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Partner Managed Cloud Opportunities and Best Practices for SAP Partners An IDC InfoBrief, Sponsored by SAP

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Partner Managed Cloud Opportunities and Best Practices for SAP Partners

An IDC InfoBrief, Sponsored by SAP

Sponsored by SAPPartner Managed Cloud: Opportunities and Best Practices for SAP Partners

pg 2

In This Study, p3

The Cloud Opportunity, p4

What is Partner Managed Cloud?, p8

Why Solution Providers Like Partner Managed Cloud, p11

Why Partner Managed Cloud is Attractive for SAP Customers, p18

Getting Ready for Partner Managed Cloud, p22

Essential Guidance, p28

Methodology, p29

Contents

IDC BELIEVES THAT BY 2019, 40% OF ALL SOFTWARE REVENUE WILL BE ON A SUBSCRIPTION BASIS.

Sponsored by SAPPartner Managed Cloud: Opportunities and Best Practices for SAP Partners

pg 3

Software as a service is the new normal. IDC believes that by 2019, 40% of all software revenue will

be on a subscription basis. Customers are embracing cloud because they recognize the traditional

technology ownership model is inadequate for agility and because they appreciate financial flexibility.

This IDC study, commissioned by SAP, looks at partner managed cloud, an opportunity for solution

providers to deliver SAP solutions by OpEx consumption model through a private hosted cloud.

Via insights gained through in-depth conversations with partners currently offering managed cloud

solutions, it provides a summary of the key benefits partners have experienced, and the major value

propositions for their customers.

Finally, it concludes with guidance on getting ready for partner managed cloud including actionable

words of advice from partners that have successfully launched managed cloud solutions.

In this study

Via insights gained through in-depth conversations with several partners currently offering managed cloud solutions, it provides a summary of the key benefits partners have experienced, and the major value propositions for their customers.

pg 4

Sponsored by SAPPartner Managed Cloud: Opportunities and Best Practices for SAP Partners

Source: IDC CloudView Survey, 2016; n=11063

Customers plan to devote 30% more of their IT spend to cloud services in 2016 compared to 2014, and allocation of funds to private cloud has doubled in the last two years.

The Cloud Opportunity

Sponsored by SAPPartner Managed Cloud: Opportunities and Best Practices for SAP Partners

pg 5

According to IDC’s most recent CloudView

survey, the vast majority of customers (80%)

have either fully embraced using cloud to power

their business applications and infrastructure or

are in the process of deploying cloud solutions.

Only 8% are not interested at all (down from 21%

in 2014). The fact is that if you aren’t offering

cloud options you are missing out on substantial

opportunity.

The majority of growth in cloud spending over

the next two years will be from organizations

that were previously only light users or who

have not yet adopted cloud. So it certainly isn’t

too late to get into the game.

It’s a fact: customers are embracing cloud

Not interested Respondents indicating that they have no interest in, or plans for, cloud computing at this time.8.0%

Evaluating Respondents indicating that they are educating themselves about cloud or the cloud approach for a specific service, without firm plans to implement.12.5%

Deploying Respondents indicating that they have firm plans to adopt cloud within 12 months or are using the public or private cloud for one or two small applications/workloads.20.3%

Embracing Respondents indicating that they are currently using public or private cloud for more than one or two small applications/workloads.59.3%

Source: IDC CloudView 2016 Survey, 2016, n=11083

IDC CLOUDVIEW: OVERALL CLOUD ADOPTION (ALL RESPONDENTS)

Sponsored by SAPPartner Managed Cloud: Opportunities and Best Practices for SAP Partners

pg 6Source: Worldwide Hosted Private Cloud Services Forecast, 2015–2019 (IDC #259066)

Many customers are already convinced of the value of private

cloud. Almost 70% of companies that are already embracing

cloud prefer using private cloud services. Customers look

to private cloud service providers as the primary guarantors

of Web performance, application acceleration, and secure

connectivity.

Worldwide spending on private cloud services will reach $18.8

billion in 2016 and is expected to grow to $40.5 billion by

2019. That’s a compound annual growth rate of 31.5%. There is

lots of interest and lots of money on the table. Of course the

landscape looks different across the geographic regions, but

even established markets will have healthy two-digit growth

over the next four years.

There is a lot of interest in private cloud

GROWTH IN PRIVATE CLOUD SPENDING

2016 to 2019 CAGR

Latin America

Central and Eastern Europe

Asia Pacific ex Japan

U.S.

Western Europe

Middle East

Canada

Japan

45.432.9 32.531.7 29.6 27.9

24.1

23.2

Sponsored by SAPPartner Managed Cloud: Opportunities and Best Practices for SAP Partners

pg 7

Hybrid cloud is the dominant operating model today

because IT buyers are shifting to a ‘cloud also’ strategy.

Most companies are not looking at a wholesale

replacement of their legacy applications. Rather, they

are considering cloud options when they have a need

to augment or upgrade their technology. IDC expects

that by 2017, 80% of large organizations will commit to

hybrid cloud architectures that encompass public and

private cloud infrastructure, middleware, software, and

non-cloud IT assets.

The need to integrate traditional systems with modern

cloud infrastructure and applications is a big opportunity

for solution providers. Customers need help with IT

operational challenges and will look to solution providers

to navigate the hybrid world.

Hybrid cloud is the normSOFTWARE REVENUE GROWTH RATE THROUGH 2017

5.5Xhigher cloud SW growth vs. packaged SW22%

4%Cloud SW Packaged SW

pg 8

Sponsored by SAPPartner Managed Cloud: Opportunities and Best Practices for SAP Partners

“The partner managed cloud solution is essentially a technology lease for a fixed term. It’s much easier for customers when they don’t have multiple contracts where one outlives the other. Managed cloud normalizes all of their service terms to the same period. It’s a win-win.” —SAP Partner, U.S.

What is Partner Managed Cloud?

Sponsored by SAPPartner Managed Cloud: Opportunities and Best Practices for SAP Partners

pg 9

Partner managed cloud is a new way for solution providers

to deliver SAP solutions. It is packaged and managed SAP

solutions delivered via OpEx consumption model through

a partner’s private hosted cloud. Partner managed cloud

enables the creation of an integrated solution spanning

hardware, software and services. Partners have complete

flexibility to package, price, and set the customer terms

and conditions for their managed cloud solution, which can

incorporate nearly any SAP product.

Partner Managed Cloud: A new way to partner with SAP

Partner managed cloud enables the creation of an integrated solution spanning hardware, software and services.

Sponsored by SAPPartner Managed Cloud: Opportunities and Best Practices for SAP Partners

pg 10

Partners can choose to acquire term licenses for SAP software on a deal-by-deal basis or execute

a partner managed cloud master agreement to cover multiple customers. Partners sell the SAP

software license along with their in-house expertise for a fixed term from 2 to 7 years. Partners can

bundle as many additional services with the SAP application as required by the customer. This would

naturally include infrastructure and hosting, but also application life cycle management, security

services, business consulting services, and anything else under the sun.

Partner managed cloud is an opportunity for partners to leverage their intellectual property, move

into the cloud, and expand revenue. To get started, partners identify a market segment that would

benefit from a repeatable cloud solution and develop a go-to-market strategy to address the target

group of customers. Managed cloud solution providers then build, sell, implement and support their

solutions with full autonomy.

PARTNER MANAGED CLOUD IS AN OPPORTUNITY FOR PARTNERS TO LEVERAGE THEIR INTELLECTUAL PROPERTY, MOVE INTO THE CLOUD, AND EXPAND REVENUE.

Sponsored by SAPPartner Managed Cloud: Opportunities and Best Practices for SAP Partners

pg 11

“Embrace the possibilities presented by partner managed cloud. Your

clients will only thank you.” —SAP Partner, Asia

Why Solution Providers Like Partner Managed Cloud

Sponsored by SAPPartner Managed Cloud: Opportunities and Best Practices for SAP Partners

pg 12

As much as the success of cloud has created substantial opportunity, it has also opened the gates

for competition among solution providers and the potential to get stuck competing solely on price.

A good way to stand out is to specialize in an industry vertical or microvertical. For example, one

SAP partner has built a healthy revenue stream by focusing on business operations solutions for craft

breweries, while another has decided to go deep into the needs of the automotive industry in Asia.

Partners we spoke to view partner managed cloud as the foundation for greater opportunities to

specialize in and capitalize on a target market. They have found that a managed cloud approach

has enabled them to define new offerings simply, strategically and with a greater flexibility than for

traditional on-premise implementations. That’s because they have been able to leverage existing in-

house assets to create unique, but also standardized, recurring solutions.

An opportunity for specialization

“We’ve had success in the healthcare industry and it’s been very attractive in many ways. Customers get their solution at a really, really decent price. And they can focus then on making people better and healthier, rather than worrying about running IT infrastructure and applications.” —SAP Partner, U.S.

Sponsored by SAPPartner Managed Cloud: Opportunities and Best Practices for SAP Partners

pg 13

A shorter implementation cycle. Partners that offer industry-specific, templated solutions indicate

that a three-month turnaround from implementation to ‘go live’ was the norm. Of course there is a

downside to a compressed project because it impacts up front professional services fees, but the

upside is being able to acquire and serve many more customers over the course of a year without

increasing delivery resources.

Streamlining sales and marketing. If you have a laser focus on a particular industry or market

segment you can also be very focused in your sales approach and marketing messages. This

requires staff to be knowledgeable about the area of specialization in order to lend credibility and

‘walk the talk’ in customer conversations. Some partners address this challenge by hiring experts

from their target industry to lead sales efforts.

Potential for higher profit. When you have a deep understanding of what makes your target

market tick you increase the value you can add to your customer’s business. This pays off because

it reduces competition and increases the price customers are willing to pay for your expertise.

THE ADVANTAGES OF SPECIALIZATION

Sponsored by SAPPartner Managed Cloud: Opportunities and Best Practices for SAP Partners

pg 14Source: IDC Global SMB Survey, 4Q15; n=1889

Partners say the managed cloud approach provides mid-

market companies the opportunity to adopt solutions like the

SAP Hybris or HANA platforms with significantly fewer upfront

costs. It’s an opportunity for organizations that didn’t think they

could afford SAP technology to economically acquire ‘enterprise

class’ functionality. This opens up the potential for a lot more

conversations with customers that were previously not considered

prime prospects.

IDC research shows that the top business goal for small and

medium-sized businesses (SMB) worldwide is to grow revenue,

followed closely by the desire to manage costs by being more

efficient. SMBs have very positive views about technology, with

most strongly agreeing that the Internet has had a positive effect

on their business and that advanced technology is an important

competitive tool. In particular, technology that contributes to the

immediate corporate goals of improving finances or improving

productivity in the next 30 or 60 days will have strong appeal to

the SMB segment.

A new route to the SMB marketTOP 3 SMB ATTITUDES TOWARDS TECHNOLOGY

The Internet has really transformed the way we do business. Advanced technology is an important competitive tool. We invest in technology to manage costs and be more efficient.

“Partner managed cloud really knocks down the mental block of the customer that doesn’t want to hear about the virtues of something they can’t afford. It’s like you’re walking into a car dealer, and you see your dream car sitting over in the corner, and you immediately turn your head away from it because you don’t want to be teased by that...

—SAP Partner, Europe

Sponsored by SAPPartner Managed Cloud: Opportunities and Best Practices for SAP Partners

pg 15

Successful solution providers say the key to a robust recurring revenue stream and

a good profit margin is achieving a critical mass of customers. By definition and

design, a partner managed cloud solution is repeatable within a target market, so it

is relatively seamless to add new customers. Partners are also able to ‘invisibly’ add

users or locations to scale the solution to accommodate customer growth. After

acquiring the first few customers, partners say the implementation, maintenance

and upgrade processes become like a well-oiled machine. As well, one partner

noted that once you have a managed cloud contract in place, you save a lot of time

because you don’t have to negotiate each opportunity individually with SAP.

One caveat is that you need to minimize exceptions to your standard solution and

methods. Partners told us it’s sometimes tempting to take on a new customer

that falls a bit outside your sweet spot because it’s hard to pass on a revenue

opportunity. Partners we spoke to advise taking a very close and objective look at

a possible exception to make sure the extra work to accommodate a deviation in

the solution will be profitable. In some cases, the time and expense might enhance

the solution and make it more attractive to potential customers. In other cases, it

will be an expensive one-off requiring ongoing special attention.

Easy to repeat, repeat, repeat

“Partner managed cloud enables us to leverage all application maintenance, upgrade processes, and common development across customers so we can dramatically reduce application maintenance costs and development costs to localize our solution. Customers all share the upgrades, development, and everything else that we do rather than having to do it for them on an individual basis.”

—SAP Partner, U.S.

Sponsored by SAPPartner Managed Cloud: Opportunities and Best Practices for SAP Partners

pg 16

Prior to signing on with partner managed cloud, solution providers may have offered managed services

but not software licenses or provided systems integration services but not a hosted environment. Now,

they can offer customers a full end-to-end service, from software acquisition to ongoing care and feeding

of the solution. Partners we spoke to are really happy with the ability to bundle end-to-end services and

infrastructure into one customer contract and one customer bill. They feel this makes their customer

relationship ‘stickier’ because they become a single provider and ‘one-stop shop’ for a wide variety of

technology needs.

There is lots of room to enhance and extend ongoing services beyond the managed cloud solution,

including consulting, implementation, content provisioning, and managed or other general business

services that are layered on the SAP software.

One hand to shake

Partners we spoke to are really happy with the ability to bundle end-to-end services and infrastructure into one customer contract and one customer bill. They feel this makes their customer relationship ‘stickier.’

Sponsored by SAPPartner Managed Cloud: Opportunities and Best Practices for SAP Partners

pg 17

For example, some partners offer a ‘virtual CIO’ service, while others outsource desktop support

and other core infrastructure services in addition to running and maintaining the SAP technology.

As services can be far more profitable than re-selling software or hardware, there is an overall

expectation of higher margin within the model.

Partners we interviewed generate between 30% and 95% of their revenue from their cloud offerings.

Although we did not conduct a quantitative study, so these numbers cannot be considered iron clad,

here is their typical breakdown of revenue:

SAP software licenses 5% TO 13%

Managed cloud solution 30% TO 45%

Infrastructure (IT assets and hosting)

30% TO 60%

Consulting services 40% TO 60%

Sponsored by SAPPartner Managed Cloud: Opportunities and Best Practices for SAP Partners

pg 18

“We did a business case recently for a client that needed to identify what’s more affordable: having their own data center or outsourcing to the cloud. If you take into account the cost of a primary data center, a secondary data center, all of the backup cycles, all the software they require and so forth, the result was that over a seven year term they were 26% better off by hosting with us in the cloud.”

—SAP Partner, Africa

Why Partner Managed Cloud is Attractive to Customers

Sponsored by SAPPartner Managed Cloud: Opportunities and Best Practices for SAP Partners

pg 19

By definition, the managed cloud environment is ready and waiting, avoiding delays associated

with buying and installing hardware and networks. The repeatable platform and solution results in

a streamlined implementation, rather than a traditional extended project timeline to accommodate

extensive customization.

Partners report being able to reduce implementation time significantly compared with a traditional

SAP implementation. Partner managed cloud also makes it easier to start small so the customer can

experiment with the solution, then turn on additional features and functions as requirements become

crystalized. Partners say it helps get customers excited about the potential of the solution and keeps

them interested in achieving the business value of SAP technology.

A faster time to value

“Getting the customer up and running very quickly allows them to see and experiment with the

solution then grow from there. We start working with them at that point to really understand what

the priorities are and continue to iterate and grow them through additional releases and functionality

over the next few months. That way we provide value quickly as opposed to waiting a year and

showing them something that they may or may not like. It also allows the client to buy in along the

way and to shift very quickly when their priorities change over time.” —SAP Partner, U.S.

Sponsored by SAPPartner Managed Cloud: Opportunities and Best Practices for SAP Partners

pg 20

Partner managed cloud solutions are structured so that

customers can use operating funds instead of capital funds

for their technology purchases. Usually, it is relatively easy

to shift operating money around and of course, it is nice to

spread payment over the life of the solution rather than write a

big check up front. IT purchase decisions are also continuing

to shift beyond the CIO and IT department. IDC believes that

line-of-business buyers are involved in 80% of all technology

purchases and are contributing budget to almost 60% of IT

sales transactions.

Managed cloud solution providers say their customers

appreciate the payment flexibility they can offer. One size

does not have to fit all, making it easier for customers to sign

on the bottom line. Because partners are in complete control

of the customer relationship, they can offer whatever financial

arrangement is mutually beneficial. Keep in mind, though,

offering too many different payment options may complicate

closing a deal.

A flexible procurement process

“We can create a different financing vehicle for our customers that allows them to have standardized monthly payments that include the hosting, managed services and the ongoing services as our customer relationship grows. We can maneuver that in a variety of different ways under partner managed cloud.”

—SAP Partner, Europe

Sponsored by SAPPartner Managed Cloud: Opportunities and Best Practices for SAP Partners

pg 21

In a traditional implementation, customers end up with several different

contracts and several different parties to negotiate with. It is safe to

say that most would rather not juggle multiple contracts for a single

solution. Partner managed cloud reduces complexity by enabling one

customer contract that covers all aspects of the solution, including

software, infrastructure, maintenance, and ongoing management

services. An added bonus is if there is less time spent executing

agreements, the solution can be implemented sooner.

Being a single source provider also aligns with customer preference

building a relationship with a cloud solution provider. IDC research

shows the majority of buyers (66%) believe the best route for adopting

cloud is to stick with a single major cloud provider. That means once you

have forged a good relationship customers are likely to stick with you.

A single source provider

The majority of buyers (66%) believe the best route for adopting cloud is to stick with a single major cloud provider.

Sponsored by SAPPartner Managed Cloud: Opportunities and Best Practices for SAP Partners

pg 22

“You have to be clinical in packaging your solution and understand you will need to deliver volume business. You may have five or ten deals going at the same time. That’s certainly what we’re experiencing as we’ve incorporated the managed cloud licensing into our healthcare package.” —SAP Partner, Europe

Getting Ready for Partner Managed Cloud

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pg 23

There are always changes and impacts when you do

something new. The degree of change will depend on where

you are starting from. If you have been in managed services

for a while, the learning curve won’t be so steep. If not, you’ll

need to map out your journey to readiness. For sales and

marketing, partners report the following impacts.

The sales cycle turns on its head. When you are selling

subscriptions instead of one-off projects the sales

transaction is just the beginning. Your money will come

in the door over time instead of as large lump sums.

The customer relationship post-sale is an important

focus, in order to make sure they are getting value

out of their managed cloud services and solution and

continue to keep their subscription relationship with

you. This increases the importance of ‘farmers’ who

nurture the customer relationship post-sale.

What will partner managed cloud mean to sales and marketing?

IDC research reveals that 65% of B2B buyers have already researched and made a technology purchase decision before they contact a sales rep.

Sponsored by SAPPartner Managed Cloud: Opportunities and Best Practices for SAP Partners

pg 24

The sales cycle accelerates. There are several aspects of partner managed cloud that contribute

to a faster sales cycle. The solution is already on the shelf and can be easily demonstrated, so

customers have lots of tangible input for their purchase decision. The ability to use operating funds

and flexible procurement terms also grease the wheels. This is good news that also comes with

some potential delivery challenges if your organization isn’t ready for the volume of new customers.

Partners we spoke to all experienced a very positive impact on their revenue stream.

The sales conversation changes. With a repeatable solution, the sales conversation is about

a ‘plug and play’ solution as opposed to exploring an array of customized possibilities. Some

customers will need to be educated about the advantages of this approach and sales staff will need

to be prepared for objections and to resist the temptation to promise deviations from the standard

solution. Another aspect that might be new to some customers is the notion of signing up for a

specific term. You need to have a ready response if the customer wants to know what happens if

they leave before the term is up.

Digital marketing is key. IDC research reveals that 65% of B2B buyers have already researched and

made a technology purchase decision before they contact a sales rep. At a minimum, you need

to get your website content up to snuff, including customer success stories and business-focused

information about your expertise in your chosen niche. It is also a good idea to use search engine

optimization techniques to help customers find out about you. And of course take advantage of

the marketing assets provided through SAP PartnerEdge.

Sponsored by SAPPartner Managed Cloud: Opportunities and Best Practices for SAP Partners

pg 25

“One of the conversations we always have during the contracting process is about the worst case scenario. ‘If we’re not happy with you two years down the line, but we’ve entered into a five-year agreement,

what happens now?’ These are the kind of things you need to have viable answers to. But if you can backup the service with the appropriate service

levels and the associated credibility, then you won’t have an issue.”

—SAP Partner, U.S.

“Partner managed cloud has certainly become an enabler of additional revenue because it

simplifies the message to the market. It gives us more flexibility in terms of our approach. I would

put it at about 20-25% potential increase in revenue compared to previous years.”

—SAP Partner, Africa

Sponsored by SAPPartner Managed Cloud: Opportunities and Best Practices for SAP Partners

pg 26

Partners we spoke to pointed out several aspects of services delivery and business operations that

are likely to change when you start offering a repeatable packaged solution.

The implementation methodology. The implementation methodology usually needs to be

adapted for partner managed cloud to accommodate the accelerated time frame to get the

solution up and running. One partner noted that project management, in particular, needs to be

very disciplined to keep the implementation tasks on track within a compressed schedule. Staff

accustomed to traditional implementations may need time to adapt to the new methods.

Project team staffing. Because the implementation tasks for a managed cloud solution are

usually less complex than those for a traditional on-premise model, partners say the learning

curve for new staff is faster. There’s an opportunity for more leverage of high-value, high-cost

resources like technical architects because projects are shorter and teams are smaller.

What will partner managed cloud mean to operations and delivery?

“You need a different type of project manager here. You’ve got to push things through according to the contract. We can only offer low prices because of the efficient utilization of our consulting team.” —SAP partner, U.S.

Sponsored by SAPPartner Managed Cloud: Opportunities and Best Practices for SAP Partners

pg 27

Pricing and contract terms. As mentioned earlier, partner managed cloud gives solution providers

full flexibility to set prices and contract terms. While flexibility is good, it can be a challenge

to consider all the options. You need to determine what to bundle into a recurring revenue

subscription component and what (if anything) you will charge up front and/or on a project basis.

Because the expectation is that most costs will be spread across several customers, pricing needs

to anticipate reaching a critical mass. Partners say this might affect profit in the short term while

you get your pipeline moving.

“We bundle everything. You have the hardware cost, the software cost, and the implementation cost. We charge upfront for some of the cost and then it’s split out into a monthly fee.”

—SAP Partner, U.S.

Sponsored by SAPPartner Managed Cloud: Opportunities and Best Practices for SAP Partners

pg 28

“The whole point of any business is making it easier to buy your services. And what partner managed cloud does is make it easier to buy your services. That’s the bottom line, right?” —SAP Partner, U.S.

Essential Guidance

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pg 29

IDC believes that partner managed cloud hits all the sweet spots in today’s technology market for partners. It

offers the opportunity for specialization and differentiation, recurring revenue, and an entry point to the cloud.

Cloud is not just the way of the future, it is the way of today. We expect a reduction in spending on traditional

client-server technologies of almost 5% over the next five years, while cloud, mobile, big data and social business

solutions will grow by almost 13% over the same period.

Partners that focus on increasing their recurring revenue realize there will likely be some short term pain as they

work to build up a critical mass of customers. But once you get there, it can be very good business indeed,

because it smooths the revenue stream. In other research we have conducted, a healthy amount of recurring

revenue can have a positive effect on business valuation.

SAP is helping their partners go where the market is going. If you take advantage of partner managed cloud and

the resources available through SAP PartnerEdge you will be well positioned to succeed in the new era of IT.

Essential Guidance

IDC believes partners that are not able to add true value, such as a solution tailored to the needs of a particular industry or market sector, will find their revenue opportunities decline. We have also seen a steady rise in the importance of services in the revenue mix as a major contributor to gross profit. And the pinnacle source of margin is intellectual property created internally that is packaged up as an ‘as a service’ solution, like those that have been created by solution providers delivering partner managed cloud.

Sponsored by SAPPartner Managed Cloud: Opportunities and Best Practices for SAP Partners

pg 30

IDC interviewed a variety of SAP partners that are delivering repeatable managed cloud solutions

to their customers located in North America, Africa, Europe, and Asia. All of the partners provide

systems integration services including software installation, training, deployment, and ongoing

support. Some had also offered hosting services prior to delivering managed cloud solutions.

Data and other insights have also been drawn from IDC’s wider-ranging research on partner

experience with cloud and managed services, as well as quantitative studies recently conducted on

cloud adoption and SMB buyer behavior.

Methodology

All IDC research is ©2016 by IDC. All rights reserved. All IDC

materials are licensed with IDC’s permission and in no way

does the use or publication of IDC research indicate IDC’s

endorsement of SAP’s products or strategies. Data in this

InfoBrief comes from IDC studies from 2015 and 2016.