For years, a variety of industry analysts and bloggers have suggested that SAP (NYSE:SAP) jumpstart its Software-as-a-Service (SaaS) and broader Cloud initiatives with a major acquisition, such as SuccessFactors (NYSE:SFSF). Today’s news that SAP will buy SuccessFactors for $3.4 billion shows that the company’s executives have finally admitted that they can no longer rely on internal development and organic sales efforts to gain a meaningful share of the rapidly growing SaaS/Cloud marketplace.
I can’t say that I’ve been among those advocating this type of bold move because I’ve been a part of a similar acquisition which failed to achieve its strategic objective, and I’m not convinced that SAP will be able to transform its business through this transaction.
Back in 1999, I worked for a fast-growing network professional services company, called International Network Services (INS), which was acquired by Lucent Technologies for $3.7 billion, or 12x revenues! Lucent’s goal was to transform the telco equipment vendor into a multidimensional services provider, like IBM’s (NYSE:IBM) Global Services unit. INS’ leaders were given responsibility to run Lucent’s services business in hopes they could reinvigorate the unit and gain market leadership. Despite all the grandiose promises made at the time of the acquisition announcement, deeply rooted corporate politics and a corporate culture which discouraged innovation within Lucent conspired to bury INS’ strengths. As a result, the acquisition couldn’t help Lucent avoid an inevitable death spiral which it never recovered from, and the INS unit was divested three years later for a penny on the dollar.
Today’s announcement states that SuccessFactors’ CEO and Founder Lars Dalgaard will assume responsibility of SAP’s SaaS and Cloud business, and SuccessFactors will continue to operate as an independent business unit. While both these moves are the right way to go for SAP, my guess is that a year from now the luster will be off the rose and many of SuccessFactors’ key executives and employees will be gone when their payouts are fulfilled or the SAP’s politics have driven them out to find new opportunities elsewhere.
This is not an indictment of SAP in particular, but a law of nature in general. There have been few corporate transformations in any industry, especially in the tech sector, fueled by bold acquisitions. Young, aggressive companies don’t fit well into old, entrenched companies. Executive and employee motives, and corporate policies and politics differ too severely to mix well. For example, you can bet many of the key personal at RightNow will also disappear from Oracle (NYSE:ORCL) a year from now as many of their predecessors have done after past Oracle acquisitions.
I hope I’m wrong. SuccessFactors (and RightNow) has been an important force in the SaaS movement. I know plenty of people within SAP who sincerely want to deliver competitive SaaS/Cloud solutions to satisfy their customers’ changing needs and escalating demands. But, SAP’s leadership and legacy software, operating systems and salary structures will need to be significantly realigned to successfully absorb SuccessFactors and make it a real catalyst for change that will make SAP a market leader in the SaaS/Cloud marketplace.
It will take more than a bold-stroke acquisition to put SAP on a fast-path to success. It will require changing the deeply embedded dynamics which have stood in the way of the company fully accepting the reality of SaaS and magnitude of the Cloud. It will take a long-term and broadbased effort to make SAP a leader in the new world order.
The good news is that the SaaS/Cloud movement is just starting to gain broad-based acceptance and SAP has time to take advantage of the market momentum. However, any indication that the company isn’t truly committed to delivering competitive offerings will drive more current and prospective customers to its SaaS/Cloud-centric competitors, such as Workday.