sap ag in 2006: driving corporate transformationsap.pdf · sap ag in 2006: driving corporate...

CASE: SM-153

DATE: 08/08/06

Thomas R. Federico prepared this case under the supervision of Professor Robert A. Burgelman as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. The authors extend their deepest gratitude to Ms. Anamarie Huerta Franc and Mr. Conrad Voorsanger of the SAP AG Corporate Consulting Team and their administrative staff for their assistance and logistical support. Copyright © 2006 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order copies or request permission to reproduce materials, e-mail the Case Writing Office at: [email protected] or write: Case Writing Office, Stanford Graduate School of Business, 518 Memorial Way, Stanford University, Stanford, CA 94305-5015. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means –– electronic, mechanical, photocopying, recording, or otherwise –– without the permission of the Stanford Graduate School of Business.

SAP AG IN 2006: DRIVING CORPORATE TRANSFORMATION

Success can be seductive. It can trick us into focusing too rigidly on long-established patterns of thought. That’s why it is often so tempting to recycle yesterday’s ideas to form the guidelines and dogmas of tomorrow. I hope that we can use the right vision and strategy to avoid this trap.

⎯Henning Kagermann, CEO, SAP AG

INTRODUCTION On a windy April evening in Walldorf, Germany, Henning Kagermann took a sip of his tea and picked up the 60-page document lying on his desk. Several months earlier, Kagermann, CEO of SAP AG, had tasked his Corporate Strategy Group with preparing a strategic analysis, informally nicknamed the “Sun-Tzu document” in deference to the legendary Chinese general. It outlined the strategic opportunities and challenges that SAP should expect to face between 2006 and 2010, and examined the prevailing forces shaping the enterprise software industry in 2006: technological change, consolidation, and shifting customer needs. Kagermann believed that emerging Internet-based technologies and standards known collectively as “Web services” soon would transform the $79.8 billion enterprise software applications industry, in which SAP held the leading market position.1 Although sales of SAP’s existing products had begun to rebound in 2004 after a multi-year slowdown, Kagermann had committed SAP to deploy new Web services-based technology on a massive scale by the end of 2007. (See Exhibit 1 for an overview of SAP’s financial performance.) He also had announced several growth initiatives that hinged on the implementation of SAP’s recently defined Web services strategy, which was based on a framework SAP called the Enterprise Services Architecture

1 “Worldwide Enterprise Applications 2006-2010 Forecast,” IDC, #201791, May 2006. Figure denotes 2006 estimated worldwide market size based on software license, maintenance, and subscription revenues but excluding consulting, support, and training revenues. SAP leadership position determined by comparing SAP’s 2005 enterprise applications software revenue to competitors Oracle and Microsoft.

SAP AG in 2006: Driving Corporate Transformation SM-153 p. 2

(ESA). As he flipped through the report, Kagermann reflected upon the sweeping internal transformation that SAP still needed to complete in order to achieve his stated goals. In addition to requiring a costly research and development effort, capitalizing on SAP’s new growth initiatives required far-reaching change that would test the very core of the company: its leadership, its culture, its values, its processes. On the one hand, Kagermann felt confident that SAP eventually would make the adjustments necessary to prolong its financial success in a future dominated by Web services; the company had weathered several technology and market cycles over its 33-year history. On the other hand, powerful and deep-pocketed competitors including Oracle, Microsoft, and IBM were investing billions of dollars into similar growth initiatives. Given the context, Kagermann recognized that time to market was critical:

Execution is a question. How long will it take, how efficient and fast can we be? Can we actually be the first in the market to deliver on the promises of the Enterprise Services Architecture? We do not have room to make many mistakes. We must break down the barriers imposed by the old power structure.2

By March 2006, Kagermann and his leadership team had taken many steps to overcome the organizational and cultural impediments to achieving the corporate transformation required to deliver upon the new strategic growth initiatives. Yet SAP had much left to do to achieve its strategic goals. In the meantime, the company’s huge customer base was generating an increasing stream of demands to enhance existing solutions, and investors, who had bid SAP’s stock up to new highs after the company reported record-breaking performance in 2005, expected sustained profitable growth throughout 2006 and 2007. (See Exhibit 2 for graphs of SAP’s stock price performance relative to its peers.) As Kagermann deliberated his options, three questions recurred in his mind. First, how could he determine whether the current pace of execution regarding the new growth strategy was right? Moving too slowly would give SAP’s competitors precious time⎯but moving too quickly could agitate employees and alienate customers who did not share a sense of urgency toward SAP’s new strategic direction. Second, how should he sequence the rollout of changes still required? And third, given the industry environment and the resurgent growth of SAP’s legacy business, how should he balance resource allocation between short and long-term opportunities?

INDUSTRY AND COMPANY OVERVIEW

The Enterprise Software Applications Industry Enterprise software applications helped companies achieve cost efficiencies, make better decisions, and increase customer value. They did so by automating formerly manual business processes (e.g. recording and paying invoices) and enabling access to and analysis of data from disparate corporate functions. Like popular desktop applications, such as Microsoft Excel or Adobe Photoshop, enterprise applications contained logic to manipulate data as well as graphical interfaces to interact with users. Applications were a primary component of the “technology stack,” a framework used to illustrate how primary software and hardware technologies 2 Interview by authors, November 22, 2005.


interoperated. (See Exhibit 3 for a depiction of the technology stack.) Enterprise applications required both database software and middleware to run, and all three of these software technologies ran on top of networks of powerful computers called servers. Enterprise applications constituted an approximately $80 billion worldwide market in 2005, with compound annual growth in the range of 7.5 percent projected through 2010.3 The market was typically segmented by product category and by customer size. Primary product categories included enterprise resource planning (ERP), customer relationship management (CRM), supply chain management (SCM), and analytics or business intelligence (BI). Primary customer segments included large enterprises (LEs), small to midsize businesses or enterprises (SMBs or SMEs), and small office or home office businesses (SOHOs). Each customer segment featured customers with very different needs, and no one vendor dominated all three segments. The SME segment, also known as the “midmarket,” was particularly broad, defined by some vendors and analysts as including any company with between 10 and 2,500 employees. In 2005, SAP’s share of the worldwide enterprise applications market by total revenue was approximately 9 percent, the largest of any industry player.4 In March 2006, SAP reported that its license revenues for business applications over the most recent four quarters were more than three times those of its closest competitor, Oracle.5 However, Oracle recently had made aggressive moves to consolidate the industry. By purchasing PeopleSoft (which itself had acquired another established vendor, J.D. Edwards, just two years earlier) in January 2005 and Siebel Systems in January 2006, Oracle effectively had created a duopoly with SAP in the LE segment.6 In the SME segment, SAP and Oracle both competed with Microsoft’s Business Solutions division and a host of other companies such as Sage Software and Lawson Software.7 In addition, new technological developments such as software as a service (SaaS) and open source software were growing in popularity with SMEs and SOHOs, and upstart vendors such as Salesforce.com, NetSuite, Entellium, and SugarCRM were attacking the enterprise applications market from the low end.8 SAP stated that based on software revenues it was the midmarket segment leader, but several other companies had a greater number of SME customers than SAP.9 For example, Salesforce.com, a company that launched its first services in February 2000, already claimed 20,000 SME accounts; Sage Software claimed 5 million.10 Furthermore, millions 3 “Worldwide Enterprise Applications 2006-2010 Forecast,” op. cit. 4 SAP’s 2005 software and maintenance revenues divided by 2005 worldwide market size estimate from IDC. 5 “SAP 2005 Annual Report,” www.SAP.com, http://www.sap.com/company/investor/reports/annualreport/2005/en/index.html (July 20, 2006). 6 “Strategic Acquisitions,” www.oracle.com, http://www.oracle.com/corporate/acquisition.html (July 20, 2006). 7 Earlier in 2004, Microsoft had initiated talks to acquire SAP, but the negotiations had broken down due to the anticipated complexities involved in combining the two companies. 8 Stacey Cowley, “Midmarket CRM Vendors Release Bumper Crop of Updates, InfoWorld, August 5, 2006, http://www.infoworld.com/article/05/08/05/HNmidmarket_1.html (July 20, 2006). 9 “Innovation and Growth in Enterprise Application Software,” Investor Roadshow, February 14-16, 2005, www.SAP.com, http://www.sap.com/company/investor/pdf/2005_global_roadshow_FINAL.pdf (July 20, 2006). 10 Complied from Phil Wainewrigth, “Benioff: Where ASPs (and Larry Ellison) Got It Wrong,” ZDNet, February 1, 2006, http://blogs.zdnet.com/SAAS/?p=103 (July 20, 2006); Customers, www. Salesforce.com, \http://www.salesforce.com/customers/ (July 20, 2006); About Sage, www. Sage.com, http://www.sage.com/about/sageataglance.php (July 20, 2006).


of smaller companies managed their operations using alternatives such as desktop applications (e.g., Microsoft Excel and Access) and/or human solutions such as bookkeepers. (See Exhibit 4 for more data on the competitive landscape in the enterprise applications market.) The dynamics of the enterprise software industry were marked by “coopetition,” primarily because many vendors played in multiple areas of the technology stack. SAP, for example, did not have a significant presence in the database software arena, but Oracle did. Consequently, despite the fact that SAP and Oracle were fierce competitors in the enterprise applications space, over 60 percent of SAP customers used Oracle databases to store the data used by their SAP applications.11 Furthermore, SAP and Oracle salespeople had been known to collaborate on joint sales opportunities. In a similar fashion, IBM supplied its DB2 database software to many SAP customers and provided application hosting services to SAP. However, IBM also offered tools, technologies, and consulting services to help enterprise customers build their own customized applications instead of buying standardized applications from vendors like SAP.

SAP Company History

Founded on April 1, 1972 by five former IBM engineers, SAP employed over 35,000 employees worldwide in 2006.12 Headquartered in Walldorf, Germany, the company served more than 32,000 business customers in 120 different countries.13 SAP’s product line consisted primarily of a set of applications called the “mySAP Business Suite” that included applications for enterprise resource planning (mySAP ERP), supply chain management (mySAP SCM), customer relationship management (mySAP CRM), and several other areas. SAP also offered industry-specific functionality for companies in over 25 different target industries.14 (See Exhibit 5 for a more detailed overview of the SAP solution portfolio.) For most of its history, SAP had focused on selling complex, standardized applications to the large enterprise market segment. (See Exhibit 6 for a sample of SAP customers, Exhibit 7 for SAP’s sales model and Exhibit 8 for recent deal size trends.) Typically, companies paid SAP millions of dollars for the rights to use the basic version of a software application⎯a charge known as the “license fee”⎯and then incurred additional costs to customize the software to their specific needs, deploy it within their information technology (IT) infrastructure, and maintain and upgrade it in the future. In the majority of cases, systems integrators (SIs) such as Accenture, IBM, or smaller regional firms performed the implementation and deployment of SAP software. SAP’s best-known enterprise application, an ERP solution named “R/3,” had generated billions of dollars of license and service revenues from large companies since its launch in the early 1990s.15 As a result, in several industries over 90 percent of Global 500 companies used software from SAP. (See Exhibit 9 for a chart of SAP industry penetration.)

11 Lisa Vaas, “SAP Allies with Oracle’s Competitors,” www.eweek.com, April 28, 2005, http://www.eweek.com/article2/0.1895.1790357.00.asp (July 20, 2006). 12 SAP 2005 Annual Report, op. cit. 13 Ibid. 14 “SAP Solutions: Making Your Business a Best-Run Business,” www.SAP.com, http://www.sap.com/solutions/index.epx (July 20, 2006). 15 Complied from SAP Annual Reports, 1995-1999, www.sap.com, http://www.sap.com/company/investor/reports/index.epx (July 20, 2006).


In the late 1990s and early 2000s, SAP had developed the mySAP ERP application as a successor product to R/3 and diversified into non-ERP areas such as CRM and SCM. Between 1999 and 2001, SAP also spun off two subsidiary companies, SAPMarkets and SAP Portals, to focus on building and selling Internet-based technology. SAP re-integrated both of these subsidiaries back into the parent company in 2002. Internally, a seven member Executive Board governed SAP. Kagermann, who took over leadership of the company from his former co-CEO and original SAP co-founder Hasso Plattner in May of 2003, also served as the Chairman of the Executive Board. (See Exhibit 10 for Kagermann’s corporate biography.) Kagermann’s first year as sole CEO had been a difficult one, largely on account of a global economic recession and the contraction of IT budgets in the United States after a boom period that ended in 2001.16 After a decade of explosive growth sparked by the success of R/3, SAP’s sales had stalled at around €€ 7 billion by 2002 (see Exhibit 1). Then, for the first time in more than ten years, SAP reported at the end of 2003 that total revenue had declined (by 5.2 percent) from the previous year.17 Sensing that a structural shift might be taking place in the industry, Kagermann put together a plan to reignite sales momentum.

SAP’S NEW GROWTH STRATEGY

After deliberating with his leadership team, Kagermann decided to focus on three primary growth initiatives. First, SAP would develop an innovative Web services-based “platform”⎯a collection of software technologies, tools, and content⎯that he believed would deliver unparalleled value to customers and partners. Kagermann referred to this platform as the business process platform, or BPP for short, and it represented the tangible product of SAP’s Enterprise Services Architecture vision. Second, SAP would intensify its focus on the SME market segment by developing more streamlined and flexible applications and expanding midmarket sales channels. Lastly, SAP would broaden the relevance of its products by offering functionality that appealed to more corporate users and by improving user interfaces. If Kagermann’s corporate analysts were correct, executing on this three-pronged growth strategy would result in the return of sustained double-digit sales growth and net margins of more than 30 percent.18 However, Kagermann believed that it would take until 2010 or 2011 before the BPP and other products of the new growth strategy achieved broad adoption across the SAP customer base.19 Defending the legacy enterprise applications business was critical in the interim.

16 Snigdha Srivastava and Nik Theodore, “America’s High Tech Bust,” Center for Urban Economic Development, University of Illinois at Chicago, September 2004, http://www.washtech.org/reports/AmericasHighTechBust/AmericasHighTechBust.pdf (July 20, 2006). 17 “SAP 2003 Annual Report,” www.sap.com, http://www.sap.com/company/investor/reports/annualreport/2003/sap/en/index.html (July 20, 2006). 18 “Innovation and Growth in Enterprise Application Software,” op. cit. 19 Denise Callaghan, “Business Process Platform is Goal for SAP Offering,” www.eweek.com, April 28, 2005, http://www.eweek.com/article2/0,1895,1818485,00.asp (July 20, 2006).


Growth Initiative One: The Business Process Platform

Kagermann positioned the BPP as an extension of an existing set of integration technologies collectively called SAP NetWeaver. The main purpose of NetWeaver was to help SAP customers integrate disparate SAP and non-SAP applications so that they interoperated seamlessly. For example, if a sales representative at the Fender Company entered an order for 300 Stratocaster guitars into mySAP CRM, NetWeaver automatically triggered an inventory replenishment order within Fender’s supply chain management application. Additionally, the order data also incremented Fender’s accounts receivable, which were tracked within a third system, mySAP Financials.20 Customers then could view data from these three applications and from other non-SAP systems all on one screen using NetWeaver’s enterprise web portal technology.21 NetWeaver also served as the technology foundation for a new class of applications called xApps, the first of which SAP released in late 2002.22 xApps were composite applications that leveraged NetWeaver to integrate functionality across multiple SAP (and potentially non-SAP) products.23 In addition to developing xApps, SAP also launched a program to certify third party software partners to build novel xApps and sell them to joint customers.24 As of April 2006, SAP had developed 7 xApps, and partners had developed an additional 20. Despite the flexibility of NetWeaver and xApps, the fact that distinct SAP applications each addressed different business processes hindered overall extensibility and innovation. For instance, if a potential customer needed a solution that integrated 20 percent of the functionality contained within three different SAP applications, that customer needed to buy all three of those applications and then use NetWeaver to integrate them. The license fees, technological complexity, implementation time, and support costs for such an initiative could be prohibitive, especially for a smaller business. Kagermann questioned the continued viability of this model:

We have all these different products – ERP, CRM, SCM, and so on⎯and they are not very tightly integrated. Why do we need these categories? Companies don’t want terms like ERP and CRM. They just want productivity and innovation. If you believe this, you ask yourself, ‘What should the architecture of the product of the future look like?’ And if you think about it a little bit, you come to the idea of the Enterprise Services Architecture⎯something that is stable, pre-integrated, easier to support, and simpler to extend and innovate around. But centered around application functionality, because that is what differentiates SAP.25

20 “Fender Rocks with SAP,” www.sap.com, http://www.sap.com/company/press/press.epx?pressID=2286 (July 20, 2006). 21 “SAP NetWeaver: Providing the Foundation to Enable and Manage Change,” www.sap.com, http://www.sap.com/solutions/netweaver/index.epx (July 20, 2006). 22 Keith Rodgers, “SAP Reaches Out with xApps,” Loosely Coupled, March 3rd, 2003, http://www.looselycoupled.com/stories/2003/xapps-sap-bp0303.html (July 20, 2006). 23 “SAP xApps: Applications That Keep Pace with Business Innovation,” www.sap.com http://www.sap.com/solutions/xapps/index.epx (July 20, 2006). 24 Rodgers, op. cit. 25 Interview by authors, November 22, 2005.


The vision of the Enterprise Services Architecture was to make it radically easier and cheaper for customers and partners to do three things: create software applications that did exactly what customers wanted, extend or change applications when desired, and integrate SAP and non-SAP applications and services. Over the past several years, integrating the wide variety of enterprise systems under their control had developed into a critical pain point for CIOs, who were traditionally SAP’s primary end customers. The ESA vision aimed to serve the IT-focused needs of the CIO while simultaneously enabling CEOs to test and implement new business models. The Enterprise Services Architecture vision built upon NetWeaver technology in two main areas. First, it added an “application platform” that contained a repository of hundreds of individual business processes. SAP referred to these application building blocks as “enterprise services.” (See Exhibit 11 for examples of specific enterprise services.) Second, it added a “composition platform” consisting of tools that enabled customers to combine individual enterprise services they wanted to use into full-featured enterprise applications. The sum of these components⎯the NetWeaver integration platform, the application platform, and the service composition platform⎯formed the BPP. (See Exhibit 12 for a schematic of the BPP.) Open and clearly defined interfaces would make it easy for customers or partners to extend the pre-built enterprise services included in the BPP, and SAP intended to add new services to the repository on a frequent basis. The BPP embodied SAP’s unique approach to what many analysts termed “service oriented architecture,” or SOA. Service oriented architecture represented a new software design paradigm that leveraged the Internet to tie together disparate, loosely coupled, yet highly interoperable software functions known as Web services. While competitors such as Microsoft, IBM, and BEA Systems all offered products that leveraged SOA to integrate software from diverse vendors, Kagermann felt that the inclusion of pre-defined enterprise services differentiated the BPP:

Think about a model car. You need parts, tools, and instructions to build it. In the same manner, SOA-based technology platforms like [IBM] WebSphere and [Microsoft] .NET give you tools and instructions to integrate applications, but they don’t give you the parts themselves. You still have to buy or build the actual applications. We will give you the tools, the instructions, and the actual parts you need to compose and integrate highly tailored, unique applications.26

To launch and support the BPP, SAP engineers needed to undertake a significant and ongoing research and development effort. Most of the enterprise services that would become part of the BPP already existed in one or more SAP applications, so each of these business processes needed to be decoupled from its “mother” application and reconciled with other similar processes that existed in other SAP applications. Furthermore, to ensure compatibility with already installed SAP applications, the entire mySAP Business Suite had to be enhanced in order to become interoperable with the service composition protocols and standards established by the BPP.

26 Interview by authors, November 22, 2005.


The Enterprise Services Architecture Partner Ecosystem SAP hoped to attract a large ecosystem of product partners to build innovative new solutions on top of the BPP. As Kagermann put it, “We want to encourage co-innovation on the platform.”27 With its Enterprise Services Architecture strategy, SAP was pursuing a model similar to the one Google had developed with its “Google Maps” service in the consumer Internet space. By defining simple interface standards and allowing external programmers to access its geographical mapping technology via the Internet, Google had sparked the independent creation of hundreds of new, specialized Web sites that featured embedded Google Maps.28 With the BPP, Kagermann hoped that hundreds of independent software vendors (ISVs) would build new, highly specialized business applications by leveraging technology and functionality from the BPP. “We will do the big head of business processes and ISVs will do the long tail,” summarized Shai Agassi, SAP Executive Board member and president of the Product and Technology group.29 Jim Hagemann Snabe, General Manager, Industry Solutions, liked to bring up the case of KMD, a firm that developed software that the governments of small towns in Denmark used to manage their day-to-day operations. Using the BPP, a company like KMD could focus solely on building functionality uniquely relevant to small town governments in Denmark, and outsource the development of more generic business application functionality (e.g. employee time tracking) to SAP. ISVs, however, constituted just one part of the partner ecosystem that SAP looked to cultivate around the shared standards of the ESA. Kagermann envisioned personal productivity vendors such as Microsoft developing widely used tools by integrating their desktop products with SAP solutions. Suppliers lower in the technology stack, such as networking giant Cisco, could embed SAP functionality directly into their offerings, and major IT vendors such as Intel and EMC could design products and services that featured “plug and play” integration with SAP solutions. Finally, systems integrators such as Accenture and IBM would continue to play a core role in SAP’s strategy by using the BPP to compose applications for customers. All of these partners also could serve as cost effective channel partners for SAP, especially in the SME customer segment. (See Exhibit 13 for examples of ESA ecosystem partners.)

The Dual Business Model: Application Platform Provider and Application Provider SAP did not intend to abandon its legacy applications business, at least in the short term, in order to become a pure platform vendor. The company’s sizeable direct sales force would continue to sell SAP applications even as other ISVs began to build their own applications on top of the BPP. Just as Microsoft sold both operating systems (e.g. Windows) and applications (e.g. Word) in the desktop software space, SAP would sell both a platform and applications in the enterprise software space. Nothing would prevent an ISV from using the BPP to build a solution that competed with a similar application already being sold by the SAP sales force.

27 Ibid. 28 See http://www.housingmaps.com/ or http://www.chicagocrime.org/ for examples. 29 Interview by authors, October 31, 2005.


Growth Initiative Two: Building Market Share in the Midmarket

SAP had competed in the SME segment for years, but its success depended upon what measure one used. On the one hand, as Leo Apotheker, SAP Executive Board member and President of the Customer Solutions and Operations group, was fond of saying, “SAP has 32,000 customers. How many companies are there in the Fortune 1,000?”30 On the other hand, Hasso Plattner, who had become Chairman of the SAP Supervisory Board after retiring as co-CEO, explained how large customers exerted a gravitational pull on SAP’s resources and thought processes. “One of the realities of a software company is that whatever we deliver is never exactly what all of our customers want or expect,” he commented. “Our larger customers apply immense pressure on us to close this gap as soon as possible, and they have more money. So guess what? We listen more carefully when they ask us something. We always get pulled in the direction of large customers, so we need to counteract this force in order to be accepted in the lower end.”31 SAP’s traditional focus on large enterprises also led it to define the SME segment more broadly than many analysts and competitors did. SAP included companies up to $1.5 billion in revenue in this customer segment.32 Consequently, a company such as Harley-Davidson, which reported $1.34 billion in revenue in 2005 and had nearly 10,000 employees working in more than 20 countries, was considered a midmarket customer by SAP.33 This approach caused some outsiders to question SAP’s true performance in meeting the unique needs of smaller firms. “Microsoft considers any company with more than 500 PCs or 1,000 employees to be an Enterprise company, not an SME,” said Anthony Cross, a Lead Product Manager for Microsoft. “I would hardly categorize a billion dollar company as ‘small’ or ‘midsize.’”34 In addition, SAP’s direct sales force still served as the primary channel for acquiring midmarket customers⎯especially the larger SME customers that substantiated the company’s claim of being the market leader in the segment (see Exhibit 7). To increase the volume of SME sales, SAP needed to move further down-market, where channels, customers, and competitors were quite different. Although a huge growth opportunity for SAP, attracting smaller customers raised many questions. Zia Yusuf, Executive Vice President of Platform Ecosystem and the former founder and head of SAP’s Corporate Strategy Group, outlined some of them:

First, we need to learn how to acquire and manage channel partners. How do you sell the product through the channel? How do you maintain the product? Who’s managing it? Then, we have the go to market side. It’s a different customer base. The pricing is different. The advertising is different. The competitors are different. They are folks we never run into in big deals: Microsoft, Intuit, Sage. A sales organization like SAP Americas has to figure all of that out.35

30 Interview by authors, November 22, 2005. 31 Interview by authors, February 3, 2006. 32 Information provided to authors by SAP Corporate Strategy Group. 33 Information gathered from Harley-Davidson Web site http://www.harley-davidson.com (July 20, 2006). 34 Interview by authors, October 15, 2005. 35 Interview by authors, November 21, 2005.


Growth Initiative Three: Providing Value to More Business Users

SAP’s existing applications, with the exception of mySAP CRM, typically catered to a small number of highly trained users within an organization. SAP had built enterprise software applications since the early 1970s, and initially the cost and complexity of enterprise computing restricted the broad use of business applications. Even by the year 2000, less than 10 percent of employees had access to their company’s primary ERP system.36 By the early 2000s, however, the decreasing cost of personal computers and the proliferation of both desktop applications and the Internet had democratized business computing. In the United States alone, 77 million people⎯representing 55 percent of total national employment⎯used a computer at work in 2003.37 Email and instant messaging had become standard means of information sharing, and web sites like Yahoo! and Google had set new standards of simplicity in the realm of computing interfaces. Compared to the average web site, the typical SAP application required employees to receive significant training in order to understand how to use it.38 Internet-focused competitors such as Salesforce.com were exploiting ease of use as a competitive advantage over SAP, and simple web-based services from the likes of Google, America Online, and Yahoo! were gaining increasingly strong adoption within corporations, primarily at the individual user, workgroup, and department levels.39 Despite SAP’s large number of customers, the company had significant opportunities to deliver greater value by developing more broadly appealing software and/or packaging existing functionality and information in ways more accessible to end users. In 2004, SAP and Microsoft had formed a broad collaboration in this area called Project Mendocino, and set out developing a product to be launched under the brand name Duet. The two software giants agreed to create joint products that embedded functionality and data from a customer’s SAP applications (e.g., vacation time tracking) into Microsoft’s Office suite of desktop applications.40 Both SAP and Microsoft would sell these pre-integrated solutions. Kagermann also had commissioned an internal team to develop a web-based, streamlined version of the mySAP CRM application. Unlike all other SAP products, SAP CRM on-demand would be delivered over the Internet instead of being installed at a customer’s site. However, the service would be designed so that customers could transition from an off-site to an on-site solution should they desire to do so in the future.

Defending and Building the Core Applications Business

Despite the magnitude of the three new growth initiatives, SAP could not afford to lose focus on its core business in the near term. The market expected continued profitable growth from SAP, 36 “ERP RIP?” The Economist, June 24, 1999, http://www.economist.com/displayStory.cfm?Story_ID=322811 (July 20, 2006). 37 “Computer and Internet Use At Work Summary,” Bureau of Labor Statistics, U.S. Department of Labor, http://www.bls.gov/news.release/ciuaw.nr0.htm (July 20, 2006). 38 Substantiated from data gathered in interviews with SAP executives, partners, and customers. 39 Eulynn Shiu and Amanda Lenhart, “How Americans Use Instant Messaging,” PEW Internet and American Life Project, September 1, 2004, http://www.pewinternet.org/pdfs/PIP_Instantmessage_Report.pdf (July 20, 2006). 40 “Microsoft and SAP: Revolutionizing How Information Workers Access Enterprise Business Applications,” www.sap.com, http://www.sap.com/solutions/mendocino/index.epx (July 20, 2006).


and maintenance and service contracts with existing applications customers provided the bulk of the company’s annual revenues. “We have more than 32,000 customers,” said Kagermann. “They have invested a lot of money in software from SAP, and they are not just sitting there waiting for a new platform. So you have to develop in parallel: some things to benefit us in the long term, and others to benefit customers now.”41 Still, he believed that synergies existed between SAP’s current and future goals and products:

The BPP is key for several reasons. First, it helps us in the high end. Large companies never have only SAP systems. They need to integrate outside of SAP, and the platform will help them do that. For the midmarket, the platform will help us assemble tailor-made products and sell them cheaply. And since the enterprise services within the platform will be analytical as well as transactional, they will help us to attract more business users within all customers.42

For these reasons, Kagermann felt that the articulation of the Enterprise Services Architecture vision would help increase sales of existing SAP solutions as the company built out its next generation of products. Larger customers moved slowly, so they could buy from SAP knowing that by the time they decided how to transition to service oriented architectures, SAP would have a solution ready for them. In addition, by 2004 SAP already had rolled out two new SME-targeted applications, SAP Business One and mySAP All-in-One, and signed up dozens of new channel partners (including American Express) to sell these two products into companies with less than $200 million in annual revenues.43 Increased focus on the midmarket did not have to wait for the BPP.

CORPORATE TRANSFORMATION: CHANGING STRATEGY AND STRUCTURE

As he considered the new growth strategy, Kagermann felt that developing new products was only part of the requirement for success. “We will not succeed with a product alone,” he posited. “It’s product plus. We have to change our processes, how we go to market, and how we are organized.”44 To kick start the change process, Kagermann made several public announcements and implemented a broad organizational restructuring. Announcing the New Growth Strategy In January 2005, Kagermann began to unveil SAP’s new growth initiatives to analysts.45 Over the ensuing months, he elaborated a roadmap that included completion of the BPP and related initiatives by the end of 2007, and set various financial goals for SAP to achieve by 2010. These included generating 50 percent of total revenue from new products outside of the mySAP Business Suite, increasing the share of software sales coming from the SME segment from 30

41 Interview by authors, November 22, 2005. 42 Interview by authors, November 22, 2005. 43 Patricia Fusco, “SAP Business One Ready To Serve U.S. Small Businesses,” www.internetnews.com, March 28, 2003, http://www.internetnews.com/ent-news/article.php/2171501 (July 20, 2006). 44 Interview by authors, November 22, 2005. 45 “SAP Announces 2004 Fourth Quarter and Year-End Results,” www.sap.com, http://www.sap.com/company/press/Press.epx?PressID=3850 (July 20, 2006).


percent to between 40 and 45 percent, serving 100,000 customers, and achieving 30 percent net margins.46 (See Exhibit 14 for examples of Kagermann’s roadmap and goals.) Several months prior to these initial announcements, Kagermann had described his ideas about the growth strategy and the BPP to SAP’s top executives. Internal discussions about the proposed growth initiatives had been ongoing, and Kagermann’s first public announcement caught some executives by surprise. The plan to pursue the BPP and a related partner ecosystem had been developed at the Executive Board level, and many employees voiced uncertainty about its scope, impact, and timing. Although opinions about how radical a change the ESA vision represented varied widely, Kagermann stood firmly behind his rationale for a bold reaction:

You cannot say that we saw all this coming five years ago. I don’t believe this. Back in 1999 we had no idea that we would choose to move downmarket so aggressively, and that becoming a volume business would become imperative. But you watch the statistics. Deal size starts going down. Software revenue starts declining. Eventually you realize the buying pattern has changed; it has become a buyer’s market. You hope that the revenue comes back. You cut costs in the meantime. Well, one year passes, and it doesn’t come back. Another year passes, and it still doesn’t come back. You cannot continue to cut costs, because eventually you reach an end. So you need to figure out what to do about it.47

Plattner, however, saw the growth strategy as more of a logical evolution:

We always had a platform; we have been working on open integration technology as far back as the 1990s. Now we are evolving our software to allow outside parties to develop applications that sit outside our platform, but are integrated as if they are sitting on the inside. It is not a radical change; we already have over 1,000 partners. Rather, we are revamping an existing strategy at a much larger scale. Frankly, the technology shift to client/server computing architectures in the early 1990s posed a bigger threat to our culture and organization than the one we face today. But the scale of the tasks involved in this change, now that we have many more products and employees, is much bigger. It’s harder to drive it.48

As Apotheker began to address the new growth initiatives within the SAP field organizations, Plattner looked to Agassi to drive the expanded platform vision from a development perspective. Several years earlier, in 2001, Agassi had convinced SAP of the potential value of a fledgling enterprise portal technology that his former company, TopTier, had developed. SAP had acquired TopTier and promoted Agassi to the Executive Board in 2002 at the age of 34. “Shai’s major contribution is that he pushes with extra energy and accelerates things,” commented Plattner. “This is where SAP is traditionally weak. The strategy itself is not as challenging as generating the energy level and the velocity to execute it.”49 46 Dawn Kawamoto, “SAP Eyes Midmarket for Growth,” ZDNet, April 6, 2006, February 2005, http://news.zdnet.com/2100-3513_22-6058685.html (July 20, 2006). 47 Interview by authors, November 22, 2005. 48 Interview by authors, February 3, 2006. 49 Ibid.


“Best-Run SAP” and Cascading the Strategy

Having been at SAP since 1982, Kagermann had experienced firsthand the company’s rapid headcount growth (which had increased more than thirty-fold since his arrival), as well as its steady transition from a single-product company into a multi-line, multinational software giant. Yet such growth had come with a price. SAP’s highly autonomous culture traditionally de-emphasized structured processes and cross-organizational collaboration in favor of functional excellence and speed to market. Now that SAP had become a large and complex organization, coordinated execution across groups and regions was proving an increasing challenge. Kagermann realized that company-wide understanding and implementation of the new growth strategy would be impossible without better communication, planning, management, and employee engagement. Throughout 2004 and 2005, he kicked off a series of internal process initiatives collectively known as “Best-Run SAP” to communicate the new growth strategy to all levels of the organization and to strengthen the “culture of execution” within SAP.50 Kagermann identified six specific process focus areas with Best-Run SAP and allocated resources – including Executive Board members – to support each one. A key process element of Best-Run SAP was the “Cascade” effort, whereby SAP intended to propagate understanding of the corporate strategy throughout the organization. By doing so, the Cascade project aimed to tie strategy to execution within each business unit, align business units that needed to execute together, and generate feedback regarding the push for strategic change. As a part of Cascade, each Board area and business unit developed its own strategic business plan (SBP) that identified and documented organizational goals, an execution plan, success measures, and critical dependencies. Each SBP also had to clarify linkages to and support of the Corporate SBP. To enhance high-level communication around the SBP and other key topics, Kagermann added an annual two to three hour session with each business unit leader (in addition to existing quarterly review sessions with the Executive Board) as a part of the strategic management process. Furthermore, he created a dedicated Corporate Strategy Management team to assist in strategy evaluation, strategic business planning, and strategy communication. Finally, Best-Run SAP defined new requirements of SAP’s cultural values and placed increased emphasis on evaluating manager performance. (See Exhibit 15 for a schematic of the Best-Run SAP framework.) To measure progress toward the goals of Best-Run SAP, a survey-based mechanism called “Pulse Check” was created to solicit periodic feedback from employees.

The GOAL Reorganization

In 2003, Kagermann and Plattner had implemented a major organizational redesign called SCORE, short for Strategic Cross-Organization Realignment. SCORE attempted to increase the efficiency of the SAP organization by grouping SAP’s 17 industry and product units into three Business Solution Groups (BSGs) and by introducing more structure into the product development process. Although many of the process change initiatives undertaken as part of SCORE were still not fully complete by 2005, Kagermann nonetheless went forward with another significant restructuring. (See Exhibit 16 for more information on SCORE.)

50 From CEO Briefing presentation (July 2005, London) provided by SAP.


In March 2005, Kagermann announced GOAL, short for Global Organizational Alignment. Starting at the Executive Board level, GOAL reorganized SAP along five segments of the value chain: Research and Breakthrough Innovation (new technology development), Products and Technology (existing technology and applications, as well as solution marketing), Production (solution testing, deployment, and release), Global Service and Support (product support, consulting, education, and hosting), and Customer Solutions and Operations (sales, field services, and field marketing). GOAL also established two support functions that cut across the five value chain focused groups: Finance and Administration, and Human Resources and Processes. A specific board member managed each of the seven new organizational groups. (See Exhibit 17 for a diagram of the GOAL organizational structure.) As part of GOAL, Peter Zencke, an Executive Board member and one of the original technical architects of SAP R/3, took on leadership of the Research and Breakthrough Innovation unit. In this role, Zencke was solely responsible for building and packaging the application platform and the pre-defined enterprise services embedded in it. In addition, Zencke and his team set out to define and build specific prototypes and modules that exploited the unique benefits of the Enterprise Services Architecture. Both before and during the implementation of GOAL, Kagermann transitioned resources from many different SAP product, industry, and support teams to Zencke’s group in order to accelerate momentum on these initiatives. Kagermann had stated publicly that the BPP would be made accessible to ISVs by the end of 2006, and the Breakthrough Innovation group played a critical role in achieving this milestone. Kagermann named Agassi as the leader of the Products group. In his new role Agassi maintained sole responsibility for the NetWeaver technology platform, and also took over leadership of all of SAP’s product teams, industry teams, and existing applications. Kagermann charged Agassi with continuing to improve NetWeaver, expanding the product partner ecosystem, and making all existing SAP applications interoperable with the BPP. The Products group was SAP’s largest organizational unit, and by late 2005, Agassi’s NetWeaver team alone had grown from 1,500 members in 2002 into a 2,500-person group.51 Apotheker was named head of the Customer Solutions and Operations unit, and was charged with transforming SAP’s sales function into a more volume-driven model that supported the company’s goal of acquiring tens of thousands of new midmarket customers in the next five years. In this position, Apotheker would play a critical role in defining the value proposition of the business process platform in such a way that both large and SME customers found it compelling. Kagermann was also relying upon Apotheker and his team to convince customers to adopt SAP solutions in broader internal usage scenarios. Together, Apotheker and Agassi served as co-presidents under Kagermann. Agassi led the Product Leadership Team (PLT), a group of senior development executives, and Apotheker led the Field Leadership Team (FLT), the PLT’s counterpart on the customer-facing end of the business. Board member Claus Heinrich, who previously led the Manufacturing Industries BSG under the SCORE structure, took over the Production group and the Human Resources and Processes group. Gerd Oswald, another key player in the development of SAP R/3, assumed ownership of Global Service and Support, and CFO Werner Brandt headed Finance and Administration. 51 From interview by authors with Shai Agassi, October 31, 2005.


After he implemented the changes, Kagermann described some of his reasoning behind GOAL:

In the old structure, it was extremely challenging to achieve alignment across product groups, support groups, and field units. Now, within each box each leader can really optimize. For example, we would not be able to execute on the BPP if one person managed applications and another person managed ISV partners and the platform. The platform guy will try to please the ISVs, and the applications guy hates the ISVs because he partly competes with them. So Shai owns both. Similarly, in services, if you have one person owning custom development and another person who is supposed to build more productized services, it creates friction. And in terms of sales and marketing, Leo can now implement, very quickly, worldwide structures and programs targeting the midmarket. We are in a big transition with the Enterprise Services Architecture, and the hope is that GOAL offers less friction and more speed within each unit.52

IDENTIFYING TRANSFORMATION CHALLENGES IN 2005

Although he believed that GOAL would help the company increase alignment and execution efficiency, Kagermann knew that executing on the new growth strategy posed several challenges that he could not solve with organizational restructuring alone.

Clarification of the Strategy and Motivation of Employees

Kagermann needed SAP employees to understand and embrace the growth initiatives, and especially the vision of the Enterprise Services Architecture. The new growth strategy involved uncertainty, change, and the sacrifice of clear short-term opportunities, and he knew that not all employees would agree with his decision and timing to pursue it. Kagermann and Heinrich were particularly concerned with keeping veteran employees engaged. “The veterans have 10, 15 years of deep integration knowledge,” stated Heinrich. “They are not the people who instigate change, but they make success happen if you can align them in the right direction. It’s interesting from an HR perspective. You have to tell the people who are too aggressive, ‘This is an evolution,’ and the people who are too slow, ‘This is a revolution.’”53 Kagermann was cognizant that thousands of lower level implementation issues lurked beneath the surface of the three growth initiatives, and that he needed strong commitment from all of his employees in order for SAP to have any chance at achieving its goals. As Herbert Heitmann, Senior Vice President, Global Communications, remarked, “At the board level, it is often easy to achieve an agreement. The tough part starts when you are in the implementation process and nobody has told the rest of the organization that there is a need for change management. Why are we doing this and why are these changes necessary?”54 To build understanding and maintain engagement, Kagermann committed himself to discussing the new growth initiatives with employees as much as possible, and focused resources on the Cascade initiative.

52 Interview by authors, November 21, 2005. 53 Interview by authors, November 22, 2005. 54 Interview by authors, November 23, 2005.


Development of New Sales and Support Models

SAP had built its fortune by selling complex software systems to the world’s largest organizations. This business was rife with complexities: developing highly advanced and reliable software, closing multimillion-dollar deals, maintaining 24/7 support for thousands of software installations across the globe. Despite the fact that it sold standardized software solutions, SAP acted, in the words of one executive, like a “build to order company.”55 “SAP has been set up for large deals,” said Yusuf, “and now the fabric of the company is being tested.”56 SAP needed to build substantial infrastructure to achieve its goal of attracting hundreds of partners and thousands of new midmarket customers. “We need to put in place a very sophisticated go-to-market approach,” observed Apotheker. “There is a big difference between managing a direct sales channel and managing indirect channels. We need to do both. That requires channel development, organizational changes, personnel changes, and re-education.”57 Although SAP already had some experience with channel sales partnerships in the midmarket, the company needed to expand its efforts in this area. Additionally, being both an application platform provider and an applications provider multiplied possibilities for channel conflict, which SAP largely had avoided in the past. The question remained whether SAP could set up the right models and processes to manage the anticipated tensions between its own salespeople, ISV partners, and other channel sales partners. Aside from potential channel conflict, the push to support greater sales volume also presented a number of tactical issues. Yusuf elaborated on the problem from an ISV partner’s perspective:

It’s okay to take three days to book a $10 million contract. It’s not okay to take three days to book a $200,000 contract. The process of sales is important to simplify. Our typical contract can be several pages long. A small ISV may struggle with it. It’s not a nice little click on an ‘I accept’ button on our web site and boom, you’re done. A partner might need to come to Walldorf to meet people. Well, two flight tickets to Germany and some of these smaller ISVs feel the pinch on their budget for the year.58

At the same time, SAP’s compensation structure favored larger deals. For example, Ted Purcell, an Account Executive in the USA Western Region, had switched roles several years earlier from a midmarket to a large enterprise focus. His reason: “LE is where the money is. It’s strictly a financial issue. There are bigger deals with large enterprises and more money to be made.”59 Regarding customer support, other structural questions arose. Heinrich Dieckmann, Director of Global Support, explained: “In order to reach the goal of having 100,000 customers in 2010, we will need to add almost 20,000 net new customers a year for the next four years. It will be impossible to send people on site to do quality assurance for all of these projects. We have to

55 From interview by authors with Doug Merritt, September 21, 2005. 56 Interview by authors, February 3, 2006. 57 Interview by authors, November 22, 2005. 58 Interview by authors, October 31, 2005. 59 Interview by authors, December 2, 2005.


think about some new ideas: remote servicing, automatic error data evaluation, automatic updating, and so on.”60 The new ideas Dieckmann mentioned largely involved building more support functionality into the BPP, which deepened the dependency of support staff on SAP’s product development teams. Dieckmann also highlighted the challenges presented by the openness of the expanded platform. “Until now the only parties we had to deal with were SAP and the customer,” he commented. “If the customer changed something in the software, we said ‘This is custom code. We can offer consulting to fix the problem, but for a charge.’ We cannot do that in the future when we ask ISVs to develop on the BPP. We have to define clearer accountabilities. In the end, if it turns out to be a platform problem, we have to solve it.”61 Yusuf concurred. “At the end of the day, we may need to do first-level and second-level support for partner-created solutions,” he said. “If so, how are we going to price this, and who’s going to take responsibility?”62 SAP also needed to expand and improve programs to educate and support small ISV partners in an efficient fashion.

Increased Scope and Importance of the Partner Ecosystem

Historically, SAP tended to view partners as a means of sustaining the sales growth of SAP applications. SAP provided application functionality, and the partner ecosystem served ancillary customer needs that SAP’s products could not satisfy either efficiently or technically. “We had a culture where we said, ‘Partners are good as long as we need them. But otherwise they only take away revenue opportunities for us,’” noted Heinrich.63 Fostering an environment in which SAP employees embraced a broader ecosystem of partners (and in which those partners trusted and felt supported by SAP) required structural, technological, and cultural change. Structurally, SAP’s sprawling matrix organization of product and industry groups had created many overlapping roles and technologies over the years. Doug Merritt, Executive Vice President and General Manager, Suite Optimization and Program Office, provided one example. “Many different internal groups within SAP deal with security,” he said. “Which one does a partner talk to when an issue arises?”64 Technologically, SAP also needed to improve the scope, functionality, and documentation of its development tools for third parties. Nevertheless, Merritt believed that the structural and technological challenges of more partnering were secondary to the cultural. “We have an emotional jump to make in embracing product partners,” he said. “There is a pride and quality issue here in doing that. SAP product developers are a very proud bunch. They know that with enough time and resources, they can build anything, which can make the concept of partnering for product functionality very difficult for them to swallow.”65 At the same time, Apotheker envisioned potential tensions from the perspective of the field. “It's a challenge for us because we need to transform both ourselves and the SAP brand from a high-

60 Interview by authors, September 21, 2005. 61 Interview by authors, September 21, 2005. 62 Interview by authors, October 31, 2005. 63 Interview by authors, November 22, 2005. 64 Interview by authors, September 21, 2005. 65 Interview by authors, September 21, 2005.


end application vendor into a world-class provider of applications and infrastructure – ‘applistructure’ as many analysts call it. So we need to put into place all of the foundations for a partner ecosystem, and build channels for the midmarket and for the small end of the market. Also, we need to open up to the notion that competitors, or vendors that we may perceive to be competitors, can actually run on our platform. That is a big cultural change.”66 Apotheker and his team also had to figure out successful revenue sharing models and joint sales processes that would provide incentives and structure for partners who wished to engage customers jointly with SAP’s sales force or on SAP’s behalf. As part of GOAL, Apotheker and Agassi had restructured SAP’s partner engagement model, first by creating a new partner management organization. Agassi’s Products group handled product partners, Apotheker’s Customer Solutions group managed implementation and service partners, and a joint partner board managed cross-organizational partnership issues.67 Agassi and his leadership team, with the help of SAP’s internal consulting and competitive intelligence groups, also had begun more strategic evaluation of SAP’s partnership opportunities. “We have built scenario maps that outline SAP’s coverage across all of the business processes of a given industry” noted Fritz Neumeyer, a senior member of the Corporate Strategy Group.68 SAP managers had begun to use these scenario maps to crystallize future product plans. “In my organization, we are trying to become more proactive in terms of the solution roadmap,” commented Snabe. “What are the strategic areas where we need to compete, and what are the other areas where we should encourage co-innovation?”69 To establish greater transparency with ISV partners, SAP intended to share its product development plans with them on a regular basis. “We are opening up the kimono to our partners,” Agassi declared, “and showing them clear areas of opportunity where SAP will not go for at least the next few years.”70 Several potential partners, though, still sought more tangible evidence that SAP was committed to becoming a partner-focused organization. Zencke commented on the tension that arose from SAP’s dual presence in both the platform and applications businesses: “There is some overlap. We aren't saying to ISVs, ‘Hey, you have a safe area here,’ and that we never will go there. Over time, it makes sense for innovations to be absorbed into the core platform.”71 In May 2005, SAP scored a major publicity boost when several of the world’s largest ISVs and IT services companies (including Cisco, Intel, EMC, Adobe, Symantec, and VERITAS) publicly endorsed the Enterprise Services Architecture vision.72 Heitmann recalled the pivotal day leading up to those announcements:

66 Interview by authors, November 22, 2005. 67 From interview by authors with Zia Yusuf, October 31, 2005. 68 Interview by authors, September 19, 2005. 69 Interview by authors, November 21, 2005. 70 Interview by authors, October 31, 2005. 71 Interview by authors, November 22, 2005. 72 Robert Westervelt, “Vendors to Line up to Adopt SAP's Software Strategy,” www.sapsearch.com, http://searchsap.techtarget.com/originalContent/0,289142,sid21_gci1089462,00.html (July 20, 2006).


I had the luck to participate in this one day in Palo Alto where it seemed like every hour another corporate strategist from a huge technology company came in, and using their own terminology each one explained their strategy to us. It was as if somebody has pre-designed it. At one point I said to one of them, ‘We use different terms but we have the same perspective on how things will evolve here. How can it be that you are now the fifth person coming in here and telling us the same thing?’ I looked at Shai and wondered whether he had done some magic. But the response was pretty simple: ‘We all have the same customers.’ They had all come to the same conclusion, and once this fact becomes visible to others, it has extremely important convincing power. From a timing perspective, that day happened two weeks prior to SAPPHIRE Boston 2005.73 So 200 industry analysts and another 200 media representatives all witnessed all these big, well known companies say that enterprise services are the future.74

Increased Need for Development Alignment, Efficiency, and Agility

The move to the BPP meant that existing SAP applications and any solutions SAP built in the future had to share architectural standards and common software components. “For a long time, the percentage reuse of components across our software products was close to zero,” said Herbert Illgner, Senior Vice President, Application Platform Operations. “Now the question is, how can we do everything just once?”75 In addition to rationalizing redundant technologies, executing on the BPP demanded that product cycles be shortened and that processes such as release planning and scheduling be coordinated across formerly autonomous groups. To Archim Heimann, Senior Vice President, ESA Adoption, achieving these efficiencies meant that SAP needed to practice what it preached regarding the ideals of the Enterprise Services Architecture:

We say that the ESA means speed and flexibility, and we need to prove it ourselves. We have to convince our partner community that we can deliver on that promise. If a partner wants to build a new application on the platform but one of the services required to do it is missing, it is not OK for us to say, ‘Sorry, you have to wait two years until our next release’ like we do now. It will not work.76

Most SAP senior executives felt that in order to deliver upon the BPP strategy, the development organization needed to be more controlled, predictable, and market-driven. Furthermore, roles needed to be more clearly defined and segmented. “With a platform strategy, some people need to focus on building services, while others need to compose applications consuming those services,” explained Snabe, “and the decision of which services to build must be driven from the outside in.”77 This increased industrialization of the development process ran counter to the high levels of empowerment traditionally offered to individual developers and development managers at SAP. Kagermann elaborated on this dilemma:

73 SAPPHIRE was SAP’s premier customer conference and was generally held twice per year. 74 Interview by authors, November 23, 2005. 75 Interview by authors, September 20, 2005. 76 Interview by authors, November 22, 2005. 77 Interview by authors, November 21, 2005.


SAP employees identify themselves very much with the company. This high level of engagement creates inefficiency because everybody believes that they are an expert in everything. People are always questioning what the leaders are saying. Still, that’s how you create engagement, and engagement is positive. We are not a hierarchical, military style of organization. We can’t just force decisions downward. We need to set up many meetings to explain everything, and even then all sorts of complexity come up. Still, it’s better to have engaged people.78

Development of New Skills and Competencies

Success with the new growth strategy required skills and capabilities that SAP traditionally did not deem critical. In the past, technical aptitude and strong customer relationships were top priority. Many of SAP’s senior managers in 2006 had spent their careers following a similar formula for success: listen to customers, build the most advanced product on the market, aggressively sell it all over the world, and repeat. Until the early 2000s, SAP’s Executive Board was composed almost entirely of company founders and former engineers who had risen up through the company ranks.79 With the BPP, SAP was now venturing into uncharted waters. The business model still was not fully defined. Profit opportunities varied widely by industry, and ongoing strategic alertness would be required to exploit them. The entire spectrum of how SAP developed, sold, and supported software needed to change, especially given the important role SAP wanted external partners to play.80 Given the challenges at hand, Merritt observed a potential competency gap. “SAP has great technical expertise at the bottom of the organization, and a great understanding of customer needs at the top,” he noted, “but very few people in the middle who understand what being a platform company really means. We are lacking general management bench strength.”81 Executives across nearly all functional groups pointed to skill development needs. “The traditional SAP product manager used to be very SAP-centric,” noted Neumeyer. “He or she thought in terms of, ‘This is what we can do, this is what we can solve for a customer.’ In the future, they will have to think as much about who and what in the ecosystem can complement SAP solutions.”82 Dieckmann noted how SAP support staff would have to go to customers with a more holistic approach: “In the future, we will have to analyze a web of interconnected systems owned by a customer, complemented by Web services from different providers, and get an impression of how these systems and services support the customer’s business processes. That requires another level of thinking, analysis, and perception.”83 On the sales front, Chakib Boudary, Senior Vice President, Value Engineering, explained that “functionality demos are not enough anymore. We have to demonstrate end to end business

78 Interview by authors, November 22, 2005. 79 See Executive Board biographies in SAP 2000 annual report http://www.sap.com/company/investor/reports/annualreport/2002/gb2002/index_en.html (July 20, 2006). 80 From interview by authors with Zia Yusuf, October 31, 2005. 81 Interview by authors, September 21, 2005. 82 Interview by authors, September 19, 2005. 83 Interview by authors, November 21, 2005.


processes capabilities supported by business metrics, industry best practices, and a clear road map to value realization.”84 Apotheker concurred. “We are no longer selling technology,” he noted. “We are selling business opportunity, and we have to prove the benefits. At the same time, we’re changing the business model for consulting from selling people to selling intellectual capital. To do all of this successfully, we need to change the genetic makeup of our people.”85 Establishing the right mix of technical expertise, customer value focus, strategic vision, and industry experience constituted a primary challenge for Kagermann, who believed he knew the root cause of many existing competency needs:

There is an ongoing tension between the field and engineering. Engineers don’t realize the complex set of skills required to close big deals; they think that good products just sell themselves. Salespeople don’t understand how hard it is to manage a development team and to build reliable solutions quickly. If you haven’t been on both sides, you cannot understand the other’s situation. The issue we have is that we do not have enough people who rotated through both groups.86

Sensing the need to do more in this area, Kagermann took on talent development and succession planning as a personal focus project.87 Integrating Newly Recruited Talent Helped in part by volatility and consolidation in the industry, in late 2004 SAP began recruiting many new employees from outside the organization. Agassi quickly earned a reputation for attracting executives to SAP from competitors, and he created a wide array of new, senior-level positions within the Products group that he filled with outsiders. Many of these roles addressed topics that were increasingly relevant to the new growth initiatives: product strategy, cross-application synergy, the partner ecosystem.88 In June 2005, SAP announced that it had hired more than 200 new employees from its competitors over the past 18 months, with the majority of them working in the company’s Palo Alto, California location.89 These hires complemented other earlier, high profile talent acquisitions such as SAP Americas President and CEO Bill McDermott, who had left Siebel Systems for SAP in 2002.90 The influx of new outside hires stirred diverse feelings throughout the organization. Purcell described his thoughts: “User experience is not in SAP’s DNA, so we’re bringing people on board to change that, and that’s good. What’s not so good is that three years ago SAP was a lean

84 Interview by authors, November 4, 2005. 85 Interview by authors, November 22, 2005. 86 Ibid. 87 Information provided to authors by SAP Corporate Strategy Group. 88 “SAP Attracts Top Talent from the Ranks of Chief Rivals,” www.sap.com, http://www.sap.com/company/press/Press.epx?PressID=4740 (July 20, 2006). 89 Matt Hines, “SAP Hires Execs from Siebel, Oracle,” www.cnet.com, http://news.com.com/SAP+hires+execs+from+Siebel,+Oracle/2100-1012_3-5753757.html (July 20, 2006). 90 “SAP Names William R. (Bill) McDermott CEO and President of SAP America, Inc.,” www.sap.com, http://www.sap.com/company/press/Press.epx?PressID=1448 (July 20, 2006).


company, but today, there are all these VPs and SVPs and new titles coming in. It makes SAP feel like a much bigger company. It feels harder to get things done, and from a cost perspective, it also contributes to margin pressure. At the end of the day, I hope we get some value out of all of this hiring.”91 Never before had SAP recruited so many senior executives from outside the company, and the moves cultivated a sense of uncertainty in many veteran employees. In the past, only achievement and tenure resulted in increased management responsibility; rarely were senior positions offered to outsiders. “The concept of going outside the company to hire somebody who comes in at a high level is indeed foreign to SAP,” admitted Plattner. “But my biggest worry is that SAP gets too old. Even myself, I could have hung on as co-CEO after thirty plus years, but every year you hang on, you block somebody else.”92 Nonetheless, Heimann was concerned about the motivational implications of all the hiring. “I think we have to bring new people, but we need to think about it carefully, and we need to continue to invest in our own people,” he worried. “If we don’t, then we run into several problems. First, we will create confrontation between newcomers and veterans. Second, we will lose productivity. We need to find a way for people who have been working at SAP for a long time to become much more enthusiastic than they are today.”93 Adapting Culture and Values Historically, SAP had been an engineering-driven company. One executive even compared SAP’s pursuit of software engineering perfection to how a skilled German vorlagenhandwerker, or master craftsman, approached his art. Since producing standardized software was always the goal, SAP developers worked to ensure that their applications were configurable enough to handle a huge range of potential use cases across many industries, even if this approach added layers of complexity. Focus on technical aptitude extended all the way to the Executive Board. Executing on the BPP, on the other hand, required a different culture and mentality. Besides the willingness to embrace external product partners and create revenue opportunities for them, success required a host of changes to traditional SAP thought processes and values. As Snabe said, “We need a pragmatic approach that is business driven and open, not a theoretical approach that is driven exclusively by IT needs.”94 To help overcome resistance, Kagermann and the rest of the Executive Board reaffirmed SAP’s foundational values but also specified several new behaviors necessary to achieve SAP’s new growth goals as part of the Best-Run SAP initiative. (See Exhibit 18 for a list of the foundational values and desired changes.) Torsten Busse, Vice President, Global Communications, described some of the tools developed as part of this project: “We developed an interview guide to get people to reflect upon their typical behaviors. What are the behaviors that really don’t lead

91 Interview by authors, December 2, 2005. 92 Interview by authors, February 3, 2005. 93 Interview by authors, November 22, 2005. 94 Interview by authors, November 21, 2005.


anywhere? How do I promote the right behaviors? For example, we talked a lot about simplifying things, which we need to do because we have a very complex business.”95 After spending months talking with employees about new skills and behaviors, Busse reflected upon the feedback he was getting: “The common question, regardless of function or rank, is ‘How do we manage to stretch between the old world, existing products and ERP, and the new world of the BPP and the partner ecosystem? Do I have to generalize or specialize, or do I have to do both?’ Ideally, you have to do both, but that’s really difficult for most people to do; a person always has a preference. So the most common reaction is, ‘Oh my God, I’ve got to prepare for the future and I’m entirely caught up in the past.’”96 Heitmann also sensed a regional cultural bias. “From my perspective, it is much easier to win the hearts and minds of the employees in the Silicon Valley for new technology than in Germany,” he observed. “In Germany, they sometimes have a tendency to say, ‘Is that the fifth propaganda stream from Silicon Valley now promising heaven on earth? That will go away. Let’s wait and see.’”97 Underscoring Heitmann’s point, an August 2005 article in Mannheimer Morgen, a local newspaper printed near SAP’s primary German campus, opened with the following line: “The employees at the Walldorf headquarters of the software company SAP fear an ‘Americanization’ of the corporate group.”98 The article went on to cite an employee who complained about the increasing “Palo-Alto-ization” of SAP’s development strategy. Kagermann viewed the issue of workforce globalization as a critical evolution process that was only just beginning:

We come from an organization where Walldorf was the center of the world, and the other SAP locations were just planets revolving around that sun. Some people in Walldorf still behave like this. And now you have to tell them you are not the sun, you are just one of the planets. There is no center of gravity any longer. This takes time for us, and all you can do is repeat, repeat, repeat the message. And remind them that Walldorf will still be the largest development center even in five years. We simply cannot hire that quickly in other locations.99

ASSESSING THE SITUATION IN EARLY 2006

As 2005 came to an end, Agassi summarized SAP’s situation:

50 percent of our R&D spend today goes into the platform, which is not yet monetizing even to five percent of new license revenue. It's like Pfizer putting half of their R&D resources into a drug that's not in the market yet, while simultaneously trying to grow margin and revenue by 15 to 20 percent, in a market that's going through price erosion, compression, and discount battles. And we also have a competitor, Oracle, that threw a $20 billion attack at us with its

95 Interview by authors, September 20, 2005. 96 Ibid. 97 Interview by authors, November 23, 2005. 98 “SAP Employees Fear Loss of Power,” Mannheimer Morgen, August 2, 2005. Article translation by SAP Global Communications. 99 Interview by authors, November 22, 2005.


acquisitions. So we need to maintain short-term momentum, grow sales, and grow the margin, all while we build a whole new wave of innovation. This is as big a problem as it can get.100

Progress on Developing the Business Process Platform

Zencke’s and Agassi’s groups were both making progress on the BPP. However, as SAP engineers delved deeper into defining and planning phases, more and more questions arose. For example, some of Zencke’s architects now posited that multiple versions of the BPP would be required to serve the needs of SAP’s diverse range of customers.101 Even the question of which specific enterprise services to include in the first release of the BPP was provoking much debate. Zencke illustrated some of the tradeoffs: “I think that we have a conflict of three dimensions. Big customers versus small customers, which are the priority? Is the market truly deciding which services to produce in this first iteration, or do we think we know? And should we give ISVs or customers the highest priority?”102 Externally, Kagermann, Apotheker, and Agassi were receiving diverse feedback about the Enterprise Services Architecture. Some SAP customers, such as Intel, had endorsed the ESA vision and were already preparing to adopt the BPP.103 Most customers, such as oil and gas giant Chevron, were still debating how exactly to plan the shift to Web services-based technology architectures, and the role that SAP would play as part of an overall architecture strategy.104 Besides, many existing customers had more immediate demands for SAP. Merritt recalled the experience of the first SAP conference he attended after being hired in 2005: “Shai spent almost an hour talking about the platform vision and the innovation it could help customers generate, and the result was polite applause. After Shai’s presentation, a few SAP developers demonstrated a new debugging feature in one of our existing tools. The crowd went absolutely wild.”105 SAP still had significant work to do to turn the concept of the BPP into a reality. Several technologies, such as the Visual Composer tool that enabled partners to combine and configure enterprise services, required major enhancements. At the same time, potential ISV partners were applying pressure on SAP to demonstrate what was real about the BPP and what was not. Determined to turn this pressure into opportunity, Agassi had spearheaded several special projects to demonstrate SAP’s determination to cater to partners.106 He reflected on the situation: “We’ve made great progress on the BPP. We just need to continue to make mistakes and correct them very quickly. Some things you can do in theory, but other things you have to do in practice. The main issue here is the agility of the organization. If we can stay agile and open-minded,

100 Interview by authors, October 31, 2005. 101 From interview by authors with Peter Zencke, November 22, 2005. 102 Interview by authors, November 22, 2005. 103 Information provided by SAP. 104 Interview by authors with Don Paul, Vice President and Chief Technology Officer, Chevron Corporation, March 22, 2005. 105 Interview by authors, September 21, 2005. 106 Most notably, Agassi had commissioned a fast-track project in 2005 to make available to ISVs 500 basic enterprise services for application composition on SAP’s existing NetWeaver (pre-BPP) technology platform.


we're going to run through the decisions that arise pretty quickly, because they're pretty obvious once you see them in the customer context.”107 After some initially frustrating experiences, Heinz Haefner, Senior Vice President, SAP NetWeaver Operations, summarized SAP’s overall progress: “We’re learning, adjusting, and learning and adjusting again. Even the idea of having two platforms we couldn’t even have imagined a year ago, because we hadn’t thought through all the implications of customer needs. I am now confident that within a few cycles we will deliver on the platform vision.”108

Progress on Growing Market Share in the Midmarket

By October 2005, McDermott had created a new sales organization in SAP Americas to focus exclusively on the SME segment. “We had been really vague at where we drew the line between midmarket and large enterprise sales until this year,” commented Purcell, “but the lines of demarcation are now very clear. Also, we're hiring a ton of reps to focus on the midmarket.”109 Efforts to build the indirect sales channel and proactively manage anticipated channel conflict were still in progress. “2006 is a critical year for us to invest in multi-channel sales models,” commented Apotheker. “I don’t think that you are ever fully done with it, as building channels is more an ongoing process, but I believe that by the end of 2006 we will have put the foundation in place to have SAP prospering.”110 On the support side, the responsible parties were still discussing many key issues. “We have top management directions,” said Dieckmann. “We have all the strategic figures and performance targets for 2007 to 2010. The task is now to develop the service and support portfolios that enable us to reach these figures.”111 The Global Service and Support group also was implementing mySAP CRM internally to help streamline their operations. Despite the overall progress, Dieckmann noted the need for more tangible use cases for the as yet unreleased BPP to facilitate the preparations for its wide scale adoption.112

Progress on Appealing to More Business Users

Efforts to attract more business users were still largely in development phases by early 2006. Project Mendocino had defined a few basic integration points between the mySAP ERP application and the Microsoft Office application suite that both companies intended to make generally available in mid 2006.113 In February 2006, SAP formally announced the debut of its CRM on-demand solution, although it launched only the first of three modules the company expected to release over the next six months. The announced price point for the service was in

107 Interview by authors, October 31, 2005. 108 Interview by authors, September 23, 2005. 109 Interview by authors, December 2, 2005. 110 Interview by authors, November 22, 2005. 111 Interview by authors, September 21, 2005. 112 Interview by authors, September 21, 2005. 113 Al Sacco, “SAP: Office Delay Won't Affect Mendocino,” CIO, March 28, 2006, http://www.cio.com/blog_view.html?CID=19655 (July 20, 2006).


the range of $1,000 per user per year.114 Several other innovation projects involving user collaboration and analytics, many of which leveraged the developing BPP, were also proceeding, some at the department level and others with the support of the Executive Board.115 Apotheker remained convinced that broadening the SAP footprint within enterprises was a critical component of SAP’s growth strategy, especially from a sales and marketing standpoint. “Almost by definition, a platform means something that is open and universally applicable,” he remarked. “You can't be in the platform business and then say, “By the way, the users can only be a very narrow band of highly specialized people from certain companies.”116

Remaining Challenges in Developing and Supporting a Partner Ecosystem

By the start of 2006, over 1,000 external software partners had been certified by SAP for developing or integrating solutions using the NetWeaver integration platform, and Kagermann stated that SAP had formed over 500 channel partnerships.117 (See Exhibit 19 for examples of NetWeaver partners.) However, since the next-generation BPP had not yet been released, it remained to be seen how many ISVs would develop solutions on top of it. Yusuf, who was responsible for SAP’s efforts to develop and enable the partner ecosystem, emphasized the importance of succeeding in this area: “Driving successful economics of our ecosystem based on an open platform and co-innovation is critical for SAP’s future growth.”118 Companies such as Virsa Systems and Vendavo had built businesses around the NetWeaver platform, but both of those companies had made significant investments to establish close reseller relationships with SAP in order to leverage the SAP sales force.119 As Snabe described, the majority of ISV partners could not expect the same treatment:

ISVs want a very close relationship, and that presents a capacity issue. How many can we handle? What we need is one model for the many ISVs with whom we don’t interact that much, and another model for the more integrated ISVs, where in some cases we even OEM or resell their solution or they do the same for ours. We’re at a stage now where we understand that it’s probably two different organizations, one focused on scalability and another on close relationships.120

Culturally, shifting to more partner-focused thought processes across the organization was still a work in progress. “To really be successful, thinking about partners has to move from being constantly pushed by the Executive Board to being a part of the DNA of each and every unit, and

114 Dawn Kawamoto, “SAP Debuts Hosted CRM Service,” ZDNet, February 2, 2006, http://news.zdnet.com/2100-3513_22-6034319.html (July 20, 2006). 115 Information provided to authors by SAP Corporate Strategy Group. 116 Interview by authors, November 22, 2005. 117 Renee Boucher Ferguson, “SAP Sketches Out Plans for the Long Haul,” www.eweek.com, http://www.eweek.com/article2/0,1759,1915453,00.asp (July 20, 2006). 118 Interview by authors, May 14, 2006. 119 Interview by authors with Jamie Rapperport, Founder and Executive Vice President of Marketing and Business Development, Vendavo, December 9, 2005. In April 2006, SAP announced that it was acquiring Virsa Systems. 120 Interview by authors, November 21, 2005.


we are not done with that,” added Snabe.121 To accelerate this process, Snabe had changed the objectives of his direct reports so that they were measured not only on SAP application revenue, but on the total revenue of the SAP ecosystem, partners included. “There needs to be a structural response,” he explained. “There’s some forcing of behavior change that needs to be done at first. Then, the business results will reinforce the strategy and accelerate execution.”122

Remaining Challenges in Aligning and Motivating the Organization

To help cascade understanding of the new growth initiatives, Kagermann had leaned heavily on his corporate communications team and the Corporate Strategy Management group.123 To evaluate progress toward achieving SAP’s corporate goals, Kagermann and his team also had identified 34 Strategic Performance Management Objectives as part of the Best-Run SAP effort. (See Exhibits 20 and 21 for the complete list of objectives and examples of measures used.) By the beginning of 2006, Kagermann was confident that his senior executives shared a clear understanding of SAP’s strategy and what would be required to execute it. In November 2005, for the first time since the GOAL reorganization, the entire senior executive team – including many of the new external hires – had assembled and formulated their goals for 2006. Each executive, and not just Kagermann, then worked with their direct reports to cascade and align 2006 objectives.124 “The industry leadership team meeting last week was the best I have ever experienced,” noted Tom Shirk, President, SAP Global Public Services, in September 2005. “We are all focused, and for the first time that I can remember, extended teams now share the same goals.”125 Siegfried Leiner, Vice President, CRM Application Solution Management, concurred: “Right now, I feel that there is broad support for the strategy.”126 At the same time, tensions still lingered between Walldorf and Palo Alto, and Plattner saw no easy way to resolve them. As much as he served as a driving force behind SAP’s growth strategy, Agassi’s rapid ascent within the organization and his multiple senior level hires had sent a wave of uncertainty across the Atlantic. “[Agassi’s] boys come in at very high levels, without even being seen by the staff here,” criticized one Walldorf employee.127 Plattner felt that some aspects of Agassi stirred apprehension in the organization, especially when one compared Agassi’s background to that of other Executive Board members. At lower levels of the organization, achieving understanding and alignment required more work. When asked about the BPP in October 2005, one salesperson responded, “When you say business process platform, what do you mean?” Busse noted, “In some functional areas, translating the vision into concrete tasks that people can do to help this company deliver is extremely difficult.”128 Peter Lorenz, Chief Platform Engineer, observed that some individuals

121 Ibid. 122 Ibid. 123 From interview by authors with Fritz Neumeyer, September 19, 2005. 124 From interview by authors with Herbert Heitmann, November 23, 2005. 125 Interview by authors, September 12, 2005. 126 Interview by authors, September 21, 2005. 127 “SAP Employees Fear Loss of Power,” op. cit. 128 Interview by authors, September 20, 2005.


seemed more “fascinated” by the options the strategy offered than aligned to execute upon it.129 And the discrepancy in understanding and buy-in between senior and junior level employees concerned Illgner. “SAP is used to working according to top-down guidance, bottom-up innovation, and bottom-up engagement,” he said. “Now we seem to be very much in a ‘we think, you execute’ mode. That’s a problem from a motivational standpoint. If you are as loosely organized as SAP is, and you try to do things top down, you will not get what you expect.”130 In addition, employees were still adjusting to the changes made during the GOAL reorganization and to the recent institution of more centralized development processes. Haefner explained:

In the past, people owned responsibility over entire areas for a given product: quality management, product management, support. For many people, this structure provided job satisfaction. They said, ‘Hey, this area for this product is my little baby.’ And as they did it better, they got to manage more people. Now the role is different. We are all part of one big platform, and we each need to contribute a little piece to it. Before, SAP was siloed from a product perspective, and internal groups competed with each other to build the best products. Now we are siloed functionally. So we went from one silo to the other.131

Most executives, though, shared confidence that given time, SAP would adjust to the various changes underway and succeed with the new growth initiatives. “People just don’t change that quickly,” concluded Haefner. “We all need time to digest this stuff.”132 “At this point,” reinforced Heitmann, “I think everyone realizes that the platform strategy is not going away.”133

Continuing to Defend and Grow the Core Business

On January 25, 2006, SAP reported record revenues for fiscal year 2005, including 15 percent year-over-year growth in software revenues, highlighted by 28 percent growth in the United States and 22 percent growth in the Asia Pacific region. SAP also announced 13 percent growth in overall revenues and 14 percent growth in net income. The company reported gains in market share (as measured by application software revenues) against its peer group of Oracle, Microsoft, and Siebel Systems. Peer market share increased to 62 percent worldwide and to 47 percent in the United States.134 Consistent with Kagermann’s earlier guidance about investing in the new growth initiatives, SAP’s operating margins remained relatively flat. Between April 1, 2005 and April 1, 2006, the share price of SAP stock on the NYSE rose from $39.36 to $54.32, an increase of 38 percent.135 Kagermann’s guidance for fiscal year 2006 included a forecast for 15 to 17

129 Interview by authors, October 21, 2005. 130 Interview by authors, September 20, 2005. 131 Interview by authors, September 23, 2005. 132 Interview by authors, September 23, 2005. 133 Interview by authors, November 23, 2005. 134 “SAP Reports 18% Growth in Software Revenues for 2005,” www.sap.com, http://www.sap.com/company/press/Press.epx?PressID=5571 (July 20, 2006). All year-to-year comparison figures in this section have been adjusted to reflect constant currency values. 135 Yahoo! Finance, http://finance.yahoo.com/q/bc?s=SAP&t=2y&l=on&z=m&q=l&c= (July 20, 2006).


percent growth in software revenues and an improvement of 0.5 to 1 percent in SAP’s pro forma operating margin. On April 20, 2006, SAP reported results for the first quarter of 2006. Compared to the first quarter of 2005, the company announced 14 percent growth in software revenues (including 30 percent growth in the Americas region), 13 percent growth in total revenues, and 9 percent growth in net income. Pro forma operating margin increased by 0.4 percent. SAP also announced that it would no longer measure its market share against a peer group of only two or three vendors, and instead would use a broader index of software application vendors representing over $16 billion in worldwide software revenues. SAP estimated its market share against this new peer group at 21.4 percent.136 During the two trading sessions surrounding the announcement of its first quarter results, SAP’s share price on the NYSE fell by 3.4 percent.

COMPETITIVE CHALLENGES AHEAD

While Kagermann was driving forward SAP’s growth strategy, the company’s rivals were not standing idle. In addition to building out its Web services-based application integration platform, .NET (“Dot Net”), Microsoft’s growing Business Solutions division had turned its first quarterly profit in the fourth quarter of 2005. Although the company had announced no official plans to build business applications targeted at very large enterprises, Microsoft Chairman Bill Gates had dropped some hints. “Our products can scale up to cover a super, super high percentage of all businesses in the world," Gates told one reporter. “When companies want to pick a new software application base, [eventually] we will be in there competing in 95 percent of the cases.”137 IBM was steadily improving its standards-based WebSphere integration platform, and was also courting ISVs to build new business software applications using open source technologies and IBM’s developer tools.138 And on the heels of its acquisitions of PeopleSoft and Siebel Systems, Oracle had announced aggressive plans to develop SOA-based middleware and applications collectively called Oracle Fusion.139 Initially scheduled for delivery in 2008, Fusion would offer similar business and IT benefits as the BPP. (See Exhibit 22 for a comparison of Oracle Fusion and the BPP.) Oracle also had formed several new midmarket channel partnerships and publicized, with much fanfare, an offer to rebate up to 100 percent of its license fees to existing SAP R/3 customers that switched to Oracle applications.140 As he assessed the competitive environment, Kagermann saw time as SAP’s primary advantage:

136 “SAP Reports 22% Growth in Software Revenues for the 2006 First Quarter,” www.sap.com, http://www.sap.com/company/press/Press.epx?PressID=6126 (July 20, 2006). 137 Ina Fried, “Microsoft Unit Key to New Strategy,” ZDNet, March 29, 2006, http://www.zdnet.com.au/news/security/soa/Microsoft_unit_key_to_new_strategy/0,2000061744,39248656,00.htm (July 20, 2006). 138 “Partnering in an Open World,” www.ibm.com, http://www.ibm.com/investor/viewpoint/features/2005/28-09-05-1.phtml (July 20, 2006). 139 Glen Kunene, “Oracle Unveils ‘Fusion’ Plan for Acquired Product Suites,” www.DevX.com, September 21, 2005, http://www.devx.com/enterprise/Article/29295 (July 20, 2006). 140 Matt Hines “Oracle Touts Midmarket Push Ahead of SAP Show,” CNet News.com, May 16, 2005, http://news.com.com/Oracle+touts+midmarket+push+ahead+of+SAP+show/2100-1012_3-5709552.html (July 20, 2006) and Robert Westervelt, “Oracle Swipes at SAP with Rebate Program,” June 15, 2005, www.searchsap.com, http://searchsap.techtarget.com/originalContent/0,289142,sid21_gci1098486,00.html (July 20, 2006).


Our competitors are big, powerful companies. I would never doubt that they have the capabilities to do what we are trying to do. I am not arrogant about that at all. Microsoft can do it, and Oracle can do it if they get their act together and don’t make mistakes. But they need more time than we do. Microsoft has to learn how to understand large enterprises. Oracle has to figure out how to bring together all these companies they have bought, which takes years. And IBM would have to go back to building standardized applications, which would be time consuming.141

Kagermann knew that every resource allocation decision he made in 2006 carried critical importance. He pondered how to proceed. Recent reports in the press and from Apotheker’s sales team confirmed the fact that enterprise adoption of Service Oriented Architectures varied widely from company to company, and not all analysts and customers felt that the new growth initiatives were the best move for SAP. While convinced of the merits of the strategy, Kagermann feared that an all-consuming focus on the BPP could prove disruptive to some customers, causing customer satisfaction to drop in the short term and creating opportunities for hungry competitors. Merritt, for one, underscored the need for urgency in completing the BPP related initiatives as soon as possible: “The timeframe in which large customers are committing to software platforms is beginning now. We can offer a better value proposition with our pre-built enterprise services, but we’re not there yet.”142 At the same time, SAP’s primary competitor in the business applications space was determined to undermine the company’s short term performance. “Oracle is gearing up for a ground war,” described Purcell. “They’re hiring people to call on customers. We’re hiring people to strategize back at the office, or people in overlay roles who add complexity as opposed to value when it comes to customer engagements. I hope that’s the best move. I hate to use a war analogy, but it’s hand-to-hand combat right now in the field.”143

CONCLUSION

Kagermann closed the cover of the Sun-Tzu document, placed it back on his desk, and thought about the scenario he faced:

Today, nobody else can do what SAP can do. That’s why execution is so important. We have a unique window of opportunity. Last year, it was important for us to clarify the strategy and reshape the organization. Now the strategy is set and we cannot question it again. It’s execution, execution, execution. Of course, we will make small changes and technical adjustments. But we can’t afford more than that. If we execute effectively, we can change the culture with success.144

Kagermann was proud of the progress SAP had made over the past year, yet he knew tensions and challenges remained. Besides the persisting internal execution issues, external threats were intensifying. Peering into the chill night, Kagermann took a deep breath and cleared his thoughts. He had plenty of time to plan his next moves on the drive back to Heidelberg.

141 Interview by authors, November 22, 2005. 142 Interview by authors, September 21, 2005. 143 Interview by authors, December 2, 2005. 144 Interview by authors, November 22, 2005.


Exhibit 1: Selected SAP Financial Results, 1997-2005*

2005 2004 2003 2002 2001TOTAL REVENUE 8,513 7,514 7,025 7,413 7,341% Change from Prior Year 13.3% 7.0% -5.2% 1.0% 17.2% Revenue By Business Area Software (License) 2,783 2,361 2,148 2,291 2,581Maintenance 3,175 2,823 2,569 2,423 2,121Consulting 2,139 1,971 1,954 2,204 2,083Training 343 302 299 414 466Other 73 57 55 81 90 Revenue By Geographical Region Europe, Middle East & Africa 4,513 4,223 3,970 4,048 3,786Americas 3,000 2,424 2,216 2,502 2,724Asia Pacific 1,000 867 839 863 831 Software Revenue by Category Enterprise Resource Planning 1,157 990 802 927 941Customer Relationship Mgmt. 603 501 440 473 445Supply Chain Mgmt. 509 480 477 464 583Supplier Relationship Mgmt., Business Intelligence, Other

352 223 273 259 416

Product Lifecycle Mgmt. 162 167 156 168 196 OPERATING INCOME** 2,410 2,086 1,880 1,688 1,471Pro Forma Operating Margin %* 28.3% 27.8% 26.8% 22.8% 20.0% NET INCOME 1,496 1,311 1,077 509 581Earnings per Share (Diluted) 4.83 4.22 3.47 1.63 1.85

2005 2004 2003 2002 2001 2000 1999 1998 1997 Total Revenue 8,513 7,514 7,025 7,413 7,341 6,265 5,110 4,316 3,022

% Software Revenue 32.7% 31.4% 30.6% 30.9% 35.2% 39.2% 37.8% 44.0% 49.9%

R&D Spending 1,071 900 832 898 866 857 705 572 363

As % of Total Revenue 12.6% 12.0% 11.8% 12.1% 11.8% 13.7% 13.8% 13.3% 12.0%

Number of Employees*** 35,873 32,205 29,610 28,797 28,410 24,177 21,488 19,308 12,856

% in R&D 32.4% 30.7% 29.9% 27.7% 28.0% 31.0% 25.1% n/a n/a

% in EMEA Region 60.1% 64.1% 67.0% 66.8% 64.9% 63.3% 60.8% n/a n/a

Revenue per Employee 0.237 0.233 0.237 0.257 0.258 0.259 0.238 0.224 0.235 *Source: All figures shown in millions of Euros; data sourced from SAP annual reports and SAP Web site. **Before stock-based compensation and acquisition related charges. ***Measured by total heads before 2000, and by full time equivalents (FTE) in 2000 and all subsequent years.

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CORE INFRASTRUCTURE Source: BMC Software (www.bmc.com).


Exhibit 4: Total Applications License Revenue by Vendor, 2001-2005*

2005 2004 2003 2002 2001SAP** 3,303 3,126 2,683 2,474 2,243Oracle 785 615 605 703 1,022Microsoft Business Solutions*** 321 267 227 123 42

*In millions of US dollars **Estimate based on Euro/dollar exchange rate as of March 1 of each year ***Estimate based on assumption of license revenue percentage of total revenue equal to 40 percent

Sources: SAP, Oracle, Microsoft annual reports; http://www.oanda.com/convert/fxhistory.


Exhibit 5: SAP Solution Portfolio, April 2006

SAP provides a comprehensive range of applications and solutions to empower every aspect of your business operations. You gain the visibility to pinpoint inefficiencies -- and the capabilities to transform them into competitive advantage. The foresight to identify new opportunities -- and the agility to respond to changing business realities. The functionality to optimize your operations -- and resources to extend best practices to your entire value chain.

Business Applications and Solutions These enterprise software applications and solutions optimize every aspect of your business operations:

Business Applications and Solutions

! mySAP Business Suite

! mySAP Customer Relationship Management

! mySAP ERP

! mySAP Product Lifecycle Management

! mySAP Supply Chain Management

! mySAP Supplier Relationship Management

! Mendocino

! SAP Analytics

! SAP Manufacturing

! SAP Service and Asset Management

! SAP Solutions for Mobile Business

! SAP xApps

! Solution Extensions

Solutions for Small and Midsize Enterprises SAP solutions for small and midsize enterprises deliver enterprise functionality and industry best practices in affordable, easy-to-implement packages:

Solutions for Small and Midsize Enterprises

! mySAP All-in-One ! SAP Business One

Platform SAP provides a robust blueprint and technical foundation for open and flexible business solutions:

Platform

! Enterprise Services Architecture ! SAP NetWeaver Platform

Source: SAP Web site (http://www.sap.com/usa/solutions/index.epx).


Exhibit 6: Examples of SAP Customers, 2005

Source: SAP Investor Relations.


Exhibit 7: SAP Sales Model, April 2006

Source: SAP.


Exhibit 8: SAP Deal Size Trends, 2002-2004

Source: SAP Investor Relations.

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il &

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harm

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tical

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P =

Ser

vice

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vide

rs, U

til =

Util

ities

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urce

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P I

nves

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atio

ns.


Exhibit 10: Henning Kagermann Corporate Biography

Prof. Dr. Henning Kagermann is chairman of the Executive Board of SAP AG and CEO. From 1998 to 2003, he was co-chairman of the SAP Executive Board and CEO together with Hasso Plattner. Following Plattner's election as chairman of the SAP Supervisory Board in May 2003, Kagermann became sole chairman of the Executive Board and CEO. Kagermann has responsibility for SAP's strategy and business development, and also oversees the areas of global communications, global intellectual property, internal audit and top talent management. Kagermann joined SAP in 1982 and was initially responsible for product development in the areas of cost accounting and controlling. Later, he oversaw the development of all administrative solutions including human resources and industry-specific development for banking, insurance, public sector, and healthcare. His duties also included finance and administration in addition to the management of all regions of SAP. Kagermann has been a member of the SAP Executive Board since 1991. As a professor of physics, Kagermann taught physics and computer science at the Technical University of Braunschweig and the University of Mannheim in Germany from 1982-1992 while at SAP. He is also a Trustee of the Technical University of Munich.

Source: Adapted from SAP Corporate Web Portal (internal).

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Exhibit 12: Schematic of Business Process Platform Components

Source: SAP Corporate Strategy Group.


Exhibit 13: Example of ESA Ecosystem Partners by Category



Exhibit 14: SAP Roadmap and Goals, February 2005

Integration & Application

Platform

CompositionPlatform

Business ProcessPlatform

Connectivity Business Innovation

TCO

ITFlexibility

�04�04

�05�05

�06�06 SAP will launch the first Business Process Platformto the market " by enriching the

SAP NetWeaver composition platform with ready-to-run business processes

" accessible through Enterprise Services

" Today, SAP generates ~50% of its business with solutions which were launched to the market 5 years ago

" In 5 years from now, continuous innovation will allow SAP to generate ~50% of its business with new solutions

ERP~40%

ERP(R/3)~90%

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2004/20051999

100%

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(SCM, CRM, PLM, SRM)

~50%

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Business Mix

2010

mySAP Business

Suite~90%

“Innovation“

mySAP Business

Suite~50%

NewProducts

~50%

“Innovation“100% Business Mix

2004/2005

Source: SAP Corporate Strategy Group, SAP Investor Relations.


Exhibit 15: Best-Run SAP Six-Tier Schematic

Source: SAP CEO Briefing Presentation, July 21, 2005, London.

VisionVision

SAP StrategySAP Strategy

Structure Policies KPIS Structure Policies KPIS

Core Values &New Requirements

Core Values &New Requirements

Behaviors and CapabilitiesBehaviors and Capabilities

Strategic Performance ManagementStrategic Performance Management

# IT “embedded” in business

# “ESA” – the next big thing

# The organizational framework

# The winning culture

# Cascading Strategy and Goals

# Global Management &Leadership; Talent Management


Exhibit 16: SCORE Organizational Structure, 2004

Business Solution Group

Solution Management

IBU3

IBU2

IBU1

IBUn

Appl. Sol. Mgmt 1 Appl. Sol. Mgmt n

Solution Managementincludes capability for both industry specific solutions and cross-industry solutions" Industry Business Unit (IBU)

" Application Solution Management (ASM)

Application Developmentcombines the development execution capability of both the industries and the cross-industry solutions

Global Marketing and Global Communications will provide shared services to the Solution Management function of the BSGs (format / delivery mechanism)

Application Development

Industry-Specific DevelopmentCross-industry Development

Source: SAP Corporate Communications Group.

GlobalMarketing

Global Service and Support

Global Field Organization

SAPConsultingBusiness Solution Groups

Manufacturing Industries

" SolutionManagement

" ApplicationDevelopment

ServiceIndustries



Financial & Public Services



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Finance & Admini-stration

Human Resources

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Internal AuditGlobal IP

Technology PlatformSolution Management

GlobalMarketing

Global Service and Support

Global Field Organization

SAPConsultingBusiness Solution Groups

Manufacturing Industries



ServiceIndustries



Financial & Public Services



Application Platform & Architecture

Finance & Admini-stration

Human Resources

Office of the CEO

Global Comm.Corp. Consulting

Internal AuditGlobal IP

Technology PlatformSolution Management

SAP

AG

in 2

006:

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Cor

pora

te T

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atio

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M-1

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p.

48

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Exhibit 18: SAP Foundational Values and Desired Changes

Foundational Values" Customer focus " Integrity

" Quality " Commitment

" Engineering Excellence " Passion

Change from" Protecting status quo to… # Agility

" Complexity to… # Simplicity

" Pockets of execution to… # High performance

" “Not invented here” to… # Global collaboration

" Employee management to… # Talent development

2010 Vision Requires Transformation to NewRequirements and Continued Commitment to Core Values


SAP

AG

in 2

006:

Dri

ving

Cor

pora

te T

rans

form

atio

n S

M-1

53

p.

50

Exh

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19:

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Exhibit 20: List of SAP Strategic Performance Management Objectives

1. Customer Net Promoter Score 18. Maintenance Revenue 2. Customer Benefits Rating 19. Global 500 Share of Wallet 3. Easy To Do Business With 20. #1 Ranked Applications 4. Customer ROI References 21. #1 in Target Industries 5. Composite Quality Index 22. New Product License Revenue 6. Value Index 23. SME Market Share vs. Peers 7. Peer-Rated Execution Excellence 24. Platform Revenue 8. Employer of Choice vs. Competition 25. Field Services Productization 9. Management Excellence 26. Analytics Market Share vs. Top 3 10. Promotions from Top Talent 27. Operating Margin 11. Partner Net Promoter Score 28. Sales Profitability 12. Indirect Channel Application Revenues 29. Services Profitability 13. Active ISVs 30. Product Profitability 14. Audience Perception Barometer 31. R&D Effectiveness 15. IP Coverage Index 32. General & Administrative Cost Ratio 16. Brand Value 33. Margin Per Employee 17. Product Revenue Growth 34. Internal Partner Execution Index


SAP

AG

in 2

006:

Dri

ving

Cor

pora

te T

rans

form

atio

n S

M-1

53

p.

52

Exh

ibit

21:

Sam

ples

of S

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SAP

AG

in 2

006:

Dri

ving

Cor

pora

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rans

form

atio

n S

M-1

53

p.

53

Exh

ibit

21:

Sam

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Exhibit 22: Comparison of Oracle Fusion vs. SAP BPP

Oracle Fusion Applications SAP mySAP 2007

Approach to the Market Vision Overall business message stresses cost-

cutting; Oracle relies heavily on technical and product messages.

Overall business message stresses strategic value of IT that evolves with business, but product descriptions are vague and complex.

Role of acquisitions in strategy

Primary role and central to vertical industry strategy

Minor role: Acquisitions are used to fill gaps such as MDM.

Vertical applications strategy

Oracle is buying and building its own vertical applications (e.g., Retek and Oracle for Clinical Applications), using Fusion Middleware as a common platform; minor role for partners.

SAP is building its own vertical applications (e.g., SAP for Oil & Gas solutions) and relying on partner applications to address “microvertical” functions and unaddressed opportunities (e.g., SAP Price and Margin Management from partner Vendavo).

Position of platform in strategy

Oracle Fusion Middleware was an estimated $900 million business in 2005 and has significant growth potential beyond the context of the Oracle Fusion Applications. Oracle competes directly with IBM and BEA in the Java/J2EE platform market.

SAP NetWeaver was an approximately $170 million standalone business, in 2005 representing uses primarily by R/3 and mySAP customers to supplement their application implementations today and in future as foundation of mySAP 2005 and 2007. Total 2005 NetWeaver revenues, including licenses embedded in mySAP sales, were $571 million. SAP rarely directly competes with IBM and BEA in the Java/J2EE platform market.

Upgrade and migration paths

Fusion Architecture elements will be available in future releases of PeopleSoft, JDE, and other existing application suites; Fusion Middleware is available today.

Customers must migrate to mySAP 2005 to get to mySAP 2007.

Partnership Strategy Partner philosophy Oracle is expanding its partnering

activities, but it has historically low levels of collaboration with partners.

New Partner Community Process aimed at extensive collaboration with partners in product design and direction and vertical strategy

Microsoft relationship Has no strategic partnership; builds its own interoperability points to Microsoft Office, other products

Has joint development partnership to enable Office and Exchange integration

Pricing and Packaging Strategy

Role of hosting in strategy Broad: Offers hosted application and infrastructure services

Limited: Offers application hosting but relies mostly on partners

Role of pricing in strategy Has transparent and flexible pricing; base application platform is priced aggressively

Despite its success in creating simplified pricing models, SAP holds pricing close to the vest; customers complain that pricing that includes NetWeaver and a variety of engines can be arcane.

Source: Adapted from “Oracle Versus SAP In Enterprise Applications: Let The Battle Of Architectures Begin!,” Forrester Research, Inc., March 2006.

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