Henning Kagermann, the soft-spoken physicist and mathematician who co-manages German software company SAP along with Hasso Plattner, is unruffled by the tough questions facing the software sector. Where's innovation in the maturing enterprise resource planning market? How can more value be wrung from existing software? Who, these days, can afford to implement an entire suite of business applications? "It's a transition time," Kagermann answers with a polite smile. "I'm not pessimistic about the industry."

Clearly, though, SAP's co-chairman and co-CEO has his work cut out. A day earlier, SAP reported weaker sales and a net loss for its most recent quarter--the first loss in the company's history. SAP cut its 2002 sales-growth forecast from 15% to between 5% and 10%. "This is not a crisis," Kagermann says.

So what is it? The new reality of the enterprise-software market. Customers no longer look to buy software that streamlines a broad range of operations in a single major project, Kagermann says. They're taking a modular approach, focusing on their most pressing business processes while leaving options open for future projects. Though a company may use only one SAP product now to optimize its supply chain, it might also examine whether SAP's customer-relationship management offering will meet its needs when it's ready--next quarter or next year--to add CRM to the mix. "When people are buying now, even when they buy software to manage a single part of the business, they are keeping all their mission-critical parts of the business in mind," Kagermann says.

The onus is on SAP and other developers to help companies see how they can afford enterprise software and to change the way software is licensed to make it more affordable. "The industry has to adjust to a reluctance to engage in large projects," Kagermann says.

SAP is offering "phased contracts." Customers can avoid big up-front payments by selecting apps that manage parts of a business and that can be deployed rapidly and at relatively low cost. The company's hope is that, when they're ready, they'll return to SAP to buy more of what they need.

Another key emphasis, Kagermann says, is on software that manages business processes. One example is SAP's new xApps (Cross Applications), which manage the workflow and business processes involved in operations such as mergers and acquisitions, resource and program management, and product launches. SAP also is working with customers to develop capabilities that aren't available in off-the-shelf products. "You enter areas where the success of the company depends on the software," Kagermann says.

SAP wants to make customers more comfortable about signing on the dotted line. Says Kagermann, "The relationship between software providers and customer is a different one now." That's an understatement, even for an executive known for his understated ways.

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