Capitalism That Would Make Karl Marx Proud

Germany's Software AG seems to defy the rules of capitalism. "Maximizing profits is definitely not our goal," says Peter Page, co-founder and chief executive. Top managers scorn the stock market and downplay the importance of marketing. And since its start in 1969, the software developer has been guided by a key principle that might have been lifted from the preachings of Karl Marx. As Page puts it, a corporation should not "produce richness for a few from work of the many." Giant salaries, inflated bonuses, and lucrative stock options are all ruled out for Software AG's top management.

For this company, at least, it's a winning philosophy. Software AG is among the 10 biggest independent software houses in the world, with $470 million in revenue last year and an unblemished 22 straight years of profitability. As the world's largest software company based outside the U.S., Software AG has ridden wave after wave of upheaval in computers while most of its rivals founded in the 1960s haven't survived as independent companies. The key seems to be the company's ability to leapfrog its competitors, including IBM, in the $10 billion worldwide market for mainframe data-base programs and software development tools.

Software AG's latest leap may be its most difficult. By the late 1980s, Page sensed that the boom in networked personal computers would transform the industry in the 1990s. Until then, all of the company's products were designed for mainframe computers. While mainframe software sales are still healthy for Software AG, the long-term trend is for big corporations to start moving jobs from those expensive, refrigerator-size machines to nimble networks of lower-cost midsize and desktop computers. So the trick for Software AG is to develop programs that work over "client-server" setups comprising mainframes that serve up information and software to hundreds of smaller client machines.

In 1989, Page (pronounced Pah-SZAY) kicked off a five-year plan to shift the 4,300-employee company in that direction. The first of these client-server products hit the market a year ago, helping boost nonmainframe revenue to 17% of sales within a few months. By 1997, Page figures that Software AG's revenue stream will be split equally among products and services for mainframes, PCs, and computers that run the Unix operating system. Software AG's products work together across many incompatible types of computers, making it possible, for example, to link systems that do invoicing on IBM mainframes in the U.S., market analysis on Digital Equipment Corp. gear in Europe, and warehouse inventory on Hewlett-Packard Co. workstations in Asia.

CLEAR VISION. If the new products take off, Software AG will have proven once again that its unique form of management has staying power. Founded by Page and five other engineers, it was conceived as a private "trust" that nevertheless reports its finances to the public. The structure is rooted in the philosophy of 19th century industrialist Carl Zeiss, who founded the eponymous camera and optical-equipment maker. Under a Zeiss-like plan, longtime employees own the company's stock, but the shares function mainly as a mechanism to prevent a hostile takeover. The employees receive no dividends or even a valuation on their holdings, which must be turned over to the company when they leave.

The trust's statutes also prevent top managers from running away with the profits. The trust requires that 70% of profits go to research and investment. Last year, for example, $118 million, or 25% of sales, were plowed into R&D, compared with just 13% at rival Oracle Systems Corp. The trust also stipulates that 10% of profits be set aside for pensions, 10% for employee bonuses, and 10% for social causes. Bonuses are the equivalent of two months' wages per year plus $300 to $1,400.

Transferring that mindset to the U.S. hasn't always been smooth. John N. Maguire, the former chairman of Software AG of North America, Software AG's U.S. subsidiary in Reston, Va., left the company last year after what he describes as "terrible cultural differences" with the German managers. He has filed suit for alleged breach of his retirement contract but maintains that the company has "great products and loyal customers." He says he encouraged Page and the other top German managers in the mid-1980s to be more aggressive in the U.S. market, which now accounts for about 23% of sales, down from 37% in 1986 (chart).

The differences between Maguire and Page came to a head in 1988. The parent bought out all the stock of the U.S. subsidiary, which Maguire had taken public in 1981 to fuel a North American expansion. Page contends that the managers of the U.S. subsidiary were short-term thinkers. "It was too quarterly-results-driven," he says. In 1991, Page assumed Maguire's post as chairman of the U.S. unit.

Beefing up the U.S. operation is crucial. The American market is the world's largest, and U.S.-based multinationals tend to buy their software at home. Also, Software AG's most important rivals are based in the U.S.

`LONGEVITY.' While Page says the company intends to stick to its principles, Software AG is also catching on to the ways of the huge U.S. market. For years, the company relied mainly on customers to spread the news about its Adabas data base. But recently, Page put the U.S. subsidiary in charge of worldwide marketing. Software AG's U.S. president, Michael J. King, has tripled marketing outlays from what they were three years ago, to $50 million, and has increased the direct-sales force by 20%, to 70 people. "We're moving from being a technology-driven company to a market-driven company," says King, a former software executive in Britain who joined the company in 1989. He says he's beginning to appreciate the benefits of the company's unusual bylaws. "The entire mission is longevity," he explains.

Page says the company's vision is neither capitalistic nor socialistic but idealistic. "What drives the world forward is not money or ideology," says Page. "It's an individual's inner motivation." Page tries to give workers maximum responsibility and freedom. At Software AG's bucolic Darmstadt headquarters 15 miles from Frankfurt, employees set their own hours, often putting in 10-hour days, with occassional breaks for tennis on the clay courts. There's no dress code, and programmers have been spotted in cut-off shorts and Daffy Duck socks. "We want to liberate people's natural drive and energy," says Page. "That's the trend of the 21st century." Unlike some of its rivals, Software AG is a good bet to last at least until then.