SAP's role in the new world order as the tech stack re-shapes for the first time in years. Muhammad Alam explains

A couple of weeks ago, SAP Strategy Officer Sean Kask opened up about the defensive moats that his firm sees around it to fend off the so-called ‘SaaSpocalypse’ that has Wall Street in meltdown.

The role of such moats for incumbent application software vendors was a theme that the organizers of this week’s Morgan Stanley Technology, Media & Telecom Conference anticipated would run through this year’s event in San Francisco.

Generative AI will have a “significant impact” on existing software vendors, admits Kask’s colleague, Muhammad Alam, Executive Board Member at SAP responsible for Product and Engineering, that’s not up for debate. But there is something important being lose in the debate to date:

The conversation that's happening today out there, is, ‘Hey, all SaaS apps are treated similarly’, and that's what the initial reaction. But we fundamentally, when we speak with customers, when we look at our portfolio, the reality seems very different.

He explains:

Not all SaaS vendors, not all applications, are created equal, nor do they play the same role within a customer's environment. So while it is true that a certain class of SaaS applications are going to be a lot more prone to risk, disruption, transformation, I think there is a class of SaaS applications - and from an SAP perspective, we deeply believe we play in that class - that are extremely mission-critical for an organization to operate.

When you think about financial management, when you talk about general ledger, you talk about treasury, you talk about GL, AP, AR. And then you get into the supply chain side where you really run your shop floor or your logistics environment and things like that, that's a different class of applications.

Alam makes an interesting comparison with Microsoft Windows to back up his point:

It's an application at the end of the day, but it's the OS of what consumers use every day on a device. SAP is very much like the operating system of a business. There's certainly a set of apps that are built on top of it. A lot of our partners do that, a lot of integrations exist, if you will. But it's hard to go take out the OS. While you could go build an OS with gen AI, are you going to go now start writing your own OS to be able to run your own devices? That's not necessarily true, but apps on top of it, sure.

From an SAP perspective, while even in the class of applications we work in, there's phenomenal opportunity to create incremental value that now is possible with gen AI that wasn't possible before, and that's what we're focused on, we do believe that the risk of disruption is different.

Why it's different

Alam goes on: 

[What] makes this class of applications different is 50 years of logic and business processes that are embedded, not just in the horizontal domains, which is Finance, HCM, Spend, Supply Chain and so forth, but it's the deep industry capabilities in oil and gas and what we've done in manufacturing and what we do in media and others. For us as an enterprise player, because our history is we run some of the most mission-critical, largest organizations across industry, the level of enterprise readiness, the governance, the security and the privacy, and the fact that we're localized in so many countries around the world, creates this moat, this barrier of entry to say, ‘Hey, I'm going to go build something and put on top of it’.

He points to SAP’s Concur as a case in point:

I know there's been some discussions that say, ‘Hey, is Concur more prone to disruption?’.  But if you look at Concur and you decompose that business, it's Expense Management. Expense Management may sound simple to the layperson, but there is a phenomenal amount of statutory requirements around the world that we spend a significant amount of our R&D investment on, keeping up to date on a very regular basis. For sure, you can go create a forms-over-data application that allows you to capture expenses, but who's going to go do the compliance to the statutory requirements? Who's going to maintain that over time? Who's going to make sure all of that is integrated across your core OS for it to work?

That's why even if you sort of look back over the last 1.5 decades, from an Expense Management perspective, you’d think if it's that's easy, the space will be pretty proliferated, but it's not. Because even there, it's a moat from an enterprise perspective, from a localization perspective. Now that said, that's more of a barrier-to-entry moat. The question is there is now an opportunity to create tremendous value on top of it, and that is what we're deeply, deeply focused on.

SAP has its own ambitions in this regard, he adds, with plans being made around the upcoming Sapphire conference:

What we have coming up is one of our most ambitious launches in terms of now taking the opportunity and what's possible with gen AI and AI in general, putting it on top of the sort of core OS of applications that are unlike any others with its enterprise readiness, localization breadth, industry depth, and creating value, which is what our customers are looking for.

Tech stack re-shaping

Another change is on a wider industry basis:

For the first time in sort of a long time, the shape of the stack is changing because there's a new layer now on top, which is this agentic experiences layer that sits on top of everything below. And then arguably, everything below becomes more platform, more commoditized and the value shifts up, if you will, both in what it creates for customers and the organizations that can charge premium for it as well. and that's really where the interaction layer happens.

We used to sit at the top as an application layer -  I mean we're still there. The world hasn't completely changed yet, but we see the signs that it's changing. So for us, it's not that the lower layers are going away, like the application data, the PaaS (Platform-as-a-Service) and the IaaS (Infrastructure-as-a-Service), they're not going anywhere. They're still there from that perspective.

The question is, for this new layer to work, how does the most value get created? We believe this agentic layer [is] the application that needs to exist because that's where data gets created, that's where action gets taken, that's where compliance happens, that's where statutory requirements happen, particularly for the class of apps that SAP is in. If you take a small single-lane application that just maybe does an HCM or does some front-office applications, that's a fundamentally different landscape. I mean we stood on stage at last Sapphire, and talked about, ‘Listen, we believe that the best-of-breeds will struggle in this world’. 

But where SAP's moat exists even in this sort of new-stack layers is the application layer becomes, again, a platform, because value shifts up. And from an application platform perspective, what organizations are telling us is this sort of sweet message to say, ‘Hey, at this platform layer, we need finance, spend, sourcing, supply chain, HCM, CX to work sort of seamlessly across’. So SaaS becomes effectively a new platform.

That being so, SAP is one of the very few vendors that can go across the breadth of the business processes to provide that SaaS platform to power the experiences on top of it end-to-end, argues Alam: 

If you pick and choose in that SaaS platform, six  different providers, guess what, you have to build the integrations, you have to make sense of the data model yourself. You have to necessarily push the data somewhere else to be able to connect to. And that's resonating with customers because that also allows them to melt the iceberg, right, the complexity and the TCO that they maintain.

He concludes:

At SAP, we both have the responsibility of running these mission-critical applications to prove and show the value, but then we have the ability to be able to have the value show and then figure out, based on feedback and discussion, what's the right business model in the fullness of time.

My take

A cogent and rational dismantling of the ‘SaaSpocalypse’ fallacy,