March 17, 2015 / 5:54 PM / 2 years ago

SAP sees procurement services as the cloud's silver lining

A SAP logo is seen at its offices in the CityWest complex, Dublin , September 5, 2013.Cathal McNaughton

HANOVER, Germany (Reuters) - Business software maker SAP is betting its development of online corporate purchasing services for its multinational customers can boost revenue and profits as it shifts its core business onto the cloud.

Steve Singh, head of SAP's recently created Business Network division for cloud-based corporate procurement services, says that by making a dent in the several trillions of dollars in total which big companies spend each year on purchasing goods and services, his company stands to take in billions of fees.

"There is a $75 billion opportunity," Singh says of the overall market that SAP is targeting.

Analysts also say subscription fees for providing such procurement and vendor management services could give SAP the buffer on margins it needs as it shifts to deliver more of its software from the cloud, a move that brings higher upfront costs on each sale than older localized software installations.

By creating a network of preferred business-to-business suppliers for big-ticket material purchases, temporary staffing, hotels and travel, SAP says it can help its multinational customers rein in on huge amounts of spending.

SAP is looking to take advantage both of its position as the world's leading supplier of corporate financial management software and the nearly $20 billion it has spent on making cloud-based business acquisitions in recent years.

These include ecommerce specialist Ariba, contract staffing firm Fieldglass and staff travel and expenses manager Concur. It is now combining these to produce a single Business Network for procurement services.

It's a market where Europe's largest software maker faces competition from traditional rivals such as Oracle, Salesforce and Microsoft but also from less obvious names like China's Alibaba, with its own vast supplier network, and smaller, but fast-growing companies like staff management software specialist Workday.

But because SAP has a vast base of customers using its financial planning software and now specific applications for managing key purchasing functions, analysts say it has a headstart in trying to win a big chunk of this market.

A PIECE OF THE ACTION

The success of this strategy is vital to ensure operating margins well above 30 percent don't shrink too far as it seeks over the next five years to generate roughly half of all revenue from software services delivered from the cloud, analysts say.

SAP told an investor meeting last month it expected the Business Network to produce a 30 percent compound annual growth rate through 2020. It generated more than $1 billion of SAP's total revenues of $18.7 billion (17.6 billion euros) last year.

And this added revenue stream could mean the difference between hitting its five-year profit target goals, or suffering sinking margins with the rest of the cloud industry.

By 2020 SAP is aiming for an underlying operating profit of 8-9 billion euros on revenue of 26-28 billlion euros. Reported operating profit in 2014 was 4.33 billion euros.

What scares investors is that cloud industry norms on profit margins are far below SAP's current 30 plus percent levels.

For while pure-play cloud software names have enjoyed rapid sales growth for years, most still struggle to turn a profit. More pessimistic analysts predict cloud margins to settle closer to computer services margins, at or around 10 percent.

"SAP has to offset lower cloud margins with a more profitable business and that is where the Business Network comes in," said Gregory Ramirez, a financial analyst with brokerage Bryan Garnier in Paris.

Additional reporting by Eric Auchard; Editing by Greg Mahlich

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