What’s behind SAP’s massive restructuring push?

When one of the largest enterprise software companies embarks on a restructuring journey, the announcement reverberates globally, touching IT stacks across industries and economies.

ERP behemoth SAP announced last week that it will pour billions of dollars into a massive transformation project. The plan, which seeks to increase the company’s focus on AI, is expected to impact as many as 8,000 current employees, open additional markets and drive new revenue streams.

The move will also affect tens of thousands of SAP customers, as the company intensifies its shift to a cloud-based delivery model with usage-based pricing.

The company factored AI investments into the transformation bill, allocating $1.09 billion (1 billion euros) to the development of use cases over the next two years. But SAP expects to spend twice that amount, $2.18 billion (2 billion euros), on broader restructuring as it shepherds its vast customer base to cloud.

Behind SAP’s interest in business AI capabilities is the need to accelerate cloud adoption among customers, an effort the company previously started but is still in process.

“Cloud ERP suite is our growth engine,” CFO Dominik Asam said Wednesday, during a Q4 2023 earnings call, noting that cloud revenue has surpassed software licensing and support and is not the company’s fastest growing revenue stream.

“Cloud is the big elephant in the room for SAP, despite some of the other announcements that they spent time on during the earnings call,” Liz Herbert, VP and principal analyst at Forrester, told CIO Dive.

Before cloud, SAP had a decades-long history as a legacy, on-prem software company, dating back to its 1972 foundation. Despite broad cloud adoption across the enterprise application suite, a lot of SAP’s customers haven’t prioritized ERP migration, Herbert said.

Shifting to cloud has clear end-user advantages.

“It opens up this idea of continuous innovation, never having to worry about an upgrade, often having the best, most current capabilities in privacy and security and everything else,” Herbert said.

But ERP modernization isn’t cheap, especially for large enterprises.

“Some enterprise customers are questioning whether now is the right time to spend what can be hundreds of millions or even billions of dollars on a big ERP modernization,” Herbert said. “It’s disruptive, it’s expensive and it can be risky.”

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