SAP Plans Restructuring to Push Growth

Despite strong revenue and profits, European software vendor repositions for cloud growth

By all accounts, SAP is a strong and growing company. The European software conglomerate posted double-digit growth and strong profits for 2018, beating its own forecast and meeting market expectations. Nevertheless, it’s undertaking a $1 billion restructuring and letting go of more than 4,000 employees to position itself for future growth.

The Lowdown:  SAP posted overall growth of 11 percent for 2018, with a 10 percent increase in profits and stable margins of 29 percent. However, the company is seeing a softening in cloud sales and economic headwinds gathering. Cloud computing grew 41 percent last year, but bookings slowed to 23 percent in the fourth quarter, down from 37 percent in the third.

In addition, SAP expects to experience headwinds in 2019 due to the United Kingdom exiting the European Union, turmoil disrupting Latin American economies, and the impact of ongoing trade wars.

The Details:  SAP will lay off 4,400 employees worldwide — roughly a 4.6 percent reduction — at a cost of nearly $1 billion in the first quarter of 2019. The company currently employs 96,500 people. Despite the restructuring, SAP expects to increase total staffing to 100,000 by the end of 2019.

The Impact:  The restructuring will likely have little to no impact on SAP operations or partner relationships. SAP does not expect the restructuring to result in any significant cost savings. The plan is about reinvestment, the company’s leadership team said.

Background:  Like nearly all software companies, SAP is transitioning from a legacy licensing model to cloud-based services and recurring revenue. SAP is offering more of its products as cloud-based services, but is also working more closely with independent software vendors and global systems integrators to create holistic services that leverage its applications as a platform. In December, SAP made access to its SAP Cloud Platform free to developers, ISVs, and integrators so they could create more complementary applications and services.

The Buzz:  “This is not a cost-cutting move. We are a growth company,” said SAP CEO Bill McDermott in an interview with Reuters.

Channelnomics Point of View:  Despite the economic difficulties ahead, Gartner expects global IT spending to increase to $3.8 trillion in 2019. SAP and other companies are transitioning to the services-based economy and committing to cloud computing as a product delivery platform. The transition is not smooth. Vendors and solution providers, such as SAP and its partners, should expect periodic hiccups during technological and business model transitions.

Related Links: 
Reuters: SAP Plans Restructuring After Signs of Weakness Emerge
MarketWatch: SAP Hits 2018 Targets on Double-Digit Cloud Growth
Channelnomics: SAP Offers Partners Free Access to Cloud Development Platform
Channelnomics: Global IT Spending Set to Climb