SAP buys Qualtrics – Some quick thoughts

I saw the news on twitter yesterday night that SAP is buying Qualtrics for $8B cash – most of it financed .

I am writing this blog post strictly in my personal capacity and it doesn’t represent my employer’s opinions . I have no prior knowledge of this deal. I have worked in the SAP field for a long time and worked in SAP Labs for a short while as well.

My first reaction was “Wow – that’s an unusually bold move”. But then knowing SAP’s leadership team – I am not surprised they went with a gutsy – and perhaps unconventional- move .

I think SAP was over due for a large acquisition any way – like the BOBJ and Sybase ones. S4Hana seems to be doing very well indeed from what I see in the field, even though the ambitions about HANA itself being a leading general purpose data base by revenue didn’t exactly play out . While there is a lot of talk about Leonardo – it seems to be more of a packaging play than an actual software play. So it makes sense that SAP went for a big acquistion now.

S4Hana is mostly a defensive strategy to keep existing ERP customers within The SAP family . The real battle to be won is on customer and employee facing applications – and perhaps industry verticals .

SAP has long been a proponent of design thinking – and human centric design and all that . Their emphasis on “experience” seems to be something that their customer base seemed to appreciate too – especially with Fiori coming in . SAP obviously has significant IP on business processes as well over decades .

However – SAP has historically not taken a holistic approach to measuring experiences and more importantly the gaps in experiences . That needed custom work in projects if a customer wanted it – be it about customer , product , employee etc . So from that perspective – Qualtrics fulfills a high quality problem .

If there is one competitor out there that SAP badly wants to compete with now – that would be Salesforce. It’s a very large market and one that SAP once had a chance to rule . SAP did make some noise with C4Hana as their primary play and I don’t think that caused Benioff to lose any sleep. Qualtrics may be a useful addition from that perspective – though I doubt even that would get Benioff out of bed and worrying about next steps.

From the press release – I understand that combining experience data from Qualtrics with operational data from SAP is where the value is . I think that’s a fair statement. But for that to be a reality – the differentiation needs to come from specialized algorithms . SAP has bought some small ML companies in the past . If these XM + OM theory needs to be converted into practice – SAP probably needs to buy some more ML companies , hire more PhDs and license more IP – and maybe invest in some large university. All of it can be done and SAP has the money and brand to do it – but that will take time to materialize . I am very curious to see the next steps on this front .

When it comes to integrating existing tech with acquired tech – SAP’s track record is decent but not stellar. BOBJ gave SAP a lot of mileage as an analytics leader. But BOBJ products took a while to work on top of BW , and even today there is plenty of product overlap across their analytics portfolio . Closed loop analytics was a promise that didn’t materialize in a mainstream fashion across SAP portfolio . Sybase was bought with mobile as front and center – but eventually the database part was what proved to be more useful to SAP . SuccessFactors was a good Acquistion too and I first hand know customers who love it – but putting it all on HANA was a promise SAP couldn’t keep for a few years.

What could be different this time is that SAP has two new board members driving this – Enslin from cloud business and Mueller from Tech. If anyone knows how to get things done efficiently in SAP – it’s Rob. Mueller is an up and coming star and has Hasso’s blessings which means a lot in SAP’s engineering and product organization. So I think things may be a lot better this time .

The big question always is whether SAP paid more than it should have. They paid about 20 times the current revenue of Qualtrics. Qualtrics just started making a profit – and it is minuscule . I read they have been cash flow positive which is great of course. I also read that SAP will keep them as an independent business .

I am not exactly sure on the logic here.

It’s not a large earnings number to boost SAP’s numbers. They only have 9000 customers compared to something like half a million for SAP and my guess is that there is significant overlap of customer base . While Cross sell and up sell are always there – it’s still a small pond for SAP to fish. Independence might be needed to keep the acquired team intact, but I can’t see any reason why they won’t be folded in at the first opportunity given the relatively small size of the stand alone business .

Plus the whole value of the acquired tech is in integration with rest of SAP – which also beats the idea of keeping them separate. I don’t know enough about XM to venture a guess on how easy or difficult it will be to integrate with SAP. But that doesn’t worry me as much given the value is in data integration to begin with – and that doesn’t need integrating two platforms . But eventually for developers to get a productive experience – I would think XM seamlessly becomes a part of SAP cloud platform .

Could they have bought other companies for this money and had similar or greater impact ? XM is not unique in its category – survey monkey , Medallia etc are all good considerations too. And I also wonder if nearly the same impact could have been had by SAP buying multiple smaller companies – perhaps with deep ML capabilities , and then building extensive tech partnerships (and/or minority investments ) with the survey vendors .

A lot of assumptions go into modeling such deals and it’s hard to make a judgment from the peanut gallery on whether the price is justified or not . So while I don’t understand the logic fully from the outside – I have the highest regard for SAP leadership, and they are generally fiscally conservative – and hence I believe they arrived at what they thought was a justified price .

I look forward to learning more about this as the transaction closes and SAP makes roadmap announcements.