What SAP Needs After Apotheker

Late in January, just hours after SAP (SAP) reported its fourth-consecutive quarterly drop in sales, executive board member Bill McDermott said that he'd heard the customers' complaints about price increases imposed during a recession and that the world's largest supplier of business software was responding. "I'm not deaf," McDermott said in an interview. He also pointed to signs of a stronger 2010: After two years of belt-tightening, customers were starting to buy software. "CEOs need to grow their businesses again," he said.

McDermott's remarks may now serve as a prescription for SAP itself, which on Feb. 7 named him co-chief executive, along with executive board member Jim Hagemann Snabe. Longtime executive Léo Apotheker, who was named CEO less than nine months ago, resigned his post after a flow of brutal financial results, customer complaints about higher prices, and the elimination of 3,000 workers, the largest in the German company's history.

In order to fix SAP, former North American sales boss McDermott and Snabe, head of product development, need to stock its pipeline with products that companies are more interested in buying, calm restive customers, and counter competition from Oracle (ORCL), which has outmaneuvered SAP through canny acquisitions. High on the co-CEOs' priority list will be shifting SAP's focus from cost-cutting to innovation. SAP must develop versions of its complicated software that can be delivered over the Internet and run on new classes of mobile computing devices.

sales down, customers vexed

"There had been an erosion in trust" with customers, says Paul Hamerman, an analyst at Forrester Research (FORR). SAP alienated them by raising prices for technical support while aggressively selling data-analysis software it acquired when it bought Business Objects in 2007, Hamerman says. The sales tactics came as information technology departments were trying to cut back. SAP was "trying to extract as much money as they could from customers," Hamerman says. "If you try to do that too aggressively, you pay a price. SAP paid the price in customer loyalty."

McDermott and Snabe will need to wage a multifront battle. Software license sales fell 28% last year as companies pared spending on computer systems during the recession. Customers balked at price hikes and forced SAP in January to back off an even-more-expensive plan to raise support fees. And SAP is perceived as lagging in inventive products. "They haven't been able to keep pace with the innovation that's gone on in the industry," says Brendan Barnicle, an analyst at Pacific Crest Securities who rates SAP shares "sector perform."

Moreover, the job cuts and organizational restructuring that Apotheker enacted sank morale among SAP's remaining 47,000 workers. An employee survey fielded last year indicated unrest in the ranks, SAP said. During a conference call with analysts on Feb. 8, SAP supervisory board chairman and co-founder Hasso Plattner said management needs to make SAP "a happy company again."

SAP American Depositary Receipts fell 2.67, or 5.8%, to close at 43.29 on Feb. 8. The shares have underperformed the market in the past year, gaining 13.2%, vs. a nearly 22% increase in the Standard & Poor's 500-stock index and a 29% gain in Oracle's stock price.

In an e-mail obtained by Bloomberg BusinessWeek that Apotheker sent to SAP's employees on Feb. 7, the departing CEO said: "The pace of change was rapid, probably too rapid for some." He wrote that "my communication toward you was not always optimal and the results of the employee survey did not completely come as a surprise to me…. I regret that I wasn't able to earn the support of each and every one of you."

a sea change in software-selling

Apotheker, a multilingual globetrotter steeped in selling, was the first CEO to lack a technical background in SAP's 37-year history. He succeeded the cerebral Henning Kagermann, a former physics professor. Bruce Richardson, senior vice-president of strategy at software company Infor Global Solutions and a former industry analyst, says Apotheker could be an "explosive" and demanding boss.

His temperament and lack of engineering pedigree may have left him ill-equipped at a time when the computer industry has been undergoing a profound shift. Systems and software are no longer necessarily owned and operated by the companies that use them; software is instead delivered as a service over the Web to a variety of devices, including PCs, smartphones, and new tablet computers such as Apple's (AAPL) iPad.

It will fall to McDermott, a brash sales executive from the U.S., and Snabe, an introspective Dane who rose through the sales and operations ranks at SAP, to position the company to grow again. McDermott is articulate and scrappy. He has been one of few SAP executives willing to spar publicly with Oracle, which has taken market share in business applications through a rash of acquisitions. "Bill McDermott is one of the world's greatest salesmen," says Richardson. "If he's breathing, he's selling." To help on the technical side of the house, SAP on Feb. 7 elevated Chief Technology Officer Vishal Sikka, who works out of the company's Silicon Valley office, to its executive board.

Such large companies as Apple, Exxon Mobil (XOM), Siemens, and Wal-Mart Stores (WMT) use SAP's software to procure goods, plan inventory levels and deliveries, and manage sales and human resources. But customers have put the brakes on purchasing software and related consulting services whose budgets can run into the tens of millions of dollars. "The average age of an SAP system is quite substantial," Plattner said. SAP's 2009 revenue fell 8% to $14.9 billion; net income fell 3% to $2.5 billion. This year the company expects software-and-related-services revenues to increase 4% to 8%.

reworking Business By Design

SAP needs to articulate to customers a clearer plan for delivering new technologies that can save money and make workers more productive, says Forrester analyst Hamerman, who says the company must deliver more software over the Web and let users interact more capably with it through smartphones and tablets. "Those are on the road map but they don't seem to be a priority," he says. "We haven't seen from them a comprehensive technology strategy."

Speeding development of new products could make SAP's software more compelling and persuade customers to upgrade to newer versions. At its Sapphire customer conference in Orlando in May, SAP plans to announce new online software under the Business By Design brand name for customer management, human resources, and procurement, according to McDermott. Once it arrives in the second half of this year, customers will be able to run the software on their own servers, access it through the Web, and run portions of it on mobile devices, he says. SAP has delayed a new version of Business By Design, first released in 2007, as it reworks the software to make it more appealing to small and midsized customers and enables it to deliver updates more efficiently over the Web.

Additional announcements of SAP software for cloud computing and mobile devices will come later this year, according to a person close to SAP. To get the message across, Plattner even plans to deliver his keynote address in Orlando with the help of an iPad.

During the Feb. 8 conference call, Plattner held up Apple as a paragon of the type of "happy company" SAP longs to become again—one that "marches forward at the highest-possible speed without complaining." For an enterprise that is regarded as slow-footed and riven with dissent, the gulf between SAP's present and its co-founder's aspirations would appear to be as challenging as it's ever been.

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