Now Europe’s answer to Microsoft is at the heart of another paradigm shift, as the rise of the Internet turns the software industry on its head once again. Tucked away in sleepy Walldorf (population: 14,445), SAP engineers are busy building the next generation of corporate software–Web-based technology that will make today’s desktop systems look as slow and inflexible as the giant mainframes of old. CEO Henning Kagermann–a thoughtful former university professor as far removed from the celebrity CEOs of Silicon Valley as bratwurst is from a California roll–has set some incredibly ambitious new goals for the €8.5 billion company. He wants to increase SAP’s potential market from $30 billion to $70 billion by 2010, doubling the market cap and share price of the company in the process. To accomplish this, he’s not only stolen several key employees from competitors, he’s also sweetened the compensation pot Anglo-American style: any employee, from secretary to president, who is deemed to have contributed in a special way to the targets will be eligible for one-off perks like a doubling of his or her yearly salary.
Although the past two years of record revenue growth have given the company a great start, SAP did hit a speed bump last week when second-quarter sales failed to meet targets. Meanwhile, competition in the field is increasing as SAP’s biggest rival, Oracle, is beefing itself up via a buying spree, and giants like Microsoft and, more recently, Google angle for a share of the business-software market. SAP and Oracle in particular have been duking it out via superaggressive ad campaigns.
Still, while not given to boasting personally, Kagermann does have a good pitch. As the top German growth company of the past decade, SAP has found a way to blend the best of corporate Europe–namely stability, the long view and topnotch engineering–with the entrepreneurial energy of the United States, a combination that has put the company at the top of its field.
SAP once looked a lot more like a traditional German exporter than it does now. Back in 1990, when the company began to transform the business landscape, it had €256 million in revenue, and only about 68 employees in the United States. Since then America has become SAP’s second biggest market, with clients like McDonald’s, the Gap and Exxon bringing in some $593 million in revenue in the most recent quarter alone. “We realized very early on we had to globalize,” says Kagermann. “We couldn’t stay in Europe, let alone Germany. We had to be where our clients were.”
SAP followed its multinational clients as they expanded around the world, setting up labs in places like India, China and Bulgaria, and building up a base of professionals that could service its software globally. By 1999, the company was riding the crest of the wave of global IT spending. Then it all came crashing down. Not only did the bursting of the dot-com bubble deflate technology spending, but companies began to wonder if all the snazzy technology they’d spent so much on was even relevant in the age of e-business, when hordes of cheap or even free open-source programs were challenging the expensive, proprietary software systems of old. Veteran software analyst Bruce Richardson of AMR Research remembers SAP, like the rest of the industry, struggling to cope with the changes. “There was one conference in Berlin in 2000, where Hasso was screaming at the crowd, ‘People think we’ve missed the Internet–we have not missed the internet!’ He looked like Khrushchev–all that was missing was the shoe banging on the podium.”
But despite the spittle and fervor, SAP was actually well poised to deal with the changes ahead. Unlike so many founding entrepreneurs, Plattner had, in pragmatic German fashion, been nurturing the next generation of leadership for years, bringing up physicist Kagermann as his co-CEO. Unlike Oracle’s Larry Ellison, or even Plattner himself–who are both flamboyant businessmen with a propensity for giant yachts–Kagermann was unlikely to be found steering his own 122-meter boat.
Notwithstanding his fondness for heavy-metal bands like Deep Purple, Kagermann was known as a “get it done” type of person, able to make the trains run on time in the toughest of environments. This was exactly the right tenor for someone trying to sell software to big companies after the Internet crash. Unlike Ellison, he was not chasing the quarterly results, but thinking five years ahead. But Kagermann wasn’t the only visionary in the company. In 2001, Plattner brought in a young Israeli outsider named Shai Agassi to help the company respond to the forces of Internet change. A 38-year-old serial entrepreneur who sold his last company, software maker TopTier, to SAP for $400 million, Agassi was the self-proclaimed “retrovirus” that Plattner injected into the body of SAP in order to evolve its DNA.
Agassi’s appointment to the board as head of technology development, in charge of creating the next generation of more-flexible, Web-based products, was only one of several moves that SAP has made away from traditional German corporate culture. By the late 1990s, English was the de facto language of the company, and honorific titles like “Herr Doktor” had been dropped from business cards. SAP also became one of the first European companies to start issuing stock options en masse. Meanwhile, the cultural mix of the company has slowly but surely changed. In 2001, only a handful of people out of a senior team of 50 were non-German. This year, when the company’s executive team met (notably) in Palo Alto, California, for their annual meeting, nearly half the 65 people in attendance were, befitting the fact that 80 percent of the company’s business is now done outside Germany.
The fact that SAP is so completely globalized underscores the difference in outlook for German companies versus the German economy as a whole, which continues to take one step forward, one step back. “German business is more confident than ever before,” notes Bank of America economist Holger Schmieding. Thanks to several years of belt-tightening, labor reform and a new round of corporate tax cuts, “there’s a new feeling that they really can take on the world.” SAP is the model for this new attitude. Kagermann says the company “can operate entirely disconnected” from national or continental politics: “What happens in Germany, or even in Europe as a whole, is not critical to our business.”
Much more important to SAP’s future are the sea changes affecting the entire technology world. As traditional “out of a box” software evolves into a more flexible product that is simply downloaded over the Internet, the basic business models of companies like SAP, Oracle and Microsoft are being challenged. Some experts are predicting the death of software altogether, betting that computing power will become a utility, like water or electricity, that you can turn on and off at will. Upstarts like salesforce.com already embrace the utility model, growing exponentially by offering products similar to those made by SAP and Oracle via cheaper monthly subscriptions.
Meanwhile, industry giant IBM has practically turned its back on software altogether, focusing on consulting services instead. SAP’s own strategy is a hedge. While it is hoping software won’t be quite as free-flowing as water, its next generation of products will be building blocks that customers can put together in many different ways, rather than all-in-one, command-and-control-type systems. In many cases, the products will work with those of competitors, a nod to the fact that in the new digital world the old-fashioned, walled-garden approach of software incumbents no longer applies.
Cleverly, the company has also entered into a partnership with Microsoft called Duet, which allows the two companies to tie together their products, giving Microsoft Office users access to some powerful back-office applications. In fact, the two companies had explored the possibility of a merger in the past, an idea that had been discarded in no small part due to antitrust considerations. But the partnership presents a golden opportunity for SAP–which has about 33,000 customers–to meet its goal of increas-ing the customer base to 100,000 by 2010.
The result, ironically, could be hand-to-hand combat with Microsoft, as the enterprise and consumer worlds begin to merge (already many sales, travel and expense-account programs that were once run from back-office computers are in the hands of individuals, thanks to this trend). “A lot of people inside Microsoft don’t like this partnership at all,” notes AMR Research’s Richardson. “The Office franchise is the most profitable part of Microsoft, so in some ways, Duet is like letting the fox into the henhouse.”
That’s not to say that the growth of the past few years is a foregone conclusion for SAP. For starters, its existing domination of the big-company IT market means that future sales will likely have to come from small and midsize businesses. While SAP is making a big push for these customers with a host of new, less expensive products, it’s unclear whether the smaller fish will bite. Last week’s quarterly earnings results showed total software sales growth of 8 percent, still well above industry average. But the shortfall in new license revenue has led analysts to question whether Oracle, which has struggled recently to integrate its many new acquisitions, may finally be gaining back a bit of ground against its larger rival.
Meanwhile, the new crop of digital behemoths, most notably Google, are the wild cards that could reshape the entire software industry. Google has begun putting some of its $7 billion in cash to work developing enterprise software. With so many applications already migrating to the Web, many analysts see no reason that companies like Google–rather than Microsoft, IBM or SAP–shouldn’t own the space.
Perhaps the most important question is whether SAP can best its own history. It is a truism that most technology companies have only one great idea. For Microsoft, it was Windows. Steve Jobs will likely go down in history for the iPod. SAP’s great genius was to bring the power of the mainframe to the desktop. Whether it can repeat that in the Internet age remains to be seen. But the fact that a German company is even in the race should make Europeans proud.
