I’m a busy guy. If you take land, air, hotel, food, entertainment and all the expenses thereof, it’s now managed in your iPhone or whatever device you choose to use. It’s automatically, digitally updated in your ERP system for the benefit of your CFO, so you’re in compliance. And by the way, now you have a best-run business because everything is taken care of financially; but more importantly, your productivity, your time and your life are enriched through technology.

Now, why do I think the network is the future? Because on all those land exchanges—take Uber as an example, the fastest-growing ground transportation company in the world—they’re a partner. Every time they pick you up, we make money. Let’s take the hotel industry. There are hotels that you favor. Every time you check into a room on the network, we’re making money. Let’s think about the air travel that you take. Every time that you choose a certain ticket on a certain airline, we’re making money.

But the best part is that you’re making more money. Because 80 percent of the travel that is done today gets done outside of the travel department, and do you know why? Because you can get a better deal on the open Internet than your travel department could have imagined, because of the real-time exchanges that take place in a real-time network called the Internet. And now, if you’re running Concur, you’re not only getting the best deal, but the financial people back at your company are happy because it’s reconciled in the system of record within the financial walls of your company.

J.P. Donlon :J.P. Donlon is Editor Emeritus of Chief Executive magazine.