SAP CEO Christian Klein was appointed co-CEO with Jennifer Morgan in October 2019. He became sole CEO just as the pandemic was hitting full force across the world last April. He was put in charge of a storied company at 39 years old. By October, its stock price was down and revenue projections for the coming years were flat.
That is definitely not the way any CEO wants to start their tenure, but the pandemic forced Klein to make some decisions to move his customers to the cloud faster. That, in turn, had an impact on revenue until the transition was completed. While it makes sense to make this move now, investors weren’t happy with the news.
There was also the decision to spin out Qualtrics, the company his predecessor acquired for $8 billion in 2018. As he looked back on the one-year mark, Klein sat down with me to discuss all that has happened and the unique set of challenges he faced.
Just a pandemic, no biggie
Starting in the same month that a worldwide pandemic blows up presents unique challenges for a new leader. For starters, Klein couldn’t visit anyone in person and get to know the team. Instead, he went straight to Zoom and needed to make sure everything was still running.
The CEO says that the company kept chugging along in spite of the disruption. “When I took over this new role, I of course had some concerns about how to support 400,000 customers. After one year, I’ve been astonished. Our support centers are running without disruption and we are proud of that and continue to deliver value,” he said.
Taking over when he couldn’t meet in person with employees or customers has worked out better than he thought. “It was much better than I expected, and of course personally for me, it’s different. I’m the CEO, but I wasn’t able to travel and so I didn’t have the opportunity to go to the U.S., and this is something that I’m looking forward to now, meeting people and talking to them live,” he said.
That’s something he simply wasn’t able to do for his first year because of travel restrictions, so he says communication has been key, something a lot of executives have discussed during COVID. “I’m in regular contact with the employees, and we do it virtually. Still, it’s not the same as when you do it live, but it helps a lot these days. I would say you cannot over-communicate in such times,” he said.
SAP shares fall sharply after COVID-19 cuts revenue, profit forecast at software giant
Wearing the crown
Uneasy is the head that wears the crown, and Klein has had to make his share of big decisions in his first year on the job. He says one of them was deciding to go solo, a choice he made in conjunction with the board.
He said that they decided to move to a single CEO after six months because the circumstances of the pandemic demanded it. “You have to make a lot of decisions peoplewise, and we both actually realized that it probably would be better for the company to move back to a sole CEO model. Plus, of course, it’s very important that you are completely synchronized around all the strategy going forward.”
The other major decision involved spinning out Qualtrics as a public company. SAP bought the customer experience company in 2018 the week it was scheduled to IPO for $8 billion. That was under Klein’s predecessor, Bill McDermott, who has since moved on to run ServiceNow.
He says SAP spun out Qualtrics for a number of reasons, including that the transaction allowed SAP to maintain 80% ownership in the Utah-based company while letting it operate independently. That means having an independent board of directors along with the ability to make acquisitions and partnerships without asking SAP while freeing it to make other decisions about how to run the company.
SAP decision to spin out Qualtrics 20 months after spending $8B surprises industry watchers
But perhaps most important of all, Klein wanted to ensure that the founding team stuck around after the initial agreement was over. Granting it independence through IPO while maintaining a large ownership stake gave him the best of both worlds.
“We fully benefit with a fully consolidated P&L. We fully participate with them on the call side, and we see that they are now also much faster in order to sell it outside of the SAP-installed base, and in the end, I also could retain the [Qualtrics] management team.”
Moving his company to the cloud
In a lot of ways, Klein is trying to do what Arvind Krishna is attempting at IBM. He needs to push his company and his customers to the cloud because that’s where the future is. As a company with a lot of legacy on-premises business, he wants to force the issue by incentivizing customers to move to the cloud more quickly.
“I actually see a lot of similarities because our customers more and more understand that by moving out of their own data center and moving ERP workloads to the cloud, you can create new business models. You can connect to customers and can make better use of new technology. You can also make better use of your data to drive automation and productivity with new technology. That’s always easier and this is why the trend and the movement in the market is certainly [to the cloud],” he said.
That transformation has come at a cost: Klein has had to shift from license revenue to subscription revenue, meaning there will be a cross-over period as that recurring revenue builds. That will likely lead to flat revenues for a couple of years, but it’s a trade-off Klein was willing to make because he believes it’s better to pay that short-term price in growth to move customers to where the market is heading more quickly.
“I really had to ask myself, what does this company need to do to be also super successful in the future, and that was actually the way [ … ] and this is why we actually decided to move to the cloud together with our customers,” he said.
Holger Mueller, an analyst at Constellation Research, who had a couple of stints working at SAP in his career, says that transition is still a work in progress. “The underlying challenges that SAP has still need to be addressed — its cloud strategy, its customer migration to the cloud and, most importantly, the vision for ERP in the 21st century,” he told me.
Mueller says if he were grading, he would give Klein a B+, saying, “Well done for a young CEO in his first year.”
It can’t have been easy taking over in a co-CEO role only to get the solo title six months in. What’s more, he had to lead the company through a pandemic while spinning out a key asset as IPO and trying to shift the revenue model of the company.
As he heads into year two, he hopes to get out into the world as the pandemic allows and meet his customers, shareholders and employees and begin to communicate more directly his vision for changing the company, with the goal of moving the organization to where it needs to go to thrive long term.
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