Okay, great. I'll start this next session off. My name's Adam Wood. I look after European tech research here at Morgan Stanley. Very pleased to have Muhammad Alam, who's a member of the executive board at SAP responsible for product and engineering. Muhammad, thank you very much for joining us here in San Francisco. Really appreciate it.
It's a pleasure to be here.
I'll get the boring compliance stuff out of the way. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. With that done, we can move on to hopefully more interesting things. I wanted to start off, I think you joined SAP about three years ago after 17 or so years at Microsoft, and you ended up running Dynamics there. It gives you quite a big insight into this landscape. Maybe could you talk a little bit around what did you see at SAP, the thought process that led you to make that change? What was the excitement about coming to SAP that got you to make that move?
Yeah, no, happy to share. I mean, I think it was a long contemplation process, about eight months. I think it took me to decide, and I have to give kudos to SAP for being that patient with me. But there's three things that ultimately led me to decide to join SAP. I think the first thing, having spent all my career in business applications, initially starting with consulting with Ernst & Young and Capgemini, doing SAP and Oracle, and then 17 years with Microsoft, all in the business application space, first in consulting, then running all product. To me, SAP offered as a product guy this amazing mix of product assets that they have with the business network, as well as now AI, to be able to create some super disruptive and highly innovative products that can create value for customers. So that excited me first and foremost.
But that in and of itself wasn't enough. I think there's two other things that had to play in as well. The second thing was Christian, our CEO. I mean, I felt like having been at Microsoft through the period where Satya helped transform the company to be more product-focused and then become truly a cloud-oriented company, seeing that transformation, to me, I saw some of that in Christian, born and raised as an SAP ERP, if you will, have that commitment to be able to transform the company, which it needed to go through and is still going through, to becoming a core cloud company driven by product and led by innovations in the product, if you will, as well. So I saw that there. That was pretty exciting. And that's, again, still true three years later, too.
And then the final thing was, listen, you can have great product, you can have great leadership, but if you don't have the ability to execute and land those innovations in the market, then it doesn't really matter. And I felt SAP, with its customer base, had this unique ability if they can get the right products and the right execution to land innovation in customers that really, I found, are rooting for SAP to win, to bring the innovation to them, to create that higher value as well. And that, again, is turning out to be true as well. So those three things effectively led me to decide, hey, this is going to be a great journey. And it's turned out to be really, really good.
That's really interesting. Thank you. Maybe just moving on to the core SAP product, S/4HANA, I think at the moment you're going through this incredibly strong upgrade cycle. I think a lot of investors discuss the end of lives that happen on the old product. But I imagine for customers, there's a lot they can do with S/4HANA. There's a lot of excitement around what's in there that also gets them to move on that journey. Could you maybe just talk about a couple of things about why companies want to make that change, what can they do with S/4HANA that they wouldn't be able to do with the old product?
Yeah, I know. Happy to. I think I'll change the premise of the question a little bit. I feel like there's many reasons that we see our customers taking on the journey from a modernization perspective for their cloud ERP and their application landscape. I think first and foremost is if you think about in almost all industries what customers are expected to do today. It's far different than what they were doing 20 years ago. So there's different business models, different needs that they have to go do. So it's not that ECC wasn't meeting their needs. It was at the time when business was a little bit simpler. But today, it's just fundamentally different. If you take a large automotive, for instance, what they're not doing today is only building products, shipping to a dealer, and then waiting for it to move to customers.
They're essentially a for-service company, a subscription company, if you will, that's selling not just cars, but a subscription to the services. And not just that, they're also deeply connected to the end consumers through in-the-car experiences as well to be able to both provide offers, get insights, and be able to engage in making that experience better as well. So it's a fundamentally different business model for a large automotive, if you will. You can take that to a large CPG company as well. It's not just about building products and pushing it to the next tier in the distribution channel to be able to get it out to the consumers. But a lot of large CPGs are now in the direct-to-consumer business, so where they could send large orders in periodic intervals to their wholesalers.
Today, they have getting into the business of selling millions of orders within an hour, in some cases, hundreds of thousands within a minute to be able to get to consumers and then understand that consumer sentiment as well. And all of that requires a fundamentally different set of business capabilities. So that's one thing that's driving this modernization wave, if you will. And there's many. You can also argue that from a regulatory perspective, the world's moving a lot more towards, hey, if you're going to operate in my country or in this country, you're going to have to have data residency. And you need to follow these regulations as well.
And that requires, again, a fundamentally different set of an application construct as well to say, hey, if I operate here, I need to be able to honor the data residency for this region and that region and this region, which is very hard to go do if you've got a monolith ERP or on-prem system running. And then certainly, there's a tech disruption at everybody's hands as well to say, hey, this value for AI, particularly with GenAI, is real. And how do I make sure I can capture value, applying it on the data and the processes that I have? And if I don't do that, I'm going to be left behind from my competitors. There's security considerations. A lot of companies, there's a lot of bad actors coming up that's going after on application landscapes as well.
And they have to have a wholly different mindset on how do they create the right security and privacy around their application landscape. And it's far easier to go do that in a cloud environment where somebody like an SAP has a massive amount of investment to provide that security, being able to stay current on what needs to be done. And then the final thing I would say also is it's about consuming innovation. We have customers that haven't upgraded in 10 years. That means they've lost out on a lot of product capabilities or innovations that can help their users and business, not to mention user experiences as well. So there's a lot of factors that drive this innovation at the core. And that's what we're seeing, not just in S/4HANA, but wholly at SAP as well and reflected in our growth.
I think there's a school of thought that says, hey, you don't really need to change out the core. You can just innovate at the edges or on the top and create this layer on top, and that can just drive modernization and value, but truly, the customers that are in it to drive sustainable value are looking at the core as well to say, hey, that's really where the transformation starts and the real value starts, if you will, and that's what we're hearing from our customers and seeing in our results.
That's a great set of reasons why we're seeing that the upgrade cycle we are at SAP that very strong reasons to move. You've also got a platform layer that sits under core S/4HANA and sits under the line of business products, the Business Technology Platform. Could you talk a little bit about what that platform enables for customers?
Yeah, I think I fundamentally believe, again, as a product leader that being in the business application space, you have to own the platform that's underneath it. It's very hard to just have a SaaS app and not have control over the platform because they're so deeply connected. Not the infra layer, but at least the platform, if you will. And that's what Business Technology Platform is for us. And there's largely three things that BTP does for us. One, it's a platform that allows us to develop our applications first and foremost. And it gives us that acceleration we need to be able to drive innovation out to the market as quickly as possible. The second thing it does is it's the extension and app development layer for our customers that are deploying our applications.
So it provides that seamless, consistent extensibility experience across our application landscape to say, hey, if I've got S/4HANA, if I've got Ariba, or if I've got SuccessFactors, and I want to create an extension for it because every business is unique. You can get most of the way with packaged application, but there's a last mile that you have to make things your own. And that's what BTP does for our customers. And then thirdly, it's the platform that our partners build on as well because as they build on this, they get the benefits of it being natively connected and understanding the SAP applications, if you will, from a construct perspective. So it allows them to build those last mile industry extensions, the last mile domain capabilities that from a product perspective, we may not be getting to in the time period.
And we see that in the results from a traction perspective with BTP. We have over 29,000 customers now that are using BTP, over 3,000 partners that are leveraging BTP to build applications. Our attach rate with S/4HANA is pretty massive. And we're even doubling down on the entitlements to our applications to say, hey, based on history, we know how much extensions customers are making to our applications. And we want to make sure that that level of entitlement is already part of the application for our customers to really get full value of our applications from that perspective. It's also an area that's, of course, ripe for us to drive innovation with AI.
So we've done a massive amount of innovation with bringing AI into the SAP Build application, into the integration suite as well, into our SAP Analytics Cloud as well to create both acceleration in developing the custom applications for our customers as well as creating value for them while they're using it as well. One of the great examples is we have Joule for Developers. That's part of our SAP Build application that allows you, if you're building on SAP Build, to be able to leverage GenAI to accelerate the work that you're doing. And this is where we've also now made generally available our ABAP large language model that allows our customers on S/4HANA to be able to build Clean Core customizations and extensions and get the same lift that they get from modern languages or other languages outside of ABAP as well.
Development platform for you, for partners, ability for customers to modify and where you can insert AI into it for customers. So pretty powerful platform there. Maybe moving on, you raised the topic of GenAI. Obviously, it's a huge focus for investors here. You've announced Joule. Could you explain in a little bit more detail what that product is? Again, what are you doing for customers? And maybe are there a couple of key use cases that are resonating with customers and pushing them on that journey to use it?
Yeah, no, happy to do that. I mean, I think AI, of course, I'm sure it's the theme here at the conference anyway, is a big, big priority for us. We, in fact, have a priority, a marching order for SAP as a strategy. We call it AI first, suite first, which means that we really have to deliver the value for our customers from an AI perspective first and foremost. But then also, we have to leverage AI in the work that we are doing, too. But then the suite first part comes very closely aligned to AI first because we believe, because of the breadth of applications we have that span from finance to deep supply chain management to deep spend management to deep HCM to CX as well, that this end-to-end nature of the suite really creates significant exponential value in the AI.
Because individually, in its own lane, we can go compete with the competitors that are out there. In HCM, there's other players out there. In procurement, there's other players out there. In CX and SCM, there's individual line of business players out there. But there aren't many players, if any, if you will, that can do the end-to-end. And the more we can bring the harmonized data model across this and light up the AI, we end up being effectively in what I call is a category of one because that value is unique. And businesses are deeply interconnected. You can't really ship a product if you don't understand what the revenue projections of it are, what the plans of it are, what does the cost structure look like, how can you connect with the spend side of it as well.
This AI first, suite first for us really doubles down on the value of AI that creates a super differentiated value for customers that's very hard. Now, let's decompose what that is then. You asked about Joule. So Joule for us is the conversational copilot, the vehicle for us to ship AI innovation to our customers. And there's three classes of AI capabilities that we're shipping to our customers. Again, before I get to the three classes of value, Joule is also one, like the business data cloud that we announced, that creates this seamless unification of the end-to-end suite that is, again, unique for the user. Because if you're in Joule, it natively understands that you as a user have access to this in finance. You have access to this in SuccessFactors. You have access to this in Ariba.
Regardless of where you are, you can converse with it to get the task done that you're trying to go do. It becomes effectively that new UX that brings the power of the suite again to your fingertips. Then the three classes of capabilities, one, we announced last SAP Sapphire that we are going to enable 80% of the most used transactions across our applications in Joule. We've done that. Things like, hey, you want to ask a basic question, you want to do a navigational scenario, you want to do an analytical scenario, you can ask in Joule, and it will take you that or bring that information back. That's available for all of our customers. Beyond that, there's what we call embedded AI or premium AI scenarios.
These are 130 scenarios that we shipped by the end of last year, exceeding the goal that we had set for ourselves. We're on track to ship more than 400 or getting that number up to over 400 by the end of this year. Now, these are high-value scenarios that have a monetization and a commercial model behind it as well. That's the second part. The third part of it is the agents that we're working on. Now, we talked about three first-party agents at our SAP Business Unleashed event two weeks ago, one around the financial side with dispute management, which could end up being a pretty complex case.
But an agent can look through the various permutations, get all the details, suggest a course of action for you to be able to go take to resolve a dispute on the accounts receivable side or the accounts payable side, if you will. The other two are on the customer experience domain, doing case classification as well as automated Q&A for salesforce automation as well. So there's agents there. That's also part of Joule. And Joule becomes that conversational, that human-in-the-loop experience for agents where needed. And of course, if there's autonomous agents that just run based on events or triggers behind the scenes, they can continue to run as well. So Joule for us covers this landscape as a vehicle for us to deliver AI scenarios to our customer.
If we flip it maybe a little bit, you've talked about the positives there of what you're doing for customers. There's also an investor conversation around, does this lower the cost to code dramatically? Does it lower the barriers to entry in software? Can others come in and replicate a lot of what you've done at lower cost and create more competition? Is that a risk? Maybe flipping it on the other side, there's people that work on your platform, best-of-breed players. Could it, on the other hand, be an opportunity for you to displace some of the players that sit and maybe have come into your ecosystem that shouldn't have done because you also can benefit from that kind of lower-cost advantage?
Yeah. I think from a cost-of-service perspective, listen, I think as a core strategy in the AI work that we're doing at SAP, we have believed, continue to believe, and we're seeing that play out in action, is the large language models in large part will become a commodity. So it'll get better. It'll get cheaper. It'll come from different sources. So the thing that we have been working on as SAP, because we are at the top of the stack from an application perspective, is to make sure that as we build these AI scenarios, we have an ability to switch out the large language models based on which one's now better or which one's now better and cheaper, if you will, to be able to deliver that value and that savings back to the customer, as well as back to SAP and deliver better results as well.
And we see that playing out very well from a strategy perspective. But that said, I think from a differentiation perspective, I'd say two things. Listen, our AI, we believe, is differentiated by a couple of things, which is very hard for, I believe, a set of competitors to compete against. And I'll explain the different categories of competitors that I'm talking about here. The thing that we have in our AI are, I'll call it two or three unique things. Thing number one is our agents and our AI deeply understands the business process context. Because we run end-to-end business processes, it understands the agents, understands when you're building an agent. Let's say I want to create an agent that helps me renegotiate contracts that are coming up due in the next three months.
Now, because we're SAP, we've got Signavio, we've got the end-to-end business applications. Just asking for this agent to be developed, it understands that we're talking about source to pay, and in source to pay, we're talking about the contracting sub-process, not just that, because it has the process taxonomy. It knows that, hey, I just created a supplier discovery agent that continually looks for this commodity, what the best suppliers are, who the lead suppliers are, and I also created a price renegotiation agent for this sub-process as well. Both of those would be relevant to come together to create this now uber agent, if you will, that allows you to do that, run that end-to-end negotiations, if you will. That's very unique because we are the publishers of the applications. We understand the business process context very deeply, and not just that.
The second thing that differentiates us is then that agent knows that, hey, it sits in the source to pay process, in the contract renegotiation. So it needs supplier data. It needs data around the orders to those suppliers. It also needs not just the order detail, but what's the on-time performance of those orders as well to be able to come up with the plan. And not just that, because it has access to SAP Business Network, it needs to understand what's the landscape to be able to go position this new RFP out to. And then from a price negotiation perspective, it understands what's the trend for that commodity because of the commerce that passes through in SAP Business Network as well. So the access to that data in a governed way that respects the authorization of that user and that organization is huge value.
These two things we believe are unique from an SAP landscape perspective. Because if you don't have that, certainly you can have an agent builder that you can connect from an API perspective, and you might even have an API library because you've built some workflows on top of it, but it's very point-to-point, and it leaves that last long mile to the customer to connect them point-to-point in a pretty rigid way, and it doesn't understand the deeper business process context, and not just that, if it needs access to data, then you need to figure out how to dump the data somewhere else that is disconnected with the application for it to really be holistic. Certainly, you can go build it, and you can throw a lot of money and resources on it, but it becomes suboptimal. This business process context and the access to data becomes unique.
And again, not just that, if you notice in the scenario, it's also a multi-app play as well. So it brings the end-to-end nature that it gets the data from the order management system. It gets the spend information from your spend applications. It gets the network information. And that end-to-end, again, is only uniquely something that SAP can provide as well. So on the AI, on the Joule side, we believe that the value we create with these unique differentiators, the end-to-end, the business process context, and the access to data in a unified, governed way differentiates us from, again, now going back to those categories of competitors, if you will, certainly the AI players that are more PaaS players is what I would say.
Because while they might have capability to build an agent or build AI capabilities, you as a customer would need to provide the API access, the data, and once you do that, it can never be as good as what the publisher provides because it's disconnected. The context gets lost. Second category are app players, but those app players are what I call single-lane app players, so you might have an HCM provider that says, hey, I can do an HCM agent. But that HCM agent won't have deep finance information or data from supply chain that might be relevant from an employee performance. Or they can build a supply chain agent that doesn't have access to finance data as a competitor or a front office agent that doesn't have the back office information.
So even in the business application competitor space, the end-to-end nature creates a unique differentiation for us because we can go wire different things. While for those single-lane players, it's very hard because that leads the customer to play in a multi-app landscape, stitch it all together. Which in the age of AI, where data and data's governance and security is so paramount, it becomes super critical. So we believe from a Joule perspective, the different scenarios that we have, the differentiation for our customers, the value is something that's resonating well with customers. And then we see that in the traction of our growth and numbers as well.
You talked about having that flexibility to be able to use different LLMs and then ultimately commoditizing. And we've seen with DeepSeek potentially seeing big benefits in performance and cost. How much has the cost of consumption been a barrier to customers adopting? Is that helpful? Or were we already quite early anyway?
Listen, I think, again, we talked about the strategy perspective. The way we are approaching the AI scenarios, it's loosely decoupled with the model. So we can have the right model and the right cost structure as well. But largely speaking, what we don't see today is cost being the barrier to adoption. I think we see two things. One is there's a lot of POCs that customers are doing and a lot of bespoke or PaaS type capabilities is how do you then get to production? Where we're seeing adoption is when these scenarios show up natively in an application in the pane of glass that the users are already using. So if you look at HCM, for instance, if you look at the writing assistance for goals, for performance, for feedback, we see a lot of usage in it because users are already there.
And then it's built with the workflow in mind. If they're decoupled from the native workflow and the native applications, it is harder to go adopt. So one is how embedded and seamless it is to the applications that users use. And again, there, we believe as SAP, we have a unique value proposition to offer to customers because we're publishers of those applications. Second, it's the reliability of it. The results are coming back. Are they reliable or not? Because you'll see a lot of one-time usage. But if you don't get repeat usage of those scenarios, it's because users aren't finding the results to be reliable.
And this is where we leverage uniquely, again, the data that we have with permission from our customers, with the right privacy and security rules applied to be able to make the results a lot more reliable for our customers and for end users, if you will. So we see good adoption in the embedded AI scenarios, 130 that we're building, again, with a lot of feedback loop that we're executing and actioning on. But where we don't see adoption is if it's not in the workflow of the user, if it's not reliable for end users to depend on. And once you detach that AI from the core process, it becomes a little bit harder.
Yeah. So when you're getting reliable results and it's in my day-to-day workflow, you'll get the adoption. It's not a cost issue. Now, that makes a lot of sense. Could we maybe come to the business network? That's been a part of your work at SAP, I think, since you joined. It's always struck me that with Ariba, with procurement, the ability to bring buyers and sellers together, that felt like a very natural area for SAP to be able to build out an amazing network. I think it's fair to say that maybe the adoption of that hasn't been as great as we would have liked. You put a price decrease through last year to try to make it a more attractive platform to work with.
Could you talk a little bit around how much of the issue was a technology issue, that it was the UI, it was the underlying functionality wasn't there, how much of it was pricing? And now you're starting to address those things. What's starting to happen in that business network?
Yeah. It's a really good question. I can go on for this for a little bit. But listen, I think business network, going back to the first question and why I joined SAP, was one of the things that excited me about what it can do to business applications. Because if you think about it, 50 years ago, when the concept of ERP came in, it effectively was largely a concept that says, we're going to bring down the silos across your business functions, your manufacturing, your warehousing, your finance, your sales. And you can have a system of record that real-time looks across all of that. And that phenomenally changed business applications' trajectory. And ERP is what it is. And I felt business network has the ability to now bring down silos, but across your value chain.
So not just your tier-one suppliers, but also your tier-n suppliers and on the demand side with your distributors and your customers as well. And that hypothesis is proving out to be true. Now, to your specific question, though, to me, I would frame that not as an adoption question. I would frame that as a revenue question, if you will, from a deceleration perspective. And it's because we're intentionally focusing on adoption. And we see some very positive signs there. And I'll explain what I mean by that. Business network, from a business model perspective, has two tiers that we monetize through the suppliers. One is what we call a standard tier. And the other is the enterprise tier. The enterprise tier is where we get transactional revenue from the suppliers. And we've done a couple of things.
We said, hey, we want to drive usage and adoption because that creates this flywheel effect in expanding the network. So what we did is two things. We pushed a lot more capabilities into the standard tier, the free tier, because we were getting feedback from customers that said, hey, why do we have this tax for my suppliers from that perspective? So we made the standard tier a lot more attractive with more scenarios and transactions that suppliers can do, as well as the experience of it. We want to make sure people are actually using the network more and more. The second thing we did is we embedded the entitlement to the use of network in our packages for RISE and GROW. Because what we want to go do is, again, increase the usage of it. Because if the usage increases, ultimately, revenue will catch up to it.
What we see is a 13% increase in transacting relationships of our suppliers, meaning they're now connected to more buyers, 13% more buyers than they were a year ago. We're also seeing more than 20% increase in the commerce that passes through the business network. We're seeing more buying organizations engage because we're giving the entitlement to a large number of our ERP customers as well. Now, what we are doing as a next step is two things. We just released, I think last week or two weeks ago, a promote offering to our suppliers again. Because we've got hundreds of thousands and millions of suppliers here that we believe will pay for real value that we can provide to them. This promote offering is a subscription offering that allows them to get a verified profile. It allows them to get stats on who's looking at their profile.
It allows them to be able to use AI to respond to RFPs and RFIs more effectively. It creates a level of matchmaking to say, hey, here's the RFPs that you're best suited for. So it creates this value at a much lower price point because we want to go after the queue. The P is pretty attractive. The price and the quantity of suppliers is large. So we've launched this offering that we're very excited about to see what the uptake looks like. And the second thing we're doing now then on the revenue side is the enterprise offering is where we want to also back more value. Because now that we have more suppliers on the standard tier, the upgrade to enterprise tiers needs to be meaningful and material. So that's what we're working on.
We expect that to, again, now that we have the usage growing, to have the flywheel catch up on the revenue side.
It's really about getting that adoption to monetize the.
Adoption, we feel really good about.
That's good to hear. Just aware of time, maybe just open it out for the audience. If there's a question from the floor, if I can take one. Maybe one last one from me then. One of the challenges for customers has been the bespoke code that's sat on the old platform. I imagine a lot of that is industry-specific functionality. And a huge benefit of SAP in the past has been the range of industry functionality you've brought to companies. Could you talk a little bit as we go to S/4HANA, we move to the cloud, how do you manage and deliver industry-specific functionality to customers? How do you monetize that and make that available rather than it being individual bespoke work for customers?
I think you used the word bespoke, but I'll probably maybe correct a little bit. We, as SAP, have invested significantly looking back in industry solutions that make our applications relevant to a retail, to a consumer industries, to life sciences, to you can pick any industries. We're in 26 industries, and I would argue from a capability perspective, from an application, the last-mile industry capability perspective, there isn't a tech vendor that has more last-mile industry capabilities across the business processes than we do. But what we're doing now going forward is two things. I think we're bringing the capabilities that are most used, highest used into our cloud solutions as well. So we manage and provide that to our customers. The other thing we're doing is with BTP, we're also driving a program to make sure now our partners and ISVs can build these last-mile industry capabilities.
Now with GenAI, it allows them to actually build them faster, quicker, more relevant to customers as well to, again, expand the list that we already have. From a monetization perspective, from an investment perspective, we have massive R&D specifically for these targeted industry solutions that we work on, and that continues because we believe that's a very core differentiator. Because a customer doesn't walk up to us and say, hey, I need a generic finance solution or a supply chain solution. They say, hey, I'm in this industry. Do you have a solution for me, and that's really how we start the conversation, and we're going to maintain that R&D investment. The second thing is for us, industry is also one that makes our applications more relevant.
So the upside and the growth in industry and how we track is not just on the revenue of the industry solutions itself, but the pull-through of the full business suite that we have. And there we see tremendous momentum. We've, in fact, simplified our packaging. Because what we ended up having as a result of our success of all the applications that we have is just a large number of solutions per industry. So it got a little bit unwieldy for a customer to say, I want this, this, and this, or a partner or a seller to go position. So we've now simplified the packaging to say, hey, you're looking for an ERP and you're in the automotive industry. Of course, you need the automotive pack with it as well. And it comes with this set of capabilities priced very attractively.
Because we believe some of the things are going to be relevant for you, some are not. So we want to make sure we price for the lowest common denominator from that perspective, and those packages are built out after tremendous success we've had in the oil and gas and utility space with those solutions. Now we're expanding that to other industries, again, to simplify our go-to market so we can position that more actively and aggressively, as well as for a customer to get value that far exceeds what they would get anywhere else.
Perfect. I mean, we could spend hours more, I think, talking about SAP's products. But there's a huge amount of, sounds like, to be excited there. But we're kind of bumping up against time. Wanted to thank you very much again for joining us here. Appreciate it. Thank you.
Thank you, Adam. Thank you for having me.