$50 Million Gambit Pays Off, SAP CEO says
SAP CEO Henning Kagermann said a decision to increase R&D spending by $50 million shortly after rival Oracle acquired competitor PeopleSoft last year is paying off with significant growth in market share.
SAP AG credits its continued dominance in the enterpriser-esource-planning systems marketplace to a strategy of broadening its product line to small- and midsize businesses as well as a modest increase in research and development spending.
Speaking to scores of investors invited Wednesday to its U.S. headquarters in suburban Philadelphia, SAP CEO Henning Kagermann said a decision to increase R&D spending by $50 million shortly after rival Oracle acquired competitor PeopleSoft last year is paying off with significant growth in market share. "It was one of the best investments SAP ever did," Kagermann said.
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SAP's market share has been rising at a 1.5 percentage point quarterly pace all this year. That follows an average of 1 point gain in each quarter in 2003 and 2004. SAP reckons that 60% of revenue generated from the category's software sales ends up in its coffers versus 20% for Oracle. At the beginning of 2003, SAP had 44% of the market versus 14% for Oracle.
Kagermann, characterizing software as the "lifeline of business," pointed out that for the first nine months of 2005, SAP's software revenue has grown by 18% as compared with a 7% decline for the rest of the market.
The CEO suggested that SAP isn't about to radically change its growth strategy, which emphasizes home-grown development of new products and strategic partnerships with key IT vendors and service providers rather than major acquisitions a la Oracle's purchase of PeopleSoft. He says SAP will continue to shop for niche software companies to acquire which offer products that complement SAP's existing products and skills.
Kagermann also said SAP will explore new ways to price SAP products and services, specifically saying he likes the utility-computing model in which customers pay for the products and services only when used. But he said he's hesitant on imposing that pricing structure anytime soon because most customers have a hard time figuring out how best to budget for it.
He also said the company places more importance on growing market share than in increasing margins, adding that margins will grow as SAP products gain more acceptance by customers.
Leo Apotheker, SAP president of customer solutions and operations, said more of the company's revenue will be generated in its fastest-growing area: small and midsize businesses. Now, 70% of SAP revenue comes from large enterprises versus 30% from small and midsize compaies. In five years, smaller companies will provide between 40% and 45% of SAP revenue. "Today," Apotheker said, "SAP serves about 75% of the Fortune Global 111, but less than 1% of the Global 1 million." That tiny percentage, Apotheker contends, will change.