Sap's Expanding Universe
For a couple of years now, success has come to Germany's SAP on a silver platter. The $3.5 billion software giant capitalized on fears that two looming events, the new millennium and the creation of a single European currency, would wreak havoc on multinationals' information-technology systems. Instead of combing through their computer systems looking for bugs, many of SAP's 8,000 customers just bought new software packages. This contributed to sales growth of 62% in 1997. But it's getting late for companies to install all-new software before the year 2000, and now SAP must figure out what to do for an encore.
Its executives have come up with an ambitious strategy. SAP already dominates the $12 billion market for so-called enterprise software, programs that can manage all of a corporation's internal operations in a single powerful network. Now, SAP plans to branch out beyond its customers' walls, building bridges to their suppliers and customers. In this scheme, a vast SAP-based network could track an entire industrial process, from mining iron ore in Minnesota to steelmaking in Indiana to car production in Detroit--all the way to selling autos in showrooms on the Web. The payoff, it is hoped, would be entire industries run as efficiently as a single plant, with razor-thin inventories and the leanest of workforces.
FRIENDLIER SOFTWARE. With time, if co-chairman Hasso Plattner has his way, SAP will grow from a faceless industrial supplier into a global brand name. The plan is to push into consumer markets, from department stores to Internet malls. At a Los Angeles users' convention on Sept. 13, Plattner will unveil a strategy that could position the company virtually everywhere business takes place.
But to gain that stature, SAP must master new markets where a host of competitors is already entrenched--and where more are expected. "There are loads of little guys in those markets, and eventually Microsoft Corp. will be there," says Neil Iscoe, chief executive of Focus Systems Inc., a maker of legal software in Austin, Tex.
Nonetheless, SAP is plowing ahead. All around its headquarters in rural Walldorf, in Germany's lush Rhine Valley, workers manning a forest of cranes are piecing together a vast complex of new SAP buildings. The company will hire 5,000 employees this year, expanding its workforce by 35%, and is expanding research labs from Palo Alto to Minsk.
Plattner is keeping his investment numbers mum. But with a research and development budget topping $500 million, SAP can spend more money per year on research than most of its rivals rack up in sales.
The challenge for SAP, a company long known only to the techies in large companies, is to come up with a stream of snazzy, customer-friendly applications. Here, Plattner is looking for help. In the past year, SAP has begun placing pieces of its bread-and-butter enterprise software package, called R/3, on the Web.
The strategy has its risks, since those pieces include the computer code that forms the basis of SAP's success. But the idea is that by sharing the code with developers worldwide, SAP will encourage them to build a panoply of applications for its systems.
This spells a fundamental shift for the giant. Traditionally, SAP's systems have been carefully crafted, though often inflexible, marvels of German engineering. Installing these programs, sometimes at a price topping $100 million, has blossomed into a $30 billion industry. Now, Plattner wants to distribute his system far and wide, hoping to make SAP's code the lingua franca of global business. "For the first 25 years of our history, we provided data to people," he says. "For the next 25 years, we'll handle interactions between people."
As a first step, Plattner plans to broaden the company's offerings. He is preparing simpler, cheaper versions of SAP's enterprise software, providing financial, warehouse, and human resource packages for small and medium-size companies. Meanwhile, new co-chairman Henning Kagerman, a former head of SAP's European operations, is overseeing the development of new software for still uncovered niches within the 17 industries SAP caters to, from utilities to chemical plants. These could include programs to reconfigure auto assembly lines for greater efficiency, for instance.
Until the new products start bringing in profits, SAP's breakneck growth pace is sure to subside. After a 66% sales increase in the first half of this year, "I see a dip coming," Plattner says. Analysts believe that SAP's sales and earnings growth will slow to 35% this year and next. That's partly because the giant multinationals that have fueled SAP's business so far are mostly set up with enterprise systems. And in the current market climate, many corporations may opt for less costly add-ons. Even so, analysts expect SAP to outpace the competition. "They're still gaining market share," says Loretta Morris, European portfolio manager at Nicholas Applegate in San Diego.
While SAP embarks on its new path, it is also wrestling with generational change. Plattner's co-founders--the former IBMers who set up the company 26 years ago--are moving from executive into advisory roles. Dietmar Hopp, the technical whiz behind the enterprise software, last spring switched to a lower-profile post on the advisory board. And Plattner wants to hire young talent to guide the company in untried markets. In March, SAP raised its stake in a small German sales-force automation company, Kiefer & Veittinger, to 80%. That gives it a foothold in technology-aided sales, a market that is expected to grow from $1.4 billion to $3.8 billion in the next two years.
Indeed, it is in sales and marketing that SAP faces its biggest hurdles. First, the company has a reputation for torturous installations, despite a worldwide team of troubleshooters. It was a rocky installation that led Dell Computer Corp. to abandon SAP last year halfway through a multimillion-dollar enterprise project. And SAP faces a $500 million lawsuit from the trustee for bankrupt FoxMeyer Corp., charging that the failure of an SAP system led to the Carrolton (Tex.) drug distributor's collapse--a charge SAP executives hotly deny.
GATES AT THE GATE. Second, nimble competitors now occupy all the niches SAP plans to attack. In fact, many of SAP's biggest customers have already installed other systems for sales and marketing applications. But like other industry leaders, SAP has the clout to bring products to market far later than its rivals. It can appropriate effective features from the pioneers, correct their mistakes, and try to wrest away market share by offering seamless integration with its massive installed base.
Eventually, SAP is likely to run head-on into that other software titan, Microsoft. For now they are partners, working together on loads of applications. Microsoft Chairman William H. Gates III, however, has declared an ambition to build the nervous system for business--the same goal as Plattner's. For the next few years, at least, the world looks big enough for both of them.
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