deal architect

Part 2 of conversation with Mike Laven of Currencycloud

In this part, Mike talks about the China influence on Fintech, Blockchain and other disruptive trends

Mike, I was in Shanghai a few months ago and I was blown away at how isolated I felt.  I didn't have the banking and other apps that the Chinese consumer has.  I felt cut out of that economy.  On the other hand, the Chinese consumer is so connected and digitally savvy. How do you see Chinese influence spreading to other global financial centers?

I just ran a seminar at a conference that I go to every year in the Alps.  It's a fun conference, put on by one of my investors. I ran a seminar for the morning on the Chinese Fintech Model.  I was the moderator and we had a whole bunch of knowledgeable people in the room discussing China. 

You’ve been in Shanghai. You walk into a restaurant. it may know who you are through geolocation.  You scan your QR code.  The menu shows up.  You order on-line, you just walk out, and you're billed.  Your account is then linked to the restaurant and everything works effortlessly. Payments can be embedded in your WeChat account.

There are a couple of things going on that are very difficult for us in the West.  First of all, a lot of the bank services are being delivered by a third party wallet outside of the banking system.  They're not being delivered by a bank.  Ant and Tencent effectively are running these huge balances that keep the wallet.  So we’re beyond the security of the banking system for holding balances.

The second thing that's quite important is our concepts of data privacy aren’t there.

Government has basically sponsored this massive infrastructure that totally integrates everyone into the financial system for every single thing that they do.  You get that utility at the expense of sharing all your information with government. Loose controls on anything to do with privacy and that makes all that work.  At this point the Chinese consumer doesn’t care about privacy in the same way, or has no choice. Maybe that will change in the future, but not now. That drives a level of integration and service provision that we can’t come close to.

When you think of whether the Chinese model will come to the West, I think, the answer is probably unlikely.  The U.S., is the most difficult market for financial innovation because U.S. banking regulations are so hard with banking regulated by 50 states. There have been attempts by the federal government to put in a national banking law and the states have defeated it each time.  Fintech innovation in the U.S., in anything that touches actual money, is incredibly difficult. The States have said, "No, we're not giving up our ability to protect our consumers," all of which means that it takes millions of dollars both in license fees and operation fees to build an innovative regulated financial platform in the US.

So in the US, Fintechs focus on technology first, and then the regulated platform becomes the bank.  Then the bank delivers the service and buys in the tech.  So I think the US model will be very bank focused.  In Europe where there is a single source of regulation it is easier to be a larger banking alternative which we’re seeing with the growth of large Neo Banks.

But the scenario that's more interesting -- and this is the summary of my seminar with a lot of really smart people -- what's much more interesting is, the Chinese may not care that much about Europe and the U.S.  

If you look at the places where that model is going, it's all over South Asia and all over Sub-Saharan Africa and all over Latin America.  The Chinese financial firms have figured out that the European and U.S. privacy standards, mean that the Chinese model of third-party wallets, total integration, and government access without so much concern for data privacy is not going to work in Europe and the U.S., but it's going to work everywhere else. It could come to dominate the whole of the world, except for Europe and the U.S.  We'll end up as a museum of how things used to done. The Chinese visitors are already piling in.

How about India's or Singapore's influence?

The interesting question here which has come up a couple of times, is whether there is a third pole globally in terms of financial models? That's India, which hasn't worked as aggressively outside of India, and is a totally different economic model and will soon have a larger population.  In India everybody now also has a government-issued ID.  There is some level of state knowledge and control but nowhere near the amount the Chinese have.  With such a massive internal market, tech savvy entrepreneurs, access to capital, India could develop a financial model more closed than China but with greater integration and ease of use than the West. After the demonetization of the 100 Rupee note a few years ago, cash payments went massively electronic through Paytm and others almost overnight. So there is scope. Whether India will end up as a third economic pole is an interesting question.

Outside of Paytm, which is huge which exploded after the demonetization of the 100 rupee note, we haven’t seen that many India Fintech product companies. Lots of expertise, the banks have huge development shops and large integrators. But the Indian market is large enough, like China, that internally focused products can get massive scale and eventually export. To go back to the Chinese model, when you go to China and see that total integration of the financial system, it's pretty impressive but its likelihood of spreading in Europe and in the U.S., we think, is really low.  However, you can also think of it this way: if China’s economy grows at 8% and India grows at 6%, if you paid a 2% penalty for a little bit more data privacy, maybe it's okay.

Singapore has a very active Fintech market, actively encouraged by the regulator and the government. But the S.E. Asia internal market is quite fragmented and except for DBS, the Development Bank of Singapore, most banks are not that tech savvy. Think of Singapore like Israel—a hot tech market focused on export.

What other trends excite you?

I think the transformation of insurance is now very interesting.  Insurance is about the ability to identify, price, manage and share risk. Now that we have the ability to collect massive data on everything, we can now refine our ability to identify and manage risk and then to distribute that risk across other venues. Additionally there are new kinds of risk. How do you insure self-driving cars, or shared vehicles, or home owners insurance for shared properties or drones.  Insurance is usually the last industry to ever transform as it’s so conservative.  Sometimes we think banks are conservative, but you're seeing a lot of InsureTech startups these days.  You should look at a company called Trove, which is pretty interesting.

People always ask about blockchain and crypto which I think isn't that interesting as a financial service at the moment. In terms of asset trading, crypto is very interesting.  But in terms of a financial services delivery vehicle, say payments or FX, it seems to have come and gone. No real advantages as yet in speed or cost.  There is a lot of experimentation with blockchain based financial systems and distributed ledger systems in the larger banks-but right now that is still only experiments. There are other ways to solve distributed data problems. A few years ago, when you attended Money2020, the major annual Fintech conference, the booths were full of blockchain and crypto start-ups. Walking around this year, they were there, but hard to find.

When I think of the conference I just came from, it was very innovative, and quite fun.  What were the themes?  The themes were InsurTech; the difference between selling to millennials to selling to the people who have the money, who are the baby boomers; and how innovative firms are trying to capture younger people without money because, ultimately, they're the people with money in 20 years. 

Conversation with Mike Laven, CEO of Currency Cloud

I had a chance to meet Mike Laven, CEO of Currencycloud over lunch in London, and then follow up by phone on how the Fintech market has evolved in major money centers around the world.

Mike, you have had a bird's eye view of the Fintech market, even before the term was coined, at Currencycloud and in previous leadership roles at Infinity Financial Technology, Cohera, Coronet and Traiana. Summarize if you can the trends you have seen.   

Currencycloud is a venture backed company that provides embedded international payments for many Fintech firms, neo/mobile bank and payment firms. We now effect well over $1B a month in payments. We got our first major funding in 2012 and then we were off and running.

I divide the Fintech world into two buckets: digitally native finance, and digitally transforming finance.  For the first five or six years of the company, we almost exclusively sold to digitally native Fintech companies. These firms didn't come out of existing banks or existing large corporations but usually from technologists trying to solve a personal or business problem. Fintech arose from meeting a customer requirement and an old, inefficient, almost customer hostile banking system.  Nobody loves their bank and the quality of services. Banks believed they had a lock on their consumer and corporate customer, and so felt no pressure to change and evolve. So Fintech companies set out first to meet Millennial digital demand, for digitally native consumers, and then have created a whole new ease of use in financial services. Those services, even when they don’t attract enough customers to scale set the standard for the traditional providers. So Fintech has massively punched above its weight in setting a standard for the industry. Digital consumers have set the standard which will filter upwards into all of finance. So yes—in finance customer requirements fueled by massive amounts of venture capital are driving industry transformation.

The early stages of Fintech were very much like other Internet-related areas.  Firms like ourselves and start-up automating lending, people, car loans, insurance, small business loans, wealth management, trade finance. Each picks off some feature and optimizes the hell out of it, focuses only on that, making a category killer. They were pure startups.  They took for granted that services would be delivered to millennials on a mobile phone and by-passed the out-dated physical bank branch system. Fintech is breaking up that massive bank platform into a series of optimized pieces. The optimized pieces are great for the early adopters but most people and businesses don't want to go to ten places to get their services. So the question is “who will provide the point of integration to provide all of these new optimized digital services. Will it be the banks who already have the customers but need the technology, or the Fintechs who have the innovation but need the customers". The Fintech companies and digitally native banks are built on a totally new banking stack, on a cloud-delivered, agile developed, next-generation banking stack.  But then those firms don't have a lot of customers compared to the large established banks.

In Europe, there's Revolut, Starling, Monzo, N26 and other Neo Banks who are starting with debit cards on which you can hold a balance and then layering in budgeting, insurance, travel, and a whole series of other banking services. These banks provide a whole new level of user experience. There's a whole series of consumer-oriented, digitally native, financial service firms.  You don't see them as much in the U.S. because of the regulatory issue but, basically, they start out mobile, and generally they start out targeting millennials. 

So talk about the incumbent global banks and their strengths and weaknesses in a changing world.

I've always been a believer that the big banks always win because of their ability to make a billion-dollar investment, their ability to shoulder risk, and their huge balance sheets but they'll just be late to the party.  Those banks still have the bulk of consumers.  Europe has this very active challenger bank segment, but it's still the early days for Fintech and the bet is that as millennial consumers grow up they won’t return to banks they’ll stay with their apps, and that the bank culture will not be able to deliver.

The established banks still have the customers and cost of customer acquisition is very high and requires off-line marketing which we see all over the London metro system and TV ads.  Pulling people away, even for a better service is complicated and expensive.  So to me the jury is still out—there will be few Fintech winners, but as you need massive scale and the banks have a lock on users, I wouldn’t bet against the big banks yet. A few Neo banks will make it-but not all.

In our world of moving money around the world, the banks, the big banks who do payments -- and that would be like JP Morgan ,Citi, Barclays, BNP and others -- service their large customers very well. Banking and finance are conservative and highly regulated industries, so their technical transformation to modern, user friendly, mobile oriented industries has come late in the internet revolution of turning all kinds of commerce on its head. Also, some of them looked at emerging Fintech and thought, "We have the customers.  Our customers aren't going anywhere.  These are small startups. Nothing to worry about."

The difficulty that the larger banks have is they're still running these big, on-premise systems.  The systems work. But if you want to offer flexible, mobile services that are delivered to the next generation of customers then, ultimately, you have to make changes to your core banking system or else you have to build a new platform. 

The firms who are really clever actually know that they can't touch their core banking system without spending hundreds of millions of dollars.  What they're doing is building an alternative platform to start the delivery of services and then hope they'll bring the platforms together later. 

We know from back in the old days of ERP, when you switch technology, when you switch from mainframe computers to minicomputers and minicomputers to desktop computers and from desktop computers to mobiles from mobiles to streaming that new entrants come in with new technology and the old guys just watch and eventually have to catch up or die.  What you're seeing now is banks trying to catch up in what I call digital transformation. Right now, the banks' advantage is that they provide all of those services through one single point of contact, but the individual services will be sub-optimal, over-priced, not transparent, hard to use, bad user experience … all the things we’ve come to expect in the digital age.

The difficulty for the big banks is that when they look at the assets that they lose or the transactions that they get, today it probably doesn't matter much because all of the challenger banks are serving a different demographic, which is the demographic that you need 20 years from now, not the demographic that you need today. 

I once had a conversation with a Head of Payments from one of the largest US corporate banks and we talked about my targeting services to SMEs. His response was that services to firms under $1B were unprofitable, so the more I could do to take that business off their hands the better. So when the established banks looked at Fintechs initially focusing on millennial consumers and small business—they just didn’t see a threat.

The smarter guys are trying to figure out how they do their digital transformation to economically capture these markets of the future and the dumber guys say, "Okay, we're fine today," but I think they're going to wake up in ten years and all their best customers are going to be somewhere else.  When I present to established banks about Fintech I usually tell them that the competition they need to worry about is not Fintech but smarter banks.

That's where I see the Fintech world now. Maybe five or six years ago, the consumer-oriented Fintech world was all about digitally native startups. Some of those firms have prospered and are scaling up and that's great.  Some have fallen by the wayside.  Now you're seeing less new entrants and a real sort of arms race on the part of larger banks who are very constrained because of old technology and old siloed organizations.

Where I see the challenge right now for larger banks is that you can't unlock a lot of the Fintech innovation unless you can migrate your core banking system.  But migrating your core banking system is really hard and really expensive. In order to provide a whole range of digitally optimized services, either the established banks have to rebuild from scratch, or modify their brand through digital partnerships. So will the banks become the point of integration for new services, or lose their customers? I actually think, from a market-facing perspective, the big banks are not in that bad of a position.  Acquiring customers is usually a longer and harder job than acquiring technology.  Their big question is “How to provide a next-generation service with a last generation core banking system?”  So, who will create the new integrated financial services stack. First for consumers, and then for business.

The other point, which I think is important, is Fintechs are tech heavy but asset lite, no balance sheet. In the world of financial services, the banks that have huge balance sheets that can meet regulatory requirements and have the ability to loan money from those balance sheets to corporates, they are the ones who have a huge scale advantage over Fintechs, even those with a banking license.

Fintechs like ourselves and people in other corners of our industry optimize transaction costs to near if not at zero, so you really have to scale and in the end there can not be that many players.  The real profitable business that's left for the banks is loaning off the balance sheet and making money on the capital.  As the Fintech world optimizes all of the transaction costs, the large banks with large balance sheets might be actually in a very, very good position because they can let Fintechs optimize all of the low margin stuff and they keep the high margin business.

European regulation, the Payment Services Directive (PSD2) is forcing the banks to open up their account information to third parties to build services on. At first, this looked like it might bring in an open banking environment. But consumers are often reluctant to switch banking providers and open banking may just allow established banks to off-load unprofitable current account services while keeping the deposits and the money making loan activities.

The reality is corporate customers are not going to go to multiple places to get finance or overdrafts, and another place to get short-term loans and another place to get a real estate loans. Corporates like to come into a single bank to get all those services.

A business wants to come to one place. So the digital transformation of corporate banking is taking longer.  The challenger banks are really at the level of very small business, you know, at helping sole proprietors and small businesses, people who sort of run their business using Intuit, Sage, NetSuite, or one of those packages.

If the core accounting system is Oracle, SAP, or anything that's really substantial, the likelihood that that firm is going to end up buying lots of different little apps to run their banking is fairly low.  The question then for the big banks is, as those alternative services put on cost pressure, to what degree are they going to respond.  They can be slower;   business banking takes a lot longer to transform than consumer banking.

Sounds like a lot of fragmentation. Do you see any consolidation anytime soon?

The way Fintech has grown up is that we’ve optimized different parts of the financial value chain:  cross-border payments, wealth management, current accounts, mortgages etc.

The current issue in Fintech, is that separate optimized services are massively inconvenient for consumers and businesses. At some point, all these things have to be reintegrated and the question becomes, who will manage the point of reintegration.

Goldman’s Marcus is a good example.  It starts as an innovative platform backed by the assets in Goldman Sachs with all the money they can put behind it.  They can then become a platform for delivering services from other Fintechs.  I think that's what you see.  Santander, BBVA, Credit Agricole and other banks are going down the same path.

You'll see Fintech massively consolidate.  Either a few guys will become huge because they start to go out of their niche or everything else will be delivered by the banks.  Remember, this happened -- I was around for this in capital markets.  Twenty years ago, when you started to get the proliferation of trading venues in equities, all sorts of new places to trade and massive price reductions in the cost of trading. Ultimately, the exchanges and the big banks consolidated everything and brought it all back.  Capital markets went back to the large players with a few survivors

In Part 2 tomorrow, Mike will talk about the China influence on Fintech, Blockchain and other disruptive trends

Vendors and Analysts: Influence v. Intelligence

Readers know my favorite vendor event is a summit - a day or two long analyst-centric event. Not that I mind going to user focused events but feel like I intrude on customer time there.

In the last year, I have seen analyst meetings get more nuanced and frankly more enjoyable with richer content

• Plex, which pioneered and continues to take analysts to customer plant tours, invited a few analysts to a Customer Advisory Board meeting. That took some courage but the interaction of their executives, their customers and analysts allowed for far more authentic back and forth. 
• SAP invited analysts and reps from ASUG (the N. American user group) to a licensing day event. Usually vendors are loathe to discuss pricing, trade-ins, audits.   That took even more courage as we were not shy in providing feedback. 
• Zoho invited a global set of employees, not just execs, to join in their analyst day. It accented the reality that Zoho's is blazing a dramatically different global path as I wrote here
• I recently had a chance to present to a group of consultants at Cognizant in India about my new book, SAP Nation 3.0. Instead of just listening to me, we turned it into a much more interactive session where we discussed other platforms, vertical solutions as well. I learned as much as they hopefully did - we could have gone on for a few more hours.

Even the evening gatherings are becoming more creative

• Workfront hosted a few analysts and customers at celebrity chef Heston Blumenthal's restaurant in London. Few things impress a tech analyst more than when you ask for a scoop of simple vanilla ice-cream and they drag in an elaborate contraption and make it in front of your eyes using liquid nitrogen.
• Workday chartered the California Spirit and took customer execs and analysts on a pretty sunset across the bay in San Francisco. Talk about ensuring a captive audience :)

It's not about elaborate settings. Frankly, I am more impressed that one CEO has started to host small dinners with analysts ( I missed the first one, but in an email he told me he looks forward to the opportunity to more sessions and to "listen and learn") and another CEO has similarly promised to make more time for one on ones.

All this contrasts to certain vendors who have not had an analyst summit in years (or ever) and many others where your only interaction with the CEO is via Q&A in a large press conference. It's their prerogative but certainly different from the share, listen and learn approach some of their competitors are taking.

Analysts can be used for influence or market intelligence - the ideal combination involves both.

Cloud Applications - A long, winding road dotted with Bystanders

Frank Scavo's Computer Economics has a nice post about the the long, winding road - the slow customer march to cloud applications. Bill Kutik pointed to similar slow movement more specific to HCM cloud applications in a recent LinkedIn post.

My recent book and my advisory work provide an additional perspective to their data. I identified a large group of what I called Bystanders in the SAP customer base. They have not taken advantage of its growing portfolio of new products - S/4, C/4, cloud properties, SCP, SAC, Qualtrics etc. They continue to stay with ECC, BOBJ, B1 and other 20-25 year old products. I did not call them laggards or anything else pejorative for reasons that will become clear as you read further. I estimated 60% of SAP's 400+K customers are in that group, especially those in Europe. If anything SAP is ahead of its on-prem peers. S/4 is maturing nicely and its coverage in functional and geographic areas is much wider. The competitors have even more Bystanders in their customer base.

There are three big gating factors for their lack of movement

Not enough functionality

I have heard from countless customers they do not see enough from individual vendors in the cloud, and they are afraid to add to their patchwork of already too many vendors. After 20 years of cloud applications, we have too little global or industry coverage. So, you have vendors like NetSuite brag they have users in 200+ countries and they support over 190 currencies, but their own site shows detailed functionality for less than 20 countries. You have vendors who claim to "do ERP" but have zero shop floor or warehouse or operational capabilities in the cloud. I got a nasty note from a vendor executive asking why I considered "back office" functionality "boring". I responded "I was trained as a CPA so boring is a strong term but I am amazed the industry talks so little about operational systems and vertical functionality compared to all the talk of hcm, crm and core accounting."

Too expensive and risky a migration

A number of customers have tested the waters and many have been shocked by the proposals they have seen from SIs. Many SIs are behaving like it's 1999. Just because the S/4 or Workday software is relatively new, it does not justify a premium in consultant rates. The functionality is not dramatically different. Also, SI delivery models have not evolved much. Just not enough automation in data conversion, testing and other phases of projects they do over and over at clients. Finally, there is their age old FUD of  "oh, there is so much change management". And yes, they still cannot show predictable outcomes. The muscle memory of the overruns and failures of the last wave of ERP and CRM remains with too many customers for them to sign up. I was actually pleased to catalog many case studies of ECC to S/4 migrations in my book which minimized the organizational change and the SI role - they stuck with SAP GUI, stayed on-prem etc.  They are postponing innovations, but frankly reducing exposure to the "change management" and other SI premiums.  

Cloud economics are just not as attractive

In wave 1 of the cloud, the economics were compelling. The cloud collapsed 4 contracts from on-prem world - the software, the hosting, the AMS and that of SIs who did frequent upgrades. Multi-tenancy and simplified contracting explained why it was so attractive to look at a Salesforce or a SuccessFactors relationship. But in the last decade, reality has set in. I have heard from a number of customers their incumbent infrastructure is fully amortized - the cloud only adds to that cost layer. I have heard from others who have sharpened their pencils, that buying their infrastructure is still cheaper than subscribing in the cloud when it is annualized. Then there is the expectation that comes from their outsourcing experiences - when you hand someone a 3 or 5 year contract you have the right to expect CMM Level 5 or Six Sigma continuous improvements. Instead, too many SaaS renewals are turning into unpleasant head-butting experiences - no improvements, just massive cost increases. 

Most customers I have talked to would love to modernize. Many, in fact are frustrated with the status quo. ABAP or Peoplecode are not exactly recruiting assets any more. Their significant customizations and technical debt are growing compliance and security risks. They realize they cannot leverage multi-tenancy, machine learning and other advances with their current set-up. But they are nervous. They want lots more operational functionality, and they want better economics and predictable results.

In the book, I called on SAP  to "tilt its bell curve" and jar the Bystanders into action. Other on-prem vendors need to do that even more in their customer bases. Pure cloud vendors continue to have the opportunity to replace incumbent vendors. But they need to tackle the three big issues I highlight above.

Just calling the Bystanders "laggards" or something else demeaning is to ignore the reality of the state of cloud applications.

Tim Cook - Book Review

I read the Leander Kahney book on Tim Cook on the long Emirates flights to and from India. In India, I had a conversation with an Apple consumer like me (not really that knowledgeable about the operations of the company). His point was India should require Apple make massive investments in return for access to their large market. I asked him if the US should expect the same of TCS, Infosys, other Indian outsourcing firms for similar access to their largest market? He ignored my question. Then we got into Apple needing to diversify production away from China given recent trade tensions. I asked him how India would improve its infrastructure to support Apple's finely tuned supply chain. Again, no good answers. Raise our amateur conversation a few levels of abstraction higher. It would highlight how Tim Cook is one of the most geopolitically influential executives in the world these days.

And if rumors of the Apple Car are true, Germany, Japan, S. Korea are just as interested in what he is going to do. So I thought it was odd that Leander's book does not look much at these global crosscurrents in his new book. Instead, I thought Kahney spends way too much time on race relations in Alabama where Cook was born and raised, and his sexual orientation. In that sense, I had the same reaction as I did to Walter Isaacson's book on Steve Jobs - bit too much focus on personal background and idiosyncrasies, less on the gears and timing belts of the Apple juggernaut.

Unlike Isaacson, Kahney did not have appear to have direct access to the subject. However, from the citations he did have access to a handful of Apple executives, and with his long time blog The Cult of Mac he has a slew of contacts in the Apple ecosystem. I find when I write books, I have to take off my blogger hat and not focus so much on newsy, gossipy stuff and focus instead on complex issues that corporate executives are interested in. I don't think Kahney does enough of that. So much of the book is actually cut and paste of lots of historical reporting about Apple. I wish he had spent time in China crawling through Foxconn, Fedex and various component vendors that make the remarkable Apple supply chain work. How it is orchestrated with last minute design changes, how it is mostly kept secret etc. 

I do like that Kahney addresses the silly notion that Cook is not innovative. By launching Apple Pay and Watch he has bought Apple a toehold in massive emerging digital payment/commerce markets and wearables/healthcare markets. And if Car becomes a reality, he should do  the same in rapidly changing mobility markets. Just wish Kahney had explored those a lot more about how those products are bought to life, and how their complex supply chains are choreographed.

You will likely understand Tim Cook a bit better as a human after you read the book. I found it did not really add that much to my understanding of him as a business executive or that of Apple's operations.

Deja Vu all over again

I was in India last week and visited with a couple of outsourcing firms. In my travels, I got reminders of several due diligence visits I had helped clients with from 2003 to 2010. The Renaissance in Powai reminded me I had stayed there with a client during a visit to TCS. A Cognizant executive reminded me of visit with another client to Chennai. A drive-by the Hinjewadi building of Persistent reminded me of a visit with yet another client.

A bit of deja vu, all over again.

My firm, Deal Architect has helped a number of clients evaluate SIs, negotiate hosting and AMS contracts. Before that I had a marketplace startup which helped customers develop digital services RFPs and evaluate responses. Prior to that at Gartner, I helped a number of clients with their ERP SI evaluations. India and E. Europe have actually been a small part of the landscape across which we have helped clients with services procurements for a couple of decades.

The time is right to help clients with their new wave of services procurements - as they move to S/4HANA, as they evaluate cloud infrastructures, as they look for post implementation support around their cloud apps.

It's a new world - not sure vendors have evolved enough in skills, methods or automation.

Clients need a deja vu to avoid some of the mistakes we all made in the last wave. Look forward to helping several of them.

SAP Nation 3.0: Excerpt Chapter 12 - Manifest Destiny?

I excerpt 10% from every book in a series of blog posts. I posted several on SAP Nation 3.0 in April, then took a break after the Sapphire event. This is the final batch I am excerpting. The book is available to purchase on Amazon in print and eBook format here

"In the start of the book, we shared that in his inaugural address in 1801, U.S. President Thomas Jefferson had talked about a nation “with room enough for our descendants to the hundredth and thousandth generation.” A couple of years later, Jefferson instructed Lewis and Clark as they began their pioneering westward trek: “Those who come after us will fill up the canvas we begin ….”

Jefferson was an optimist and helped fire up a country’s imagination for a massive westward expansion. SAP needs a similar call to action."

"McDermott, himself, after announcing the large Qualtrics acquisition, said, “Very few people are aware of the implications of courageous decisions. Especially not if they’re hit unexpectedly …. Looking back in a few years, SAP will have reached a whole new level with the Qualtrics deal. We dream and fulfill dreams. That’s the wow factor that distinguishes an average company from a great company.”

"Of course, SAP is not the only vendor who sees this second wave opportunity. Dave Vellante of SiliconANGLE Media paraphrased IBM CEO Ginni Rometty’s message at her Think conference in February 2019. “Chapter two is about the hard stuff. It’s about scaling AI and creating hybrid clouds. It’s about bringing the cloud operating model to all those mission-critical apps and enabling customers to manage data, workloads, and apps and move them between multiple clouds. This is a trillion dollar opportunity and IBM intends to be #1.”

"McDermott has a best selling book titled “Winners Dream”. On Facebook, he periodically posts inspirational quotes such as “My parents gave me permission to dream big. Do the same for those around you”.

So, how bold can SAP’s and McDermott’s dreams be? Are they ready to issue the Manifest Destiny clarion call to go from “sea to shining sea”?

The continent of enterprise computing is waiting to be tamed."

SAP Nation 3.0: Excerpt Chapter 12 - From Sea to Shining Sea

I excerpt 10% from every book in a series of blog posts. I posted several on SAP Nation 3.0 in April, then took a break after the Sapphire event. Over the next week I will excerpt the final batch. The book is available to purchase on Amazon in print and eBook format here

"In Ch. 11, we looked at how SAP could become a first mover with its huge incumbent customer base. At the same time, SAP could be thinking much bigger. There are plenty of other markets where SAP could adopt a fast follower approach after missing out on the first wave of opportunity."

"Or take the world of the Industrial Internet and Industrie 4.0. In Ch. 2 we discussed GE’s “Power of 1%”: 1% in fuel sav- ings in aviation and utilities, 1% productivity improvement in healthcare, 1% reduction in oil and gas cap-ex. In just five sectors combined — rail, aviation, healthcare, power and oil and gas — GE had projected US$276 billion in efficiencies over 15 years.” These were only in sectors GE was interested in, where it sold turbines and MRI scanners. There is a far bigger market around connecting other assets, listening to them, delivering predictive maintenance and other tangible benefits."

"Or take verticals. Just take one sector — fintech. According to Deloitte, “264 companies have received a total of US$7.71 billion in investment since 1998. Contrast that with China, where only seven payment fintechs are found, but these are backed by US$6.92 billion in funding. Similar patterns are seen in deposits and lending, investment management, personal insurance, and real estate leasing/purchase and sale." After leading its peers to industry solutions in the early 2000s, can SAP do so again with so much turmoil in so many verticals?"

"If anything, I would like SAP to find a different inspiration from Google and more specifically from X, the idea incubator of Google’s parent, Alphabet.

Astro Teller, Captain of Moonshots at X (seriously, that is his name, title and company name), said in an interview with The Wall Street Journal:

“Nine years ago, if you had written down a list of the problems that Google was trying to solve in the world, transportation wouldn’t have been one of them. In fact, connectivity, what Loon is working on, wouldn’t have been one of them. Health care wouldn’t have been one of them. Other than internally, cybersecurity wouldn’t have been one of them. Those are all things where we said, ‘There’s something important here that’s worth working on whether or not Google is focused on this.’ Google doesn’t need us to solve Google’s problems."

"But to be able to do so, SAP needs its own version of a Manifest Destiny Call."

SAP Nation 3.0: Excerpt Chapter 11 - X’s and O’s

I excerpt 10% from every book in a series of blog posts. I posted several on SAP Nation 3.0 in April, then took a break after the Sapphire event. Over the next week I will excerpt the final batches. The book is available to purchase on Amazon in print and eBook format here

”SAP has the biggest “business applications” laboratory — across business process, geography and industry. However, every few years SAP gets bored with applications and dabbles in platform and infrastructure areas. It seeks out partners and acquisitions to grow its applications’ reach when a better approach would be to partner with its customers. It is sitting on the mother lode of business process and enterprise application innovation and that’s where they need to put their focus. Fahey of Louisiana- Pacific described one such example around IBP in Chapter 3.

The industry desperately needs a business application leader. After two decades, when you look at the global and industry landscape of applications, only about 20% is available in the public cloud. Most application vendors are investing heavily in platforms. In a way, it’s abdication. A good analogy would come from the food sector. You go to a restaurant you really like and the chef says we have changed our business model. We are only serving semi-cooked meals now. Enjoy the meal at home. Or come on in, but be aware we are now offering grills. You bring your own ingredients and cook your own. That’s similar to what SaaS vendors are doing with their emphasis on platforms when they are being paid to deliver “cooked meals” in the form of applications."

" In Ch. 10, Bell of Uptake talked about a new way of selling — one focused on customer outcomes, not TCO or ROI. Even if that is too far a bridge, Sommer challenges SAP to think differently in the current economic model: “While I know there would be substantial backlash to this — from Wall Street for sure — I think SAP needs to get to the point where they EARN a customer’s business every single month. That means getting rid of long-term subscriptions, not charging for software until after the customer is in production, having reasonable renewable subscription pricing, a commitment to ever lower pricing (a la Amazon AWS), etc.”

"As we discussed in Chapter 9 in the section around IA, value in enterprise software has been moving away from transaction processing to analytics, intelligence and machine learning. Automation in the form of sensors and wearables is perform- ing edits and validations ERP and CRM software used to do in the past. Their pricing needs to reflect that shrunk role. Finally, SAP is starting to talk open source in SCP, and as it evolves its developer ecosystem. This brings even higher expectations of very different economics."

" For over a decade, SAP has branded itself with its “Run Better” and “Run Simple” campaigns. Indeed, in 2018, in a marketing survey, it was named the most valuable German brand and ranked even higher than BMW and Mercedes-Benz.88   The enduring image, however, of SAP in the enterprise technology world is that of its ERP products, and there, expensive ones. Between the unforced errors like IA (which we discussed in detail in Ch. 9) and the persistence of 35-year-old technologies like ABAP in the customer base, you could argue that SAP actu- ally has a brand challenge. Wright of Accuride, Hortovanyi and others have pointed out that ECC and ABAP are not attractive to young technology talent. As Dennett discussed in Ch. 4, it also has to become better respected in open source and ML circles. Mueller of SAP talks about expanding its image way beyond ERP. All these factors point to a need to rethink the branding."

Control your own destiny when it comes to EOL of your packages

A recent Rimini Street survey says that in spite of the announced 2025 end of life for core applications in SAP Business Suite 7 ERP product and older versions, "Of the IT leaders surveyed, two-thirds state they either have no plans to migrate to S/4HANA (35%) or are undecided about moving to S/4HANA (32%) "

IDC, on the other hand, surveying 300 of its clients concludes "it’s not a matter of if companies will adopt SAP S/4HANA anymore, but when."

Steve Miranda of Oracle tells Diginomica "We're pretty comfortable with our strategy of supporting customers who are on-premise and want to stay that way (with support from Applications Unlimited) until the time is right for them to make a move. I feel good about that."

UpperEdge, on the other hand, argues that under pressure from Wall Street "So ready or not, Oracle will be trying to force migrations according to their own timeline."

Who to believe? In my recent book, SAP Nation 3.0 I had profiled several risk-takers, modernizers and diversifiers in the SAP customer base who have been refreshing their application portfolio. The biggest segment is still what I called Bystanders which are not moving - they make up about 60% of the base of over 400,000 customers. I had a whole chapter where I provide guidance to SAP to "tilt the bell curve" and energize the Bystanders.  

Others make similar points in the book

"Mueller of Constellation said, referring specifically to ECC and moves to S/4:

“The next two or three years will show if SAP can create the value proposition. We’ll see how much customers push back. SAP could say, ‘We listened to our customers and we will give you another two or three years (beyond 2025), but you have to pay not 18%, but 21% or 25% or maybe even 30% in annual maintenance.’

However, the writing has been on the wall and for years now. It should have been clear to every CIO that the innovation is happening on the S/4 side. Do you want to be in 2030, 11 years from now, with an ERP system that cannot run machine learning, which doesn’t have a good IoT story and so on?”

Or as Wright of Accuride and Howlett of diginomica have pointed out, it’s tough enough today to recruit younger talent to an ECC and ABAP shop. Can you imagine what it will be like in 2025 or 2030?"

By all means, listen to all these perspectives, but in the end make your own hard-nosed decision. Actually decisions. Revisit them every year. The market is changing rapidly.

As I show in the book, the SAP world has dramatically changed in the last few years. So many new products - not just S/4, C/4, SCP, SAC, Qualtrics, AIN, BCP. So many cloud flavors. You should also get clarity on upcoming releases, especially around vertical and geographic functionality that keeps growing.

Oracle has an even more acute Bystander issue - by my estimate 80% of their customer base is in the Bystander category, and they have not been as forthcoming about their next-gen products. They keep talking about their financials, hr and crm - not so much about the rest of the enterprise. So, they have an even bigger challenge - and opportunity - to tilt their bell curve. As a customer, use it to your advantage.

Also take advantage of the market bounty. These are not either/or options. We live in multi-vendor, multi-cloud worlds.  In my book, EBSCO which went with Rimini for third party maintenance, describes how they continue to buy new products from SAP. I have talked to other Rimini customers who are moving to next-gen applications over a few years, and in the meantime move their legacy apps with significant customizations to Rimini.

Don't wait for a vendor-driven EOL date and then have to fight a crowd of your rushed peers. Plan how and when at your own terms. You should be deciding the EOL of your legacy applications.