SAP Philly Guy McDermott Germany-Bound as Growth Stalls

As software maker SAP AG expands in emerging markets from Beijing to Buenos Aires, managers are also focusing their attention on a place they have sometimes neglected: the company’s home country of Germany.

Bill McDermott, who will take over as SAP’s sole chief executive officer in May, this spring plans to buy a home in Heidelberg, a 15-minute drive from the company’s headquarters in the town of Walldorf. For McDermott, 52, who now lives near Philadelphia and speaks little German, the new digs bring him closer to a key constituency in the company.

Leo Apotheker, SAP’s most recent sole CEO, lived in Paris. In bringing its first American chief to Germany, the 42-year-old company is reaffirming the importance of Walldorf and its 12,800 employees as it develops more software that can be run over the Web. Apotheker antagonized developers with organizational changes, and he angered German unions with plans to cut 3,000 jobs to boost productivity as the global economy suffered.

“My ambition is to make sure people in Germany, for example, understand how I respect the company’s heritage,” McDermott, who was raised on New York’s Long Island and speaks with a trace of the regional accent to prove it, said on a conference call with analysts last July.

SAP, the leading supplier of business applications, is pushing to keep pace with rivals such as Oracle Corp., Inc. and Microsoft Corp. in shifting to software delivered via the Internet. Forging strong relationships with developers in Walldorf will be key to making software that’s accessible to businesspeople who have grown accustomed to websites like Google and Facebook.

Cultural Change

“We have to retrain 20,000 software developers,” Chairman Hasso Plattner said last month at the opening of an SAP development center in the Berlin suburb of Potsdam. “It is a huge cultural change.”

SAP last summer said Jim Hagemann Snabe, a Dane who serves as co-CEO with McDermott, would step aside this year. Though Snabe will join the supervisory board, people familiar with the matter say his departure as CEO came amid friction with Chief Technology Officer Vishal Sikka, a Plattner protégé who last year took over software development from Snabe.

The two disagreed about whether resources should be allocated to developing new software or to spreading current technology to more customers, said two of the people. Snabe, 48, is spending more of his time helping companies outside the tech sector improve their IT operations.

“Each of us has different ways of working and styles of leadership,” said Sikka, 46, who called their relationship collegial. “He’s a more systematic kind of guy and that comes from his background. And I’m an innovator.”

NBA Contract

The management shift comes as growth is stalling at many old-guard business software companies. Oracle on March 18 reported fiscal third-quarter sales and profit that missed analysts’ estimates; SAP is scheduled to report first-quarter earnings April 17.

SAP, which analysts predict will report 17.8 billion euros ($24.7 billion) in sales this year, supplies Bayerische Motoren Werke AG, Nestle SA, the National Basketball Association, and more than 250,000 other companies with tools for managing their supply chains and finances.

SAP’s overall software revenue in the fourth quarter grew 2 percent to 2.1 billion euros, the company said in January. Sales of traditional packaged programs, which made up 90 percent of the total, fell by 2 percent while software delivered online grew 66 percent., which supplies customer-management and human-resources software over the Web, grew 37 percent in the quarter ended in January, to $1.2 billion.

Dividend Boost

SAP shares rose 1 percent to 56.40 euros at 3:58 p.m. in Frankfurt. They have lost 13 percent in the past year. Oracle is up 7.3 percent and Salesforce has climbed 37 percent in the U.S. during the period. SAP yesterday proposed a 2013 dividend of 1 euro a share, an increase of 18 percent from a year earlier.

McDermott understands the importance of shifting to Internet software, said Brad Zelnick, an analyst at Macquarie Capital USA in New York, who has the equivalent of a “buy” rating on SAP. With the investment it has made in online software, often referred to as cloud computing, SAP had to push a profit target out by two years, to 2017.

“They’re going to really go after cloud even if it means foregoing near-term financial results,” Zelnick said.

SAP isn’t exactly hurting. Its gross margin of 70 percent last year makes it the second-most profitable company in Germany’s DAX Index after drugmaker Merck KGaA, with 72 percent, data compiled by Bloomberg show. By comparison, automaker Daimler AG had a gross margin of 22 percent.

Heidelberg House

McDermott, Snabe and Sikka all received raises last year, SAP said in its annual report released today. McDermott received total compensation of 9.6 million euros, compared with 8.8 million euros in 2012.

Snabe’s compensation rose to almost 10 million euros from 8.2 million euros, while Sikka earned 4.2 million euros, compared with 3.9 million euros in 2012.

Even as SAP has added thousands of programmers in the U.S., China, and India -- which now has some 7,500 workers -- Walldorf remains the heart of the company, both commercially and technically. About a fifth of SAP’s 66,000-plus employees work there, and more than half of them are programmers.

“It’s a very politic move, taking up an abode in Germany and being more of a presence in Walldorf,” said Josh Greenbaum, an analyst at Enterprise Applications Consulting, a tech advisory firm.

McDermott, who currently works at SAP’s U.S. headquarters in Newtown Square, Pennsylvania, has picked out a house in Heidelberg and plans to move in May or June, SAP spokesman Jim Dever said.

Acquiring Growth

McDermott and Snabe became co-CEOs four years ago after Apotheker’s departure, with McDermott leading sales and Snabe product development. Snabe spent more time in Germany and took up residence there to bolster morale after Apotheker’s reign, according to people familiar with the matter. Apotheker declined to comment on his time at SAP. In the past, he has said he treated departing employees fairly as he tried to steer SAP through a severe business downturn.

The co-CEOs have made big acquisitions to expand in mobile-and cloud computing. In 2010, SAP bought database and mobile device software maker Sybase Inc. for $5.3 billion. It bought SuccessFactors Inc., a top maker of online HR software in 2012 for $3.3 billion. The same year it paid $4.3 billion for Ariba Inc., which operates an online purchasing system for businesses.

McDermott has said he plans to work on his German once he lands and that he aims to spend more time exploring SAP’s home country and the rest of Europe.

“I was born in the United States, that is true,” McDermott told analysts last summer after his appointment. “But SAP is a truly global software company. And it’s neither German nor American nor Chinese.”

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