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Spotlight on … SAP

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SAP, the world leader in management systems software has become a textbook case thanks to its successful - though admittedly rather late – transition to the Cloud. The attention the company pays to its employees is clearly related. Though still in the very early stages, the Group has also started thinking about the quantification of its extra-financial impacts. Some background information:

SAP software

SAP (Systeme Anwendungen Produkte), the German group founded in 1972, is now recognised as the world leader in management software, also known as Enterprise Resource Planning (ERP). These applications enable a company to manage and monitor all its operational data and services (inventory and human resource management, performance reporting to managers etc.) and, in a broader sense, can allow it to automate its key management processes. At the start of the decade, SAP also became known as a database publisher with the launch if its HANA platform. This new string to its bow has since enjoyed strong growth. Today, 76% of all transactions made throughout the world are managed by SAP systems and the Group works with 345,000 clients in 180 countries.

SAP has capitalised on two of its competitive advantages to generate growth

SAP generates income from the sale of licences on its software, but also from invoicing as a service provider (maintenance, subscriptions etc.) on a recurring basis. The company’s business model is known as “defensive: it provides the investor with a great deal of visibility on a mid-term basis, covering both organic sales (estimated growth of 6% min. per annum), operating margins, which should comfortably settle above 25% each year, and the surplus free cash flow of several billion euros every year.

The Group is now leveraging two of its main assets to drive growth. First, its product cycle – the most recent generation is called “S4/HANA” – is in the start-up phase and should deliver growth over the next 10 years or so, particularly in light of its large, captive installed base. Second, SAP’s transition to the Cloud has been a success, with the company one of the few in the world to find the right equilibrium between moderate growth in licencing, strong growth in subscriptions (around 30%) and quasi-stable margins.

SAP

Source : www.bmb-services.com

A key feature in the Group’s shift towards the Cloud: the care given to employees

Though the transition took place rather late, the company’s shift from software to the Cloud has made a textbook case out of the software publisher. One key feature of this transformation was the attention paid to employees.

In 2014, amid a challenging economic environment due to rising competition from Cloud operators and poor client satisfaction, and following a period of managerial instability, Bill McDermott was appointed as Managing Director. Beyond his recognised skills in tech and software, his listening ability and his respect for the existing corporate culture successfully and durably rekindled the teams’ engagement with the company’s new mission. At a time when employees were becoming increasingly disengaged and with a high attrition rate, SAP’s first task was strategic communication. It was crucial for all employees to understand the direction in which the company was headed and the role each individual had to play in the transition. The second task was to train the teams in the new skills required by the shift in business model. In this respect, the approach was interesting as the group opted for a continuous and informal learning model. Finally, the company focused on empowerment in order to foster employee motivation and engagement. Examples of these initiatives include the set-up of a social impact lab and an intrapreneuriat programme.

SAP has started thinking about the quantification of extra-financial impacts

From an environmental perspective, the group is also well positioned. While the ISO 14001[1]-certified Environmental Management System only covers 49% of employees, the group aims for a 70% coverage ratio in 2018. Furthermore, the Cloud technology chosen by the firm – which represents a substantial environmental impact for SAP – has been carbon neutral since 2014 thanks to the purchase of 100% renewable energy certificates, which supply all the electricity needed, and a carbon compensation mechanism. The next step with be to improve the energy efficiency indicator (PUE) of its servers.

Broadly speaking, SAP first started managing the issue of sustainable development in 2009, when a specific unit was created. The group’s founders are still shareholders and are therefore in a position to bring a long-term perspective to strategic decisions. A pioneer in the area, SAP was one of the first to explore the quantification of extra-financial impacts via monetisation. By using cause-and-effect analysis and linear regression, SAP has measured the economic impact of 4 extra-financial indicators on its operating income:
- A change of 1 percentage point (pp) in the business health culture index would, according to the group, increase operating income by €80-90 million
- A change of 1 pp in the employee engagement score would increase operating income by €45 to 55 million
- A change of 1 pp rise in the employee retention rate would boost operating income by € 50-60 million
- A 1 pp drop in carbon emissions would improve operating income by €5 million.

How can the company impress investors today?

To fully meet investors’ requirements, several challenges still need to be addressed: SAP will have to provide further evidence of its ability to increase its operating margin during 2018, while continuing to manage its transition to the Cloud.

This publication is not intended to be an offer or solicitation for the purchase or sale of any financial instrument whatsoever. References to specific securities and issuers are for the purpose of illustration only and should not be construed as a recommendation to buy or sell these values. Communication promotional in nature. This communication has not been prepared in accordance with regulations to promote the independence of financial analysis. SYCOMORE Asset Management or management companies involved with the preparation of this document are not subject to the ban on conducting transactions on the instruments mentioned by the publication of this communication.

[1] An Environmental Management System (EMS) is a corporate management tool that enables the company to organise its operations with a view to reducing and managing its environmental impacts. The ISO 14001 certification guarantees the reliability of the system.

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