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SAP Reassures Silicon Valley, Post-Agassi

The German software maker moves to bolster its presence, and influence, in the U.S. high-tech hub after the exit of charismatic executive Shai Agassi

Throughout the tech industry crash and subsequent resurgence in Silicon Valley, German software maker SAP (SAP) was one of the lucky ones. Under the leadership of Shai Agassi, the company's San Francisco Bay Area outpost became a locus for local computer science talent and forged alliances with some of the region's most influential companies.

Now, little more than two months after Agassi's sudden departure, SAP is trying to show employees, industry partners, and startups that it still has West Coast mojo. At a June 7 press conference at SAP's Palo Alto (Calif.) campus, Chief Executive Henning Kagermann, Deputy CEO Léo Apotheker, and other top officers said the company can still hold sway in America's tech innovation hub, even in the absence of its onetime star.

"You have to have a development presence in the largest economy in the world," Kagermann says. He spoke in an interview in the back of a black Ford SUV ferrying him from SAP's offices to a speech at the Computer History Museum in Mountain View, Calif., where SAP made a $250,000 donation.

Earlier in the day, Kagermann announced what SAP calls a co-innovation lab in Palo Alto, where it will work with local heavyweights Hewlett-Packard (HPQ), Intel (INTC), and Cisco Systems (CSCO) on a new breed of software that weaves together features from various vendors and is tailor-made to meet a customer's specific needs. It's referred to in industry parlance as component-based software, and it's critical to SAP's future.

Without the Visionary

As his driver plied the Valley's streets, Kagermann underlined the area's importance. "Whatever happens in Asia, [Silicon Valley] is still the place most innovation is happening," he says.

The States are also SAP's fastest-growing market. First-quarter sales of the company's software for managing accounting, inventory, orders, and manufacturing schedules rose 15% in the region that includes the U.S. and Canada, measured in constant currency. That fueled a 9% overall revenue increase and a 10% rise in earnings, to $421.6 million, and halted a series of bad quarters. Second-quarter U.S. sales are "on track," Kagermann says without elaborating.

Now the question is whether SAP can attract top talent, keep close ties to its Bay Area neighbors, and undertake an ambitious reworking of its software code without Agassi, whose technical knowhow, business acumen, and charisma helped SAP find a balance between a deliberative German corporate headquarters and the Valley's nimbler culture. Palo Alto-based Agassi, who headed product development and was considered a candidate for CEO, left on Apr. 1 to start a new venture in electric vehicles after facing a five-year wait to contend for the top job (see, 3/29/07, "Agassi's Departure Realigns SAP").

The change leaves Apotheker, who was head of sales, next in line. It didn't take long for Agassi's departure to cause ripples within SAP's ranks. At the end of June, Aliza Peleg, managing director of SAP Labs in Silicon Valley and a longtime Agassi associate, will leave the company, a spokesman said.

New Guard Steps Forward

"Shai was clearly the glue between the U.S. and Germany," says Brent Thill, director of software research at Citi (C). Thill is quick to voice his confidence in the software maker's ability to forge ahead. "The bench is fairly deep," he says. "They're going to try to not miss a beat."

On hand for the new lab's opening were two Palo Alto execs SAP has elevated since Agassi left. Doug Merritt, a fast-rising star who's made the rounds of Valley companies including Oracle (ORCL) and PeopleSoft, was promoted in March to take charge of a key software project with Microsoft (MSFT) and lead development of SAP's regulatory compliance and mobile-phone and search products.

In April, the company named Vishal Sikka, who holds a computer science PhD from Stanford University, as chief technology officer. Merritt, recruited by Agassi to SAP two years ago, admits the departure is a loss. "When your visionary leader leaves, what the heck is that going to do?" he says. But he adds that others could step in to fill the breach. "It's sad to lose [Agassi], but he's just one person."

SAP's new guard will need to get up to speed quickly. The company faces competition from Oracle, which is gaining share through a series of acquisitions in the $56 billion-a-year market for enterprise resource planning software.

On June 1, Oracle filed an amended complaint against SAP in a federal district court in San Francisco reiterating charges that SAP employees stole Oracle software and support documents (see, 3/29/07, "Oracle vs. SAP: Sound or Fury?"). Apotheker said at the press conference that SAP planned to "vigorously" fight the claim. "Our customers know we have a long-standing history of protecting intellectual property," he said.

Modular-Software Mission

Meanwhile, new threats have emerged from Bay Area companies like sales management software maker (CRM), and Workday, an HR software startup led by PeopleSoft founder David Duffield. To counter the rise of online software and fend off Oracle, SAP will spend as much as $520 million to launch next year two low-priced software products, called A1S and A1N, aimed at small and midsize companies.

They're supposed to bring in $1.3 billion in revenue by 2010, and their code, based on a collection of modern software standards, could form the basis for SAP products into the next decade (see, 4/20/07, "SAP's New Target: Small Biz").

SAP executives have repeatedly said they plan to resist pressure to acquire more companies in the wake of Oracle's buyout spree of nearly 30 companies over the past several years. SAP in 2007 has made four small acquisitions but says building its most important products in-house assures better quality. "SAP has this deep belief that it's better to build a product from the ground up," says Citi's Thill. "They may overthink things, but they get it right."

Still, the blueprint is changing. Today's business software is often assembled from a collection of components from different vendors that customers call on to perform various functions.

That's where SAP's new partnership with HP, Intel, and Cisco comes in. The companies plan to help businesses build data centers that incorporate such modular software. "They're looking to deliver the message to people that SAP doesn't really believe they have to invent everything themselves," says Jim Shepherd, a senior vice-president at AMR Research.

Out of Sync with the Street

SAP is opening up in other areas, too. It teamed up with Silicon Valley's Adobe Systems (ADBE) to embed Adobe's Flex technology in its NetWeaver software, letting SAP spruce up its products' presentation. "You can use SAP data but present it in a much more interesting way," says Adobe Senior Vice-President and Chief Software Architect Kevin Lynch.

SAP is also stepping up efforts to strengthen ties with startups. The company plans to appoint about 15 senior technologists and sales execs as SAP "fellows," charged with imparting knowledge about products and sharing their personal network with the roughly 30 companies in SAP's venture capital portfolio.

"It's really a grassroots effort," says Lisa Reeves, senior vice-president of SAP Ventures. And Kagermann, in his speech at the Computer History Museum, called on computer scientists at top American universities to work more closely with the company to speed new technologies to market.

Now, SAP needs to show investors that its commitment to internal innovation with a coterie of partners is worth even more. Shares of SAP closed 99¢ lower on June 7 at $47.85. The shares are down 10% since the beginning of the year, and Kagermann says Wall Street was wrong to punish the stock after the company disclosed its new development spending in January.

"We're in an industry that generates a lot of cash," Kagermann says. "The question is what to do with it." By Kagermann's lights, SAP pays a price for directing cash toward research and development that it wouldn't if it used the money for acquisitions, since R&D hits the income statement right away. "We have to educate the Street over time," he says.

Tech Hub No. 1?

Out on the West Coast, SAP's 1,600 developers are busy crafting next-generation products. That's just a few hundred more than the head count of 1,400 at U.S. headquarters near Philadelphia and a fraction of the 14,000 who work in Germany, plus 4,000 in India.

Even China and Japan now boast nearly as many SAP workers as does Palo Alto. At the press conference, Paris-based Apotheker took pains to point out that Silicon Valley isn't the center of the universe for customers. "Palo Alto is a very important node of the network," he said. But "what works in Northern California might not work so well in southern Bavaria."

Yet in the post-Agassi era more than ever, executives in Germany would be well advised to stay plugged into their Silicon Valley knowledge base.

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