SAP Takes on the World From German Champion to Global Player

It's a time of radical change for SAP. The German business software giant is now trying to attract small- and medium-sized companies as customers, as well as changing from a company with a strong German identity to a multi-cultural global player. But some long-serving employees are unhappy with the new direction.

SAP headquarters in Walldorf, Germany.

SAP headquarters in Walldorf, Germany.

The man is a true linguistic marvel. Léo Apotheker switches effortlessly between German and French, converses in Hebrew and gives presentations in fluent English.

But now this cosmopolitan executive faces a true trial by fire. "I have to learn the language of small to medium-sized businesses," he says. This is no easy task for someone running a global company.

Léo Apotheker has been the second-in-command at software giant SAP since March, and he is widely touted as being destined for the top spot at SAP when the contract of its current CEO, Henning Kagermann, expires in 2009.

Apotheker, 53, spent 19 years in his Paris office helping to make a global player out of the company, based in the southwestern German town of Walldorf. His efforts have clearly paid off: Today SAP is the global market leader in the business software industry, employing almost 42,000 people in 50 countries.

A born salesman, Apotheker has been a member of the SAP board of directors since 2002. He is intimately familiar with most of the world's major corporations, including companies like Volkswagen, Aventis Pharma, Siemens and Deutsche Bank.

But now Apotheker will have to learn to think on a small scale, putting himself in the shoes of German ball bearing manufacturers, Indian textile producers and French purveyors of luxury foods. "We must develop solutions for the problems that keep owners of small- and medium-sized businesses awake at night," he says.

It's an enormous task, and for SAP it means nothing less than completely reinventing itself: its technology, it distribution channels, its marketing and its consulting. Hardly any aspect of SAP's business with major companies is relevant to smaller businesses with 50 or so employees.

These sorts of companies don't need fine-tuned, customized products, but a reliable, easy-to-use and inexpensive program. SAP has already developed a uniform and robust platform for these new customers. Starting with this platform, the customer can develop special programs specific to his industry. "This is essentially a major step toward the industrialization of software," says Apotheker.

The new product is so different, so foreign, that although it was developed within SAP, a separate subsidiary was set up specifically for it. This approach is meant to prevent a potential dilution of SAP's traditional values. "We are still practically religious when it comes to quality and reliability," says Apotheker.

The new software for mid-sized companies, which is currently known by its working name, A1S, and which SAP will unveil in New York on Sept. 19, undoubtedly marks the most radical shift in the company's 35-year history. Unlike SAP's corporate software packages, which are sold under license and modified by SAP consultants, a process that sometimes takes years, the new product will be available for download by mid-sized companies in early 2008. The company is pursuing an "on-demand" model in which the product is leased instead of purchased and where software can be updated, modified and maintained online. "It has to be as easy as downloading music from Apple's iTunes," says Apotheker. "I want to create a cool platform for companies."

Léo Apotheker has been the second-in-command at SAP since March.

Léo Apotheker has been the second-in-command at SAP since March.

Cool? SAP? Until now the Walldorf-based software company was notorious for its complicated products, which caused endless headaches for company's IT departments. And now SAP wants to become another Apple?

"We are undergoing an image evolution," says Apotheker. The company needs to take a different, more mass-market approach to its communication strategy if it wants to appeal to smaller businesses. This is where the marketing experts come in. SAP is running TV advertising for the first time, a series of self-mocking spots in which small business owners express their surprise at the fact that they can now simply buy SAP software.

Coming up with a name for the new baby, which will be announced in New York, was a long and complicated process. SAP's marketing strategists spent three months racking their brains, testing and trying out possible names. Some of the names they came up with -- and discarded -- like R/3, simply aren't sexy enough for the mass market.

"Sexy software?" Henning Kagermann asks, clearly irritated, as he sits in the lobby of the Hyatt New Delhi, where he is staying on a short trip to India. The 60-year-old, who has been sole chairman of SAP's executive board and CEO since 2003, is by profession a physicist. Kagermann is also a problem-solver and strategist and is writing a book about corporate transformation in his free time. He is clearly not a marketing man. "We don't talk big. It would only hurt our image," says Kagermann. "You would expect that from some competitors, but not from us," he adds, in a cutting reference to his archrival Larry Ellison, the big-mouthed CEO of California-based Oracle.

Ellison has always been a thorn in SAP's side, constantly announcing his intention to overtake SAP in the business world -- and its founder, Hasso Plattner, in the sport of sailing. But he continues to fall short of the mark, at least when it comes to business. With its 25-percent market share, SAP remains the market leader in the corporate software sector, even after Oracle spent roughly $20 billion to acquire 30 competitors in 2004. "Ellison has to buy his customers," says Kagermann, "but we grow organically. We are the market leader because we innovate from within. That's something you can't just buy."

Indeed, it's not necessary to buy expertise -- sometimes theft is also an option. Ellison recently caught SAP trying to steal Oracle software in the United States. In November, an SAP subsidiary downloaded far more software than would be considered normal from an Oracle customer Web site.

SAP is the leading manufacturer of business software.

SAP is the leading manufacturer of business software.

Ellison claims SAP stole from Oracle and is suing the German company for damages. With great reluctance, Kagermann was forced to admit that the accusations were true. The two rivals were due to meet in court in San Francisco this week -- a deeply humiliating situation for down-to-earth SAP -- but the hearing has now been postponed to Sept. 25.

What irks Kagermann even more is the fact that Wall Street has reacted much more positively to Ellison's shopping spree than to SAP's strategy of sustainable growth. But he doesn't let this stand in his way. "Sometimes you also have to take risks, even when the market would rather wait," he says.

But this approach is also risky. A share price that is too low attracts takeover candidates. Investors, concerned that SAP's stock has been hovering near the bottom of the DAX for so long, initially reacted cautiously to the company's enormous €400 million investment in A1S.

Kagermann went on the offensive in mid-2007 when he presented an ambitious growth plan, which envisages increasing the number of SAP customers from 40,000 to 100,000 by 2010. The effects of the program are already evident. In the last quarter, SAP surprised the markets with a 10-percent rise in sales. The markets responded by pushing the company's share price up to over €42.

Investors now appear to have found confidence in SAP's change in strategy, having forgotten Plattner's now-discredited conviction that companies would never download their software from the Internet. They have also forgotten the period when SAP took their eye off the ball and completely missed out on the Internet's opportunities.

In retrospect, some experts even believe that being a latecomer to the Internet has ultimately helped the company. While many other companies plunged headlong into the Internet -- and into financial ruin due to the whole e-business hype -- SAP was able to calmly study the Web's real opportunities after the bubble burst, without inflicting significant damage on itself. SAP essentially prepared its entry into the Internet on the ashes of the New Economy.

Kagermann decided to embark on the A1S program in 2003. His strategy was clear: Business was likely to stagnate in the big customer sector for the foreseeable future. For SAP to continue achieving double-digit growth figures, it would have to acquire new customers: small and mid-sized businesses. In this market, only one third of companies had already purchased SAP's "old" software packages, Business One and All-in-One. Kagermann hopes that the new technology will enable the company "to gain a large share of this new market segment."

His decision also spelled radical transformation for the entire corporation. "The old SAP no longer exists," says Léo Apotheker.


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