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SAP sticks to tradition with dual CEO appointments as McDermott departs

by ace
SAP sticks to tradition with dual CEO appointments as McDermott departs

Bill McDermott, CEO of SAP at the World Economic Forum in Davos, Switzerland.

David A. Grogan CNBC

Before Bill McDermott, outgoing CEO of SAP, decided whether to hold the position for another five years, he sought advice from top executives from other companies.

"Everyone told me 10 years is the right time," he told CNBC in an interview on Thursday. "I told Hasso [Plattner, chairman of the SAP supervisory board] that 10 years was the right time as CEO."

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

"Few CEOs can do this on their own, where they take part in the succession plan and hand the baton in a smooth transfer of power where everyone is happy," said McDermott.

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

SAP did not consider external candidates.

"We have a philosophy of taking care of ours," said McDermott, who joined SAP in 2002. "We have a very interesting culture. You need 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, former co-CEO of SAP and former executive of the company – and became sole CEO when Snabe left in 2014.

"It has always been my goal as CEO to hire from the inside and create a succession plan underneath me," said McDermott.

Morgan said she and Klein have complementary skills, but share similar philosophies about how they would like to move the company forward. In a note distributed to customers on Thursday, Bernstein analysts Mark Moerdler and Firoz Valliji, who have the equivalent of an SAP stock buy rating, said they were pleased with the experience and the difference between the two new CEOs.

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

During McDermott's nine years in charge, he said the company got the big things right. SAP has built a significant cloud business and there is likely to be more growth ahead – Bernstein analysts think SAP is still at the beginning of 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 industry leaders such as Amazon and Microsoft.

"You need to have enough capital to slow the race to zero," McDermott said. "The nature of the hardware business has never been our strong point. And the investment required for this level of economy of scale to compete with the largest was not in our interest."

Overall, though, McDermott said he would not have done things differently if given the opportunity. McDermott said it would be fair to say that under him, SAP has invested heavily to achieve its current position, including through deals such as the $ 8 billion acquisition of Qualtrics last year.

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

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