SAP sticks to tradition with dual CEO appointments as McDermott departs

CNBC Technology 2 months ago

Before Bill McDermott, the outgoing CEO of SAP, made up his mind about whether he should keep the role for another five years, he sought advice from top executives at other companies.

"They all told me about 10 years is the right time," he told CNBC in an interview on Thursday. "I said to Hasso [Plattner, chairman of SAP's supervisory board,] 10 years was the right time as CEO."

Then McDermott got to help pick his successors, existing executives Christian Klein and Jennifer Morgan, honoring a tradition of hiring from within at the 47-year-old German software company. A dual-CEO structure isn't very common in the corporate world, but McDermott himself was a co-CEO once, and as McDermott reminded reporters during a conference call about the news on Thursday, even SAP's founders were co-CEOs.

"Very few CEOs get to do this on their own terms, where they actually get to participate in the succession plan and hand the baton off in a smooth transfer of power where everyone is happy," McDermott said.

Until Thursday, Klein had been SAP's chief operating officer, and Morgan was head of the company's cloud business group. McDermott felt that the two of them were doing well in their roles.

SAP didn't consider outside candidates.

"We have a philosophy of grooming our own," said McDermott, who joined SAP in 2002. "We have a very interesting culture. You have to understand our company. You have to understand the dynamism of the global economy."

McDermott became co-CEO with Jim Hagemann Snabe in 2010 — they replaced Léo Apotheker, who himself was once an SAP co-CEO and previously an executive at the company — and was left as sole CEO when Snabe exited in 2014.

"It was always my goal as CEO to hire from within and create a succession plan from beneath me," McDermott said.

Morgan said that she and Klein have complementary skill sets but share similar philosophies on how they'd like to move the company forward. In a note distributed to clients on Thursday, Bernstein analysts Mark Moerdler and Firoz Valliji, who have the equivalent of a buy rating on SAP stock, said they were happy with the range of experience, and the difference, between the two new CEOs.

"Frankly, we're on 24/7, pretty much, between the two of us," Morgan said.

During McDermott's nine years in charge, he said the company got the big things right. SAP has built a meaningful cloud business, and there should be more growth ahead — the Bernstein analysts think SAP is still earlier on in its transition than Microsoft and Oracle.

Operating in the cloud infrastructure market presented a challenge, and earlier this year SAP announced a plan to focus on higher-margin areas and maintain close alliances with market leaders like Amazon and Microsoft.

"You have to have enough capital to put behind that to be in a race to zero," McDermott said. "The nature of the hardware business was never our strong suit. And the investment required for that level of economy of scale, to compete with the biggest ones, wasn't in our interest."

Overall, though, McDermott said he wouldn't have done things differently if given the opportunity. If anything, McDermott said, it would be fair to say that under him SAP invested heavily to reach its current position, including through deals like last year's $8 billion Qualtrics acquisition.

"That's why this is the crowning moment where you see the inflection in the business model," he said, pointing to margin expansion.

WATCH: SAP restructuring after a 'huge' 2018, CEO says

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