CEO of SAP Bill McDermott abruptly resigns

Bill McDermott abruptly stepped down as CEO of SAP, choosing not to renew his contract with one of the world's biggest software companies, a vendor of ERP, CRM and analytics software.

The departure of the longtime CEO of SAP Thursday triggered a predetermined plan of succession that elevates executive board members Jennifer Morgan and Christian Klein to co-CEOs of the longtime vendor.

The move surprised some observers, at least in its timing, and although most believe that SAP has a strong bench and succession plan, the departure comes at a critical point for the company. SAP is struggling to move its vast customer base from legacy, on-premises ECC systems to the next-generation ERP SAP S/4HANA, and has had a rocky transition to become a more cloud-first company.

In addition, one year ago SAP acquired Qualtrics, a customer experience management (CXM) vendor, for $8 billion. SAP and McDermott have touted the value of combining SAP's operational data ("O data") with Qualtrics's experiential data ("X data") to be a leader in the "experience economy," but questions remain about how successful this strategy will be.

McDermott's departure as CEO puts an exclamation point on a year of change within SAP. In April, Robert Enslin left his position as head of the cloud business group. He was replaced by Morgan. Longtime executives Bjoern Goerke and Bernd Leukert also departed. SAP also laid off 4,400 employees in March, fueling speculation about the fate of the SAP HANA database.

Conjecture that changes may be afoot at SAP began to surface when Elliot Management, an activist shareholder hedge fund, took a $1.35 billion stake in SAP in April. Elliot Management has been known to use its ownership stakes in companies to make structural changes when results don't meet expectations.

Bill McDermott

McDermott joined SAP, based in Walldorf, Germany, and founded in 1972, in 2002 as CEO of SAP America. He became co-CEO in 2010, sharing the role with Jim Hagemann. In 2014, he took over as sole CEO. McDermott will remain an adviser until the end of the year, according to the vendor.

Morgan joined SAP in 2004 and was president of SAP's cloud business group. Klein, meanwhile, started at SAP when he was still a student and has been with the company for two decades, most recently as its chief operating officer.

The resignation of the CEO of SAP was made public just seven minutes after SAP preannounced its third quarter earnings Thursday evening.

Total revenues were up 13% from 6.02 billion euros ($6.6 billion) during the third quarter of 2018 to 6.79 billion euros.

"I've been at SAP a long time," McDermott told CNBC in an interview broadcast Friday morning. "At the beginning of 2020 I would have had to announce a decision to renew my contract or not renew. I had made the determination that I wasn't going to renew, so right now was the perfect time to make this transition."

McDermott said the company is now at "maximum strength," based on the just-released earnings report.

"Our revenues are growing faster than everyone else in the cloud," he said. "Total revenue, operating income -- everything is at an all-time high."

McDermott said that he had been working closely with Morgan and Klein for years, and had recommended them as his replacements to the SAP board.

The news caught many by surprise, but, in retrospect, Joshua Greenbaum, principal, Enterprise Applications Consulting, said the timing makes sense.

There's certainly the temptation to go out on a high note, and I think that [McDermott] saw that high note.

"There's certainly the temptation to go out on a high note, and I think that [McDermott] saw that high note and thought it was time to pass the torch," Greenbaum said. "In particular, having groomed two young and dynamic successors, the timing was good for him. It also makes sense to pass the baton at this moment, when there's a transition in place to the cloud internally, so it's a good time to freshen up the scene with the two new co-CEOs and it was a good moment for [McDermott] to step out."

The new CEO team of Morgan and Klein are both experienced enough to handle the transition, Greenbaum said.

"Morgan is charismatic and understands the company very well, having run the global sales organization and briefly the cloud business, and has spent a lot more time with customers than a lot of other SAP executives," he said. "It's also smart of SAP to bring in an American and German, one with an understanding of the company's sales culture experience and one with a little more technical background. These two co-CEOs are blending the different strands of SAP together in a pretty cohesive way."

Analyst Cindy Jutras, president of Mint Jutras, echoed Greenbaum's sentiments about the timing of McDermott's departure. "Actually, it seems smart to do this now rather than the beginning of the year," she said. "But it really isn't clear to me why it is happening now versus years from now."

That's a question he didn't address in his CNBC interview, something Jutras found disappointing.

Still, she said, "I think he's handing over a strong company and not leaving [Morgan and Klein] a mess to clean up. They are both solid operational performers, and I'm glad to see a woman rise to this level. But I don't have a clear view of how visionary either of them is."

Although the current numbers look good for SAP, McDermott may be leaving just before the company faces turbulence with increased competition and a changing economy, said Predrag Jakovljevic, principal industry analyst for Technology Evaluation Centers.

"SAP has the issue with moving folks onto S/4HANA, and it's also not really beating Salesforce in CX," Jakovljevic said. "The competition by Oracle, Workday, Salesforce, IFS and so on will be fierce, and the economy is slowing down anyway already."