Competing for the cloud

Cloud computing has made life easy for millions of users. But it's a different story for software companies providing those cloud-based services: the field is small, the game is fast and the battle for dominance is fierce. SAP is determined to win.

Nearly four decades ago, in centre city Philadelphia on the East Coast of the USA, in a bohemian-chic historic little side street, stood a popular fantasy-filled boutique named "Vendo Nubes" - "I Sell Clouds".

Today, in 2012, Jim Hagemann Snabe sells clouds, too, and he makes a lot more money at it than Vendo Nubes imagined was possible – not just for him but for the shareholders of enterprise software-maker SAP. As co-CEO (he's the engineer, in charge of product development), Snabe's mission is to actually own the cloud "the next stage of online computing.

"We have declared our intent to be the leader for business software in the cloud," Snabe told INSEAD Knowledge on the sides of the Global Business Leaders Conference in Paris on July 6, 2012. "We are already the largest player today in terms of numbers of users consuming our services. We have more than 15.6 million users, and that is approximately four times more than Facebook."

But despite being Germany's largest listed company by market capitalisation, SAP is not yet the number one player in the clouds. That spot is occupied by the legendary Salesforce.com. Snabe is duking it out with Larry Ellison, CEO of Oracle for the number-two position. It's a competition with a history of acrimony: in November of 2001, SAP lost the largest software privacy suit in history - a US$1.3 million - to Oracle, conceding it had "inappropriately downloaded" Oracle software via its subsidiary, TomorrowNow, Inc. The verdict was overturned less than a year later but competition between the two companies remains.

Buying size and expertise

Consequently, SAP is modifying its organic-growth policy to make key acquisitions in order to scale up fast: Sybase, Inc. as well as SuccessFactors, Inc., and this past May made a US$4.3 billion offer for California-based supply-chain global network operator Ariba, Inc. Combined with SAP's resource planning and back office software, the system would be able to oversee operations all the way to network tracking and managing corporate purchases. Real streamlining. The U.S. Department of Justice thinks so, too – so much so that it's concerned the Ariba purchase could accelerate an SAP-led price war and has asked for enough additional information under the Hart-Scott-Rodino anti-trust laws to nudge the deal's closing into Q4 instead of Q3.

"Ariba is the next wave of cloud computing," says Snabe. "We don't believe in acquisition to consolidate the past. When we acquire, it's been about identifying new categories where there was significant value-add for new customers. And the question we always ask ourselves is: are we able to get there faster through our own organic innovation or do we need a quantum leap to get into that market fast? Ariba run the largest marketplace for buying and selling between companies…they are the eBay for businesses (to date more than 730,000 customers), so it was obvious for us to go for the leader."

This acquisition also speaks to SAP's changing customer base. When the company was founded in 1972 by five former IBM engineers in Mannheim Germany, ICI (Imperial Chemical Industries) was their first client. Early customers were specimens from the Fortune 500. Today, it's small and medium-sized (SMEs) companies who are filling the order books. The kind of companies that really need help managing data, beyond traditional corporate data.

"In today's world, you need to be able to analyse Twitter sentiments in order to understand your impact in this market and guide your efforts and promotions in the right directions," points out Snabe. "In the cloud, the speed of innovation is extremely high and the deployment and delivery of services is hugely simplified."

New challenges

These kinds of new technologies are changing the way businesses are run and, says Snabe, the way we work and live. As an engineer, "What really gets me up in the morning is the opportunity for us to solve some of the resource-constrained challenges that this world has: we are now seven billion people; in the next thirty years we could be nine billion. We need to find new ways to solve challenges around water, energy, food, ways to optimise healthcare." For example, SAP software can analyse the DNA of a cancer patient and identify the mutation to find the most effective medical treatment.

One problem that particularly worries Snabe is youth unemployment today, particularly in Europe. "Many of the innovations of the future require young people's open mindset, and the diversity of bringing young people together in solving problems around energy, etc. We are in the final stages of launching a programme where we will offer education in our technology to unemployed young people in Europe...we have a very strange dilemma: on the one hand, unemployed young people; on the other, in the IT sector there are a lot of positions we can't fill. So we felt that one of the obligations we have is to offer education to unemployed people and with that increase the level of skills and technology in Europe."

SAP's global presence is far-flung: a strong engineering force in Germany, Canada and Brazil; a huge lab in Palo Alto, California; more than six thousand people in India and a rapidly growing presence in China – 32 locations in all. Snabe is also able to identify significant growth in Europe, "We are able to grow through an increase in SMEs, who are in many ways global companies; they're just smaller, but they still need world-class technology, just as the large companies get."

SAP has had nine consecutive quarters of growth and ambitious plans to double the size of the company by 2015. It won't be easy: the company's "Business by Design" cloud service is still very short of its 2011 goal of 10,000 customers needed to keep pace with Oracle. But Snabe is undeterred. He owes it to long-distance running (it clears his head and lets new ideas come in) and a love of classical music.

Leadership rhythm

"I like classical music because it's on the one side a very structured form, where there's no ambiguity about what's being played; yet the real fantastic classical experience comes when there is an element of creativity in that system, coming from the individual musicians and the conductor."

It's an echo of his leadership style and one which underscores his goal to be the dominant player in the cloud. "I don't believe in the leader taking all of the decisions," he says. "It's my role to bring the best people together. But I also believe you need to be a very ambitious-type leader who sets ambitious targets for the team. Because if you're not competing to be number one, you're not competing."

(This video is republished courtesy of INSEAD Knowledge. Copyright INSEAD 2012.)