Q&A: SAP's Kagermann On Technical Strategy, Oracle

SAP is a giant growing bigger. The German enterprise applications company, which has picked up 6 percentage points of market share worldwide in the past two years, kicked off its SAPPHIRE conference in Boston this week with the debut of a new services-based architecture that furthers its transformation into a more complete platform company. At the same time, SAP unveiled its new PartnerEdge partner program, fruits of more than a year's effort to build out an indirect channel to sell and implement its SMB-focused software portfolio. SAP's CEO, Henning Kagermann, sat down with VARBusiness managing editor/technology Carolyn A. April to talk about the company's momentum, channel efforts and future challenges.

VB: You've talked a lot this week about the evolution of SAP from an enterprise applications company to a more comprehensive platform player. What is the vision?

Kagermann: We are on a journey. We announced the transition two years ago at SAP, and [today] we are on track and will be finished in 2007. Ours is a different type of platform. We come from the applications side of it, and we will continue to deliver applications to market. But they will be more flexible, a new generation of applications. In the past, we were known for bringing best business practices to the market, but then people said, "OK, SAP has nearly all the chemical companies' [business] and their software represents best practices, so if I use it there's no risk and I can run my business and improve productivity." But what was missing were the companies that wanted to be different from others and have competitive advantage. They could not do this with SAP [software], which was not that open. The value proposition now [with the new platform] is that you get both. You can combine best practices with innovative practices. In order to deliver on that, we had to change our architecture and underlying software -- which we did. It's called an Enterprise Services Architecture, and it's based on a business-process platform. This is a broader platform than others because it brings the applications with it as well. So it's in the same space as IBM.

VB: Tell me about SAP's plans for building out the channel and plans for SMB space?

Kagermann: We are in the business of building for a long time. It's not completely new. It started when SAP decided to go into the midmarket many, many years ago. When we found out that we needed microverticals to be successful, we came out with the first product for the space called MySAP All in One, which had industry flavor, but was too complex for the midmarket. [For example], we had a CPG solution to sell to the Nestles and Unilevers of the world. But if you go to a small local brewery or dairy, the processes are similar there but not exactly the same. So we decided that ISVs could put a template on top that had our "dairy" solution. We have hundreds of those already. Later on, we acquired Business One, which is sold completely indirect. Today, we feel we have to extend this. We want to do more business in this space, and with the new platform, we can get new types of partners. And therefore it was necessary to bring a very seasoned team [of channel execs] to SAP, people who have done it, who have experience. In the past, it was not really the focus of SAP, but now it is becoming a focus.

VB: What are your goals for the SMB business in particular?

Kagermann: We have 30 percent of our revenue coming from the midmarket. This is not all channel. It's channel and direct sales, but it gives you a feeling that we are a leader in the midmarket, which people don't often know. We are larger than anyone else worldwide. We sell three products: Business One, All in One and ERP. At the higher end, people go more for the suite products; at the lower end, it's Business One. The midmarket for us are companies below $1 billion. At the end of the day, this is a segment we are going after with different products, and because the midmarket is so large I think you can go with direct and indirect sales. What we want to do is strengthen the indirect channel for better coverage. And the goal is to have in 2010 a ratio of 60/40, with 40 percent of revenue coming from the midmarket. We expect half of the midmarket business to go through the channel.

VB: Many platform players like IBM are looking to partner with ISVs to help sell their software. How is your approach different from the other players?

Kagermann: In our case, the ISVs start building their software on top of 70 to 80 percent of the application already supplied by SAP. So it's much faster for them to bring innovative stuff to the market. Why should they rebuild a general ledger, order management and all that stuff? There are more innovative solutions on top of the [basic software] that clients want to have.

VB: What did you think the first moment you heard that Oracle was trying to buy PeopleSoft?

Kagermann: My first thought was, what is IBM doing? For us, it was not a big thing. The question was, would this force some of the other players to do something that would change the market? But then I got feedback from them and felt comfortable. We benefited from the uncertainty [around the deal], and on the other side there was some desperate price behavior that was not good. So both benefited and hurt us because if two companies fight and one is fighting for survival, they promise everything. It was PeopleSoft. They had to make their quota. But look at our market share gains, and we benefited. Now, there is some uncertainty still there. I don't think Oracle has been able to convince the market that what they came up with solves the issues.

VB: What's your biggest challenge looking ahead?

Kagermann: The challenge is always execution. So far we have done well from my CEO point of view. Keeping this level of execution is now key.