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On Tuesday, IBM and SAP announced a partnership that plays to their strengths and addresses growing demand from customers for cloud-delivered software. It also deals with data sovereignty issues of customers who want data to be stored locally, and significantly widens SAP's global reach.

This partnership will help with SAP's emphasis on HANA. In a survey, the company found that half of its customers want to move some or all of its business applications to the cloud. That makes sense. Companies want to save on costs and avoid the hassle of maintaining on-premises servers. SAP can now utilize IBM-operated facilities in addition to its own to deliver its software over the internet. And IBM is investing as much as $1.2 billion to create 40 new data centers after its $2 billion purchase last year of SoftLayer Corp.

That creates a lot more capacity for SAP to deliver more on the cloud in near future. It also addresses concerns of some European customers about storage of their data. They are now pushing to have it stored locally, rather than in other countries, to ensure laws governing privacy are stringent. Such requirements were always a top priority for organizations, and further gained in importance after disclosures about data-collection by intelligence agencies last year.

IBM and SAP are also on the same page when it comes to realizing how important cloud has become. SAP's customers are now ready for it; they are more comfortable with sensitive corporate data residing outside company walls as cloud security has improved. Also, this leaves SAP free to focus on its software than worry about creating new data centers, which can be quite expensive and require compliance with data and security regulations. IBM CEO Ginni Rometty has been acquiring companies to build a significant cloud presence, which would be bolstered by its traditional expertise in computer security and disaster recovery. This was one important reason why SAP chose IBM.

SAP CEO Bill McDermott has been clear that cloud is the way forward. Last month's $7.4 billion acquisition of Concur Technologies Ltd., was another step towards that. Now, with the deal with IBM, it can push its flagship HANA to the cloud, showing that you can run full-fledged core enterprise applications in the cloud. The result of this deal will be more visible in the fourth quarter, when the cloud-delivered software will be available on a limited basis followed by a full introduction next year.

Competitors of both SAP and IBM might follow with deals of their own. But they will be up against a formidable team of SAP-IBM who understand the cloud business, are creative in their thinking, and constantly innovating. It will be hard to run better than them.

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