Amid Challenges, SAP CEO Kagermann Sticks To His Plan

SAP's faith in itself is unshakable. It remains committed to organic growth, despite archrival Oracle's considerable market share gains through big acquisitions. It's sticking to its wait-your-turn CEO succession strategy, despite losing its highly regarded heir apparent. It's taking a tentative approach to subscription-based software, even as the midsize companies it covets warm to the idea of pay-as-you-go services.

SAP's approach: Stay the course, keep cool, even amid Oracle's bare-knuckle tactics, such as dispensing people to downtown Atlanta last week to hand Oracle bags to attendees of SAP's big customer conference. "We are never defensive. We just have our style," explains SAP CEO Henning Kagermann in his soft-but-to-the-point delivery. "I don't like their style. Why should I adopt it?"

Oracle filed a lawsuit in March accusing SAP's TomorrowNow support subsidiary of corporate theft, claiming the unit used customer passwords to download massive amounts of app-support documentation. SAP will reply within the next week or two, Kagermann says.

He calmly adds that nothing about Oracle scares SAP, including the billions of dollars Oracle has spent to close the gap in enterprise applications. "You should not compare us," Kagermann says. "Oracle is still mainly a database company." Ah, right. And Honda's mostly a motorcycle company.

It's hard not to admire SAP's conviction, even if it sometimes sounds like the grown-up at a college kegger. At last week's conference, company executives spoke of how SAP, once synonymous with unwieldy application megaprojects, can help customers become more agile and flexible, particularly by using its NetWeaver middleware, the core of its service-oriented architecture. They peppered their speeches with references to blogs, wikis, and YouTube, assuring attendees they get Web 2.0, though they'll never be accused of throwing money at the latest trend.

Still, a number of forces are sure to test SAP's faith.

SAP established its SOA technology ahead of Oracle. But even though it has some notable trailblazers in its camp--Coca-Cola, Dow Chemical, Home Depot--other SAP customers aren't sure what SOA will mean to their businesses, so they're moving slowly.

Then there are doubts about SAP's commitment to subscription-based software, also referred to as software as a service, and the company's ability to draw midsize customers. The Oracle lawsuit could be a major distraction. And the resignation last month of Shai Agassi, president of products and technology, raised fresh questions about its top executive succession plan.

SOA: ELEGANT CONCEPT, HARD SELL

Coca-Cola is embarking on an ambitious project to get its worldwide bottling franchises to use common business processes, cut costs, and improve supply chain efficiency. It's using SAP's Enterprise SOA to develop reusable services that underpin processes, like a bottler placing an order with Coke.

The approach eliminates the need to write code every time developers want to change a process. It also means there's no "big bang" switchover to a new software system, something that's been the death of many an ERP-driven plan. "That will allow bottlers to converge one step at a time, one process area at a time, one module at a time, at a time that's right for that bottler," says Coca-Cola CIO Jean-Michel Arès.

Another huge win for SAP is Home Depot, which over the next few years will shift from its customized applications to SAP's ERP suite and Enterprise SOA framework. "SOA's been around for a while, but it took a company like SAP to give it a kick in the butt to get it more widely understood and known by people," says Matt Stultz, Home Depot's director of SAP technology.

Overall, SAP is growing modestly; first-quarter software license sales were up 10% compared with the same quarter last year. Net income rose 10% to $421.6 million from last year's first quarter, and total revenue increased 9% to $2.95 billion. Can SOA drive bigger sales gains? The company reckons that 16,000 of its 39,000 customers are appropriate for the SOA-based version of its enterprise ERP suite. About 2,500 already have migrated--hardly a stampede, given that some likely did so for a temporary maintenance discount.

Most businesses aren't ready for SOA because it's expensive and can take years to implement. Peter Lagana, director of SAP technologies at Wyeth Pharmaceuticals, has just started trying to persuade his business-unit colleagues of the value of SOA, but it could take months, even years, he says. SOA could help SAP shake its reputation for complex applications marked by long implementations and messy customizations. "There's so many times you have to put in the whole module of SAP, and then if your business can't fully align to what this huge app does, you have to customize it," Lagana says. "SOA should make that unnecessary."

SAP is looking flat-footed in another emerging technology area--software as a service. Granted, most big software companies are moving slowly, for fear of cannibalizing their sales of packaged software. SAP positions its hosted CRM product as a stepping stone to its licensed product. At last week's Sapphire event, it introduced an on-demand procurement application, but more interesting will be the larger service-based ERP product it's testing with a few dozen customers called A1S. Kagermann is candid in acknowledging some customers might be ready for software as a service before SAP is ready for such a different business model. A1S is scheduled for delivery in 2008, but Kagermann says he'll push back those plans if needed.

SAP also needs to improve its tools for letting people analyze and share the data stored in its systems. Starting this year, it will add Web 2.0 capabilities to NetWeaver and SAP ERP, including an Ajax-enabled interface for NetWeaver Portal to more easily create mashup views of business data from different sources. Portal users will also be able to create wikis and social networking circles. SAP also said it has sold, with Microsoft, 400,000 licenses for Duet, the companies' co-developed software for accessing SAP data through Office apps.

On the SOA front, SAP says an upgraded NetWeaver, due in the third quarter, will provide a repository from which developers can pull services to build composite apps.

BEHIND IN BUSINESS INTELLIGENCE?

SAP also is planning an improved version of NetWeaver Business Intelligence designed to make it easier for employees to access company information without IT creating reports. It also announced new risk management and compliance applications aimed at CFOs, who SAP thinks are having a bigger impact on IT decision making.

But rivals have been making bolder moves in BI. Oracle is in the midst of buying Hyperion, a business intelligence vendor best known for its roots in the finance department. Business Objects last week said it's buying Cartesis for $300 million. Cartesis has financial reporting and risk and compliance tools. Asked if SAP needs to acquire a BI player, Kagermann suggested it isn't shopping for a major acquisition. "We look always," he said. "We're always making small acquisitions."

The job of selling SAP software to small and midsize businesses falls to Hans-Peter Klaey, who moved in January from president of SAP's Asia-Pacific region to lead a new business unit focused on those customers. His job will be made harder if SAP doesn't have a credible software-as-a-service ERP suite.

A bigger leadership shift came with the departure of Agassi. Longtime SAP executive Leo Apotheker, who leads SAP marketing as president of Customer Solutions & Operations, also became Kagermann's deputy CEO last month. President of Americas Bill McDermott added oversight of Asia-Pacific. Kagermann split among several executives the oversight of products and technology. Agassi was "brilliant in presenting," Kagermann says, but "it's good to have several people with product experience."

Agassi's resignation is telling of SAP's unwillingness to bend its culture. SAP was asking Agassi to serve as co-CEO alongside Apotheker for five years, and then after that, commit to at least five years as solo CEO. SAP would ask for such a commitment from anyone seeking the top spot, Apotheker says.

SAP is part of an industry in transition, and it's made changes, too--in management, in technology, and in the types of customers it's pursuing. But it also knows what it doesn't intend to change.