SAP's Very Big Small Biz Challenge

The German business-software giant wants to extend its global reach and reach out to small and medium-sized companies with new products

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."

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.

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.

Part 2: A Painful Metamorphosis

For decades, SAP was controlled from its Walldorf headquarters, where the R&D work was done and where all major decisions were made. Looking to California's Silicon Valley, management hit upon the idea that its programming could be done much more cheaply in India. SAP was still running all of its operations from its headquarters in a small southern German village next to asparagus fields. But when the company decided to move into the global village, everything changed rapidly. "In the past, Walldorf was the sun, and everything revolved around it. Today we have a global network," Apotheker explains.

Since then SAP's decision centers have migrated to where the greatest competency can be found. Its creative drive comes from Palo Alto, Israel supplies ideas and complex programming problems are solved in Walldorf. The Indians are at the forefront in industrial design, with China following close behind.

Most of SAP's employees still work in Walldorf, where about 11,000 software developers are crowded into a space that has always been too small. The Silicon Valley facility has 7,000 employees, while another 4,200 work in SAP's Indian plant in Bangalore.

SAP's metamorphosis into a global company has not been entirely painless. Employees at the Walldorf headquarters suffer from a loss of status and are concerned about low-wage competition from Asia. They have even formed a works council, despite considerable opposition within the company. Kagermann has trouble understanding their fears. "I always tell them: You are among the best, and as long as you make this clear, it's really a no-brainer."

But are German software developers still the cream of the crop? Kagermann admits they are no longer automatically always the best. Sixty percent of the world's population lives in Asia, so that sheer numbers alone make the potential talent pool that much bigger.

Two weeks ago, SAP's entire senior management traveled to Bangalore to formally open the company's new campus. In a ceremony accompanied by Indian music, Kagermann lit a number of candles at an altar of flowers, and then an architect wearing a turban gave the SAP executives a tour through the new facility's spacious buildings and offices. Bubbling fountains surround the open-air cafeteria, and gardens line the paths between the glass-enclosed buildings.

The campus is designed to provide a pleasant working environment in India's high-tech metropolis, where the demand for competent personnel is as high as the turnover. SAP manages to retain its employees here for three years on average. Salaries here are seeing double digit growth; as they rise, so do expectations. Companies hoping to attract the top echelon of Bangalore's talent must offer more than just good salaries and perks such as transportation in air-conditioned buses and health insurance plans that even include benefits for employees' parents: Indian's highly qualified professionals now also want to have a say in the company.

This shift in attitudes meant that German developers have now been reporting to their Indian colleagues for the first time, because the Indians had been placed in charge of developing the A1S user interface. With this new level of autonomy, SAP's overseas operations have even become career stepping stones, so much so that employees from the company's Walldorf headquarters are now applying in droves for positions in Bangalore, Israel and China. The competition is enormous, partly because SAP provides support to university computer science programs in an effort to recruit future employees early on. SAP donates free software to 15 universities in India alone, and to more than 700 worldwide.

And the company needs its international personnel -- after all, SAP earns 80 percent of its revenues abroad. "The customer, wherever he may be, demands qualified local support," says Kagermann. "We have to be a global company, but one with strong local competence."

People from more than 100 countries work together under one roof at SAP -- but not entirely without friction. Stabs at multiculturalism such as offering "Chinese food week" in the cafeteria and playing Mexican salsa music on the company's phone answering system are no longer enough. SAP now offers diversity management courses to integrate the various cultures. There is even a Web site where employees can test their cultural awareness.

The case of Shai Agassi, the former chief developer in Palo Alto, shows just how difficult navigating among the many cultures is. Agassi, an Israeli, was Hasso Plattner's favorite. As president of SAP's Product and Technology Group, he guided the company into the Internet and was slated to become Kagermann's successor. But the man, who speaks very little German, was unpopular among the employees in Walldorf. They found his behavior, which included an appearance in a Superman costume, perplexing and were opposed to his willingness to take risks. The employees derisively dubbed Agassi's Walldorf residence "Shai's house." When the CEO-to-be announced his intention to run SAP from California, his popularity ratings plunged permanently

The supervisory board extended Kagermann's contract until 2009. The plan was to allow Agassi and old-timer Apotheker to run the company after that. But this dream came to an end on March 28, when Agassi resigned. What happened? One rumor circulating at company headquarters is that he was tired of waiting for the top job -- but at the age of 39? Another persistent rumor is that he was forced out.

Will a foreigner ever run SAP? Kagermann says that he could certainly see this happening, because nationality is less and less important in a global company.

But roots remain important. Even if the programming is done in China, SAP ultimately relies on its reputation for high-quality German engineering. German conscientiousness is undoubtedly one of the company's recipes for success.

The Walldorf employees were greatly relieved to learn about Apotheker's promotion. They feel that Apotheker, a native of the western German city of Aachen, is one of them, despite the fact that he grew up in Antwerp, studied economics in Jerusalem, has lived in Paris for the last 20 years and worked in the United States.

Apotheker's nickname among employees is the "grand old gentleman," because of his goatee, his baroque appearance, and his love of good food, red wine, the theater and chess.

Apotheker has also sufficiently demonstrated that he is a doer. He successfully ran SAP France, the European division, and in 2002 he restructured the US division, sending Oracle CEO Ellison into a state of agitation. This alone is enough for most SAP employees to forgive him for being the first sales executive -- someone who can't even write code, a real faux pas in this techie company -- to rise to the top. Another sign of change is the fact that salesmen are playing an increasingly important role in the new mass-market business.

But Apotheker did manage to endear himself to the Walldorf staff by taking an apartment in Heidelberg, not far from SAP headquarters, despite the fact that his family lives in Paris and that he is on the road 170 days a year.

The power he now enjoys as the number two man at the world's third-largest software company hasn't gone to his head. But he is acutely aware of the responsibility that comes from being in such a senior position in a company that Apotheker believes facilitates, in one way or another, more than half the world's trade. " I certainly don't want to be the one who wakes up one day and says: Now I've ruined the world."

Translated from the German by Christopher Sultan

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