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Prepare for SAP's Five-Year Plan to Fight Back in the Cloud (Q&A)

The empire strikes back with an upcoming five-year growth plan.

SAP

SAP CEO Bill McDermott took over the German company this summer, inheriting a lumbering giant that once dominated the business of selling the software that companies use to run their operations, but that is now the whipping boy of its rivals.

Salesforce.com and NetSuite have aggressively poached its customers and have routinely ridiculed it for being slow and difficult to get up and running. In one recent example, NetSuite slammed SAP in full-page newspaper ads.

Even so, SAP still controls about a quarter of the $24 billion market for Enterprise Resource Planning software — essentially the software that companies use to manage planning, manufacturing, delivery, marketing and payments for whatever they sell — well ahead of Oracle, Sage, Microsoft and NetSuite.

Prepare for the empire to strike back. Early next year, McDermott will outline a five-year plan for SAP’s survival and business expansion, especially in the cloud, he told Re/code last week in an interview.

The first broad brushstrokes of the plan will be laid out in January, when SAP next reports quarterly results, he said. Then, in February, at a shareholders meeting in New York, he’ll present his plan in minute, year-by-year detail.

Critics have scoffed that SAP has bought its way into a cloud software business it initially failed to anticipate, or at least to fully appreciate. Over four years, SAP has spent nearly $16 billion acquiring cloud software companies: SuccessFactors (2011, $3.4 billion), Ariba (2012, $4.3 billion) and Concur (closing next month at a price of $7.3 billion). By McDermott’s reckoning, the combination will give SAP the largest base of individual users of cloud business software — about 50 million — and the second-largest stream of cloud software revenue after Salesforce.com.

Now it falls to McDermott to make the disparate parts work together in a coherent strategy with SAP’s core group of applications, which have themselves been adapted to run in cloud-computing environments. The technical bits of that transition are done. SAP’s existing apps were tweaked to run its new database, HANA, as of last year. The pain comes in the financial details of how they’re sold. Old-school “on-premise” software used to be sold for a one-time purchase price, all accounted for at once. When sold “as a service,” as software in the cloud is described, customers pay a monthly subscription fee that gets treated as revenue only after it has been delivered.

Shifting from selling one to the other hurts in the short term, but pays off over the long term. It’s a tough financial corner to turn, and last month SAP cut its profit outlook because of it.

Progress has come in fits and starts. A recent team-up with IBM will enable SAP software to run on Big Blue’s SoftLayer cloud, which will widen SAP’s reach and availability to cloud-friendly customers. But it took years to get SAP’s numerous applications running on the new HANA database technology.

My first question was about SAP’s most recent deal, for the travel and expense software company Concur:

So what’s so great about Concur that it’s worth almost $8 billion?

Every company has a corporate travel department, but no one wants to work with it. You can use your phone and go out on the Internet and as long as you stay within your budget you can travel any way you want, stay where you want, eat where you want, and Concur lets you do that. Why should the corporate travel department tell you where you’re going to sit on the plane or where you’re going to stay if you can maybe get a better rate? The other point is that 84 percent of Concur’s revenue is in the U.S., but only 30 percent of the world’s business travel spending occurs in the U.S. We operate in 190 countries and we have a global sales force. And when we close the deal, which I expect will be in the first week of December, every SAP customer will have access to Concur on a global basis. So the 30 percent compound annual growth rate that they averaged over the 23 years they’ve been in business is going to go up. And we wouldn’t have bought it if we didn’t think so.

So what does the Concur deal say about your larger vision on cloud software? You’ve been steadily buying cloud software companies — SuccessFactors and Ariba came before — for several years now.

Concur is the second-largest independent software-as-a-service company on the market today. It strengthens our position in the cloud. We already have the most individual users of any cloud software company in the world — nearly 50 million. We’re already No. 2 in the cloud by revenue behind Salesforce.com. Remember, we had no cloud revenue and no cloud users in 2010. Our vision is to be number one both in users and in cloud revenue by 2020.

And yet when we see the financial results, you’re still in that transition from selling on-premise software to cloud software. You’re still turning that corner, and by your own admission it’s a tough one. Even Oracle and IBM are seeing it.

A lot of this is telling the vision story clearly over the next five years. When I first came on as co-CEO in 2010, we laid out a plan to double the company. And we laid out specifically how we were going to do things like mobile and cloud. Now that we’ve got all the assets, we feel like we’ve completed the vision that we laid out back then. Our core business is rock solid. We have 276,000 companies around the world that have chosen to run their most important data on the SAP backbone. So we need to make clear that our core business has never been stronger. The retention rates have never been higher. But now you have more choice in how you can run it: In the cloud, on premise or in a mix. You can run it in a private cloud environment, through our partnership with IBM, you can run SAP on their SoftLayer cloud. If our customers would rather rent the software than buy it, they should have that choice. Our sales teams are trained and compensated in such a way that they can be indifferent to that choice. Whatever the customer wants, the customer gets. But in addition to the core applications they already know, they’ll have access to new things, including Concur. That strengthens our core business and adds a new revenue stream in the cloud.

So that in mind, what can we expect from you in the coming year? You’ve made several moves, but are you going to sketch out a bigger vision for where you intend to take this company?

In January, when we report our earnings, we’ll give guidance that takes us out to 2020. And then in February, we’ll have a shareholder day where I’ll go into very distinct detail concerning how we’ll scale the business model all the way out to 2020, so that everyone will know what we’re doing.

Are you done doing deals?

We’re done doing big ones. We have a very good cash-flow model at our company, so we can pay off the loans we took out very quickly, and we’ll do that because we’re a very conservative company. But I think we’ve done the big deals we want to do.

This article originally appeared on Recode.net.