Caso5 Sap Ag

8/2/2019 Caso5 Sap Ag

1/54

CASE: SM-153DATE: 08/08/06

Thomas R. Federico prepared this case under the supervision of Professor Robert A. Burgelman as the basis forclass discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Theauthors extend their deepest gratitude to Ms. Anamarie Huerta Franc and Mr. Conrad Voorsanger of the SAP AGCorporate 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.

SAPAG IN 2006:DRIVING CORPORATE TRANSFORMATION

Success can be seductive. It can trick us into focusing too rigidly on long-established patterns of

thought. Thats why it is often so tempting to recycle yesterdays 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 andpicked up the 60-page document lying on his desk. Several months earlier, Kagermann, CEO ofSAP AG, had tasked his Corporate Strategy Group with preparing a strategic analysis, informallynicknamed the Sun-Tzu document in deference to the legendary Chinese general. It outlinedthe strategic opportunities and challenges that SAP should expect to face between 2006 and2010, 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 collectivelyas Web services soon would transform the $79.8 billion enterprise software applicationsindustry, in which SAP held the leading market position.1 Although sales of SAPs existingproducts had begun to rebound in 2004 after a multi-year slowdown, Kagermann had committedSAP to deploy new Web services-based technology on a massive scale by the end of 2007. (SeeExhibit 1 for an overview of SAPs financial performance.) He also had announced severalgrowth initiatives that hinged on the implementation of SAPs recently defined Web servicesstrategy, which was based on a framework SAP called the Enterprise Services Architecture

1Worldwide 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 excludingconsulting, support, and training revenues. SAP leadership position determined by comparing SAPs 2005 enterprise

applications software revenue to competitors Oracle and Microsoft.


2/54

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

(ESA). As he flipped through the report, Kagermann reflected upon the sweeping internaltransformation 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 SAPs newgrowth 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 thatSAP eventually would make the adjustments necessary to prolong its financial success in a futuredominated by Web services; the company had weathered several technology and market cyclesover its 33-year history. On the other hand, powerful and deep-pocketed competitors includingOracle, 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 theEnterprise 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 theorganizational and cultural impediments to achieving the corporate transformation required todeliver upon the new strategic growth initiatives. Yet SAP had much left to do to achieve itsstrategic goals. In the meantime, the companys huge customer base was generating anincreasing stream of demands to enhance existing solutions, and investors, who had bid SAPsstock 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 ofSAPs stock price performance relative to its peers.)

As Kagermann deliberated his options, three questions recurred in his mind. First, how could hedetermine whether the current pace of execution regarding the new growth strategy was right?

Moving too slowly would give SAPs competitors precious timebut moving too quickly couldagitate employees and alienate customers who did not share a sense of urgency toward SAPsnew strategic direction. Second, how should he sequence the rollout of changes still required?And third, given the industry environment and the resurgent growth of SAPs 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 businessprocesses (e.g. recording and paying invoices) and enabling access to and analysis of data fromdisparate corporate functions. Like popular desktop applications, such as Microsoft Excel orAdobe Photoshop, enterprise applications contained logic to manipulate data as well as graphicalinterfaces to interact with users. Applications were a primary component of the technologystack, a framework used to illustrate how primary software and hardware technologies

2Interview by authors, November 22, 2005.


3/54


interoperated. (See Exhibit 3 for a depiction of the technology stack.) Enterprise applicationsrequired both database software and middleware to run, and all three of these softwaretechnologies 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 wastypically segmented by product category and by customer size. Primary product categoriesincluded enterprise resource planning (ERP), customer relationship management (CRM), supplychain management (SCM), and analytics or business intelligence (BI). Primary customersegments included large enterprises (LEs), small to midsize businesses or enterprises (SMBs orSMEs), and small office or home office businesses (SOHOs). Each customer segment featuredcustomers with very different needs, and no one vendor dominated all three segments. The SMEsegment, also known as the midmarket, was particularly broad, defined by some vendors andanalysts as including any company with between 10 and 2,500 employees.

In 2005, SAPs 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 thatits license revenues for business applications over the most recent four quarters were more thanthree times those of its closest competitor, Oracle.5 However, Oracle recently had madeaggressive moves to consolidate the industry. By purchasing PeopleSoft (which itself hadacquired another established vendor, J.D. Edwards, just two years earlier) in January 2005 andSiebel Systems in January 2006, Oracle effectively had created a duopoly with SAP in the LEsegment.6 In the SME segment, SAP and Oracle both competed with Microsofts BusinessSolutions 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 opensource software were growing in popularity with SMEs and SOHOs, and upstart vendors such asSalesforce.com, NetSuite, Entellium, and SugarCRM were attacking the enterprise applicationsmarket from the low end.8 SAP stated that based on software revenues it was the midmarketsegment leader, but several other companies had a greater number of SME customers than SAP. 9For 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

3Worldwide Enterprise Applications 2006-2010 Forecast, op. cit.

4SAPs 2005 software and maintenance revenues divided by 2005 worldwide market size estimate from IDC.

5SAP 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).


4/54


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 4for 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, didnot 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 SAPapplications.11 Furthermore, SAP and Oracle salespeople had been known to collaborate on jointsales opportunities. In a similar fashion, IBM supplied its DB2 database software to many SAPcustomers and provided application hosting services to SAP. However, IBM also offered tools,technologies, and consulting services to help enterprise customers build their own customizedapplications 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 employeesworldwide in 2006.12 Headquartered in Walldorf, Germany, the company served more than32,000 business customers in 120 different countries.13 SAPs product line consisted primarily ofa set of applications called the mySAP Business Suite that included applications for enterpriseresource planning (mySAP ERP), supply chain management (mySAP SCM), customerrelationship 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 amore detailed overview of the SAP solution portfolio.)

For most of its history, SAP had focused on selling complex, standardized applications to thelarge enterprise market segment. (See Exhibit 6 for a sample of SAP customers, Exhibit 7 for

SAPs sales model and Exhibit 8 for recent deal size trends.) Typically, companies paid SAPmillions of dollars for the rights to use the basic version of a software applicationa charge

known as the license feeand then incurred additional costs to customize the software to theirspecific needs, deploy it within their information technology (IT) infrastructure, and maintainand 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.SAPs best-known enterprise application, an ERP solution named R/3, had generated billionsof dollars of license and service revenues from large companies since its launch in the early1990s.15 As a result, in several industries over 90 percent of Global 500 companies used softwarefrom SAP. (See Exhibit 9 for a chart of SAP industry penetration.)

11Lisa Vaas, SAP Allies with Oracles 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).


5/54


In the late 1990s and early 2000s, SAP had developed the mySAP ERP application as asuccessor product to R/3 and diversified into non-ERP areas such as CRM and SCM. Between1999 and 2001, SAP also spun off two subsidiary companies, SAPMarkets and SAP Portals, tofocus on building and selling Internet-based technology. SAP re-integrated both of thesesubsidiaries back into the parent company in 2002.

Internally, a seven member Executive Board governed SAP. Kagermann, who took overleadership of the company from his former co-CEO and original SAP co-founder Hasso Plattnerin May of 2003, also served as the Chairman of the Executive Board. (See Exhibit 10 forKagermanns corporate biography.) Kagermanns 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 theUnited States after a boom period that ended in 2001.16 After a decade of explosive growthsparked by the success of R/3, SAPs sales had stalled at around 7 billion by 2002 (see Exhibit1). Then, for the first time in more than ten years, SAP reported at the end of 2003 that totalrevenue had declined (by 5.2 percent) from the previous year.17 Sensing that a structural shiftmight be taking place in the industry, Kagermann put together a plan to reignite sales

momentum.

SAPS 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 platforma

collection of software technologies, tools, and contentthat he believed would deliverunparalleled value to customers and partners. Kagermann referred to this platform as thebusiness process platform, or BPP for short, and it represented the tangible product of SAPsEnterprise Services Architecture vision. Second, SAP would intensify its focus on the SMEmarket segment by developing more streamlined and flexible applications and expandingmidmarket sales channels. Lastly, SAP would broaden the relevance of its products by offeringfunctionality that appealed to more corporate users and by improving user interfaces.

If Kagermanns corporate analysts were correct, executing on this three-pronged growth strategywould result in the return of sustained double-digit sales growth and net margins of more than 30percent.18 However, Kagermann believed that it would take until 2010 or 2011 before the BPPand other products of the new growth strategy achieved broad adoption across the SAP customerbase.19 Defending the legacy enterprise applications business was critical in the interim.

16Snigdha Srivastava and Nik Theodore, Americas 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).


6/54


Growth Initiative One: The Business Process Platform

Kagermann positioned the BPP as an extension of an existing set of integration technologiescollectively called SAP NetWeaver. The main purpose of NetWeaver was to help SAP customersintegrate disparate SAP and non-SAP applications so that they interoperated seamlessly. Forexample, if a sales representative at the Fender Company entered an order for 300 Stratocasterguitarsinto mySAP CRM, NetWeaver automatically triggered an inventory replenishment orderwithin Fenders supply chain management application. Additionally, the order data alsoincremented Fenders accounts receivable, which were tracked within a third system, mySAPFinancials.20 Customers then could view data from these three applications and from other non-SAP systems all on one screen using NetWeavers enterprise web portal technology.21

NetWeaver also served as the technology foundation for a new class of applications calledxApps, the first of which SAP released in late 2002.22 xApps were composite applications thatleveraged 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 partysoftware partners to build novel xApps and sell them to joint customers.24 As of April 2006, SAPhad developed 7 xApps, and partners had developed an additional 20.

Despite the flexibility of NetWeaver and xApps, the fact that distinct SAP applications eachaddressed different business processes hindered overall extensibility and innovation. Forinstance, if a potential customer needed a solution that integrated 20 percent of the functionalitycontained within three different SAP applications, that customer needed to buy all three of thoseapplications and then use NetWeaver to integrate them. The license fees, technologicalcomplexity, 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 onand they arenot very tightly integrated. Why do we need these categories? Companies dontwant terms like ERP and CRM. They just want productivity and innovation. Ifyou believe this, you ask yourself, What should the architecture of the product ofthe future look like? And if you think about it a little bit, you come to the idea of

the Enterprise Services Architecturesomething that is stable, pre-integrated,easier to support, and simpler to extend and innovate around. But centered aroundapplication functionality, because that is what differentiates SAP.25

20Fender Rocks with SAP, www.sap.com, http://www.sap.com/company/press/press.epx?pressID=2286(July 20,

2006).21SAP 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.


7/54


The vision of the Enterprise Services Architecture was to make it radically easier and cheaper forcustomers and partners to do three things: create software applications that did exactly whatcustomers wanted, extend or change applications when desired, and integrate SAP and non-SAPapplications and services. Over the past several years, integrating the wide variety of enterprisesystems under their control had developed into a critical pain point for CIOs, who were

traditionally SAPs primary end customers. The ESA vision aimed to serve the IT-focused needsof 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 individualbusiness processes. SAP referred to these application building blocks as enterprise services.(See Exhibit 11 for examples of specific enterprise services.) Second, it added a compositionplatform consisting of tools that enabled customers to combine individual enterprise services

they wanted to use into full-featured enterprise applications. The sum of these componentstheNetWeaver integration platform, the application platform, and the service composition

platformformed 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 enterpriseservices included in the BPP, and SAP intended to add new services to the repository on afrequent basis.

The BPP embodied SAPs unique approach to what many analysts termed service orientedarchitecture, or SOA. Service oriented architecture represented a new software design paradigmthat leveraged the Internet to tie together disparate, loosely coupled, yet highly interoperablesoftware functions known as Web services. While competitors such as Microsoft, IBM, and BEASystems 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 thesame manner, SOA-based technology platforms like [IBM] WebSphere and[Microsoft] .NET give you tools and instructions to integrate applications, butthey dont give you the parts themselves. You still have to buy or build the actualapplications. We will give you the tools, the instructions, and the actual parts youneed to compose and integrate highly tailored, unique applications.26

To launch and support the BPP, SAP engineers needed to undertake a significant and ongoingresearch and development effort. Most of the enterprise services that would become part of theBPP already existed in one or more SAP applications, so each of these business processes neededto be decoupled from its mother application and reconciled with other similar processes that

existed in other SAP applications. Furthermore, to ensure compatibility with already installedSAP applications, the entire mySAP Business Suite had to be enhanced in order to becomeinteroperable with the service composition protocols and standards established by the BPP.



8/54


The Enterprise Services Architecture Partner EcosystemSAP hoped to attract a large ecosystem of product partners to build innovative new solutions ontop of the BPP. As Kagermann put it, We want to encourage co-innovation on the platform. 27With its Enterprise Services Architecture strategy, SAP was pursuing a model similar to the oneGoogle had developed with its Google Maps service in the consumer Internet space. By

defining simple interface standards and allowing external programmers to access its geographicalmapping technology via the Internet, Google had sparked the independent creation of hundredsof new, specialized Web sites that featured embedded Google Maps.28

With the BPP, Kagermann hoped that hundreds of independent software vendors (ISVs) wouldbuild new, highly specialized business applications by leveraging technology and functionalityfrom 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 andTechnology group.29 Jim Hagemann Snabe, General Manager, Industry Solutions, liked to bringup the case of KMD, a firm that developed software that the governments of small towns inDenmark 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 inDenmark, 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 cultivatearound the shared standards of the ESA. Kagermann envisioned personal productivity vendorssuch as Microsoft developing widely used tools by integrating their desktop products with SAPsolutions. Suppliers lower in the technology stack, such as networking giant Cisco, could embedSAP functionality directly into their offerings, and major IT vendors such as Intel and EMCcould 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 inSAPs strategy by using the BPP to compose applications for customers. All of these partnersalso could serve as cost effective channel partners for SAP, especially in the SME customersegment. (See Exhibit 13 for examples of ESA ecosystem partners.)

The Dual Business Model: Application Platform Provider and Application ProviderSAP did not intend to abandon its legacy applications business, at least in the short term, in orderto become a pure platform vendor. The companys sizeable direct sales force would continue tosell SAP applications even as other ISVs began to build their own applications on top of theBPP. 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 enterprisesoftware space. Nothing would prevent an ISV from using the BPP to build a solution thatcompeted with a similar application already being sold by the SAP sales force.

27Ibid.

28See http://www.housingmaps.com/or http://www.chicagocrime.org/for examples.

29Interview by authors, October 31, 2005.


9/54


Growth Initiative Two: Building Market Share in the Midmarket

SAP had competed in the SME segment for years, but its success depended upon what measureone used. On the one hand, as Leo Apotheker, SAP Executive Board member and President ofthe 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 howlarge customers exerted a gravitational pull on SAPs resources and thought processes. One ofthe realities of a software company is that whatever we deliver is never exactly what all of ourcustomers want or expect, he commented. Our larger customers apply immense pressure on usto close this gap as soon as possible, and they have more money. So guess what? We listen morecarefully 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

SAPs traditional focus on large enterprises also led it to define the SME segment more broadlythan many analysts and competitors did. SAP included companies up to $1.5 billion in revenuein 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 20countries, was considered a midmarket customer by SAP.33 This approach caused some outsidersto question SAPs true performance in meeting the unique needs of smaller firms. Microsoftconsiders any company with more than 500 PCs or 1,000 employees to be an Enterprisecompany, not an SME, said Anthony Cross, a Lead Product Manager for Microsoft. I wouldhardly categorize a billion dollar company as small or midsize.34

In addition, SAPs direct sales force still served as the primary channel for acquiring midmarket

customersespecially the larger SME customers that substantiated the companys claim ofbeing 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 raisedmany questions. Zia Yusuf, Executive Vice President of Platform Ecosystem and the formerfounder and head of SAPs Corporate Strategy Group, outlined some of them:

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


31Interview by authors, February 3, 2006.

32Information provided to authors by SAP Corporate Strategy Group.

33Information gathered from Harley-Davidson Web site http://www.harley-davidson.com (July 20, 2006).




10/54


Growth Initiative Three: Providing Value to More Business Users

SAPs existing applications, with the exception of mySAP CRM, typically catered to a smallnumber of highly trained users within an organization. SAP had built enterprise softwareapplications since the early 1970s, and initially the cost and complexity of enterprise computingrestricted the broad use of business applications. Even by the year 2000, less than 10 percent ofemployees had access to their companys primary ERP system.36 By the early 2000s, however,the decreasing cost of personal computers and the proliferation of both desktop applications andthe Internet had democratized business computing. In the United States alone, 77 million

peoplerepresenting 55 percent of total national employmentused a computer at work in2003.37 Email and instant messaging had become standard means of information sharing, andweb sites like Yahoo! and Google had set new standards of simplicity in the realm of computinginterfaces.

Compared to the average web site, the typical SAP application required employees to receivesignificant training in order to understand how to use it.38 Internet-focused competitors such asSalesforce.com were exploiting ease of use as a competitive advantage over SAP, and simpleweb-based services from the likes of Google, America Online, and Yahoo! were gainingincreasingly strong adoption within corporations, primarily at the individual user, workgroup,and department levels.39 Despite SAPs large number of customers, the company had significantopportunities to deliver greater value by developing more broadly appealing software and/orpackaging 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 ProjectMendocino, and set out developing a product to be launched under the brand name Duet. Thetwo software giants agreed to create joint products that embedded functionality and data from acustomers SAP applications (e.g., vacation time tracking) into Microsofts Office suite ofdesktop 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 versionof the mySAP CRM application. Unlike all other SAP products, SAP CRM on-demand would bedelivered over the Internet instead of being installed at a customers site. However, the servicewould be designed so that customers could transition from an off-site to an on-site solutionshould 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 onits 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).


11/54


and maintenance and service contracts with existing applications customers provided the bulk ofthe companys 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 therewaiting for a new platform. So you have to develop in parallel: some things to benefit us in thelong term, and others to benefit customers now.41 Still, he believed that synergies existed

between SAPs current and future goals and products:

The BPP is key for several reasons. First, it helps us in the high end. Largecompanies 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 helpus assemble tailor-made products and sell them cheaply. And since the enterpriseservices within the platform will be analytical as well as transactional, they willhelp us to attract more business users within all customers.42

For these reasons, Kagermann felt that the articulation of the Enterprise Services Architecturevision 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 knowingthat by the time they decided how to transition to service oriented architectures, SAP would havea 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 newchannel partners (including American Express) to sell these two products into companies withless than $200 million in annual revenues.43 Increased focus on the midmarket did not have towait for the BPP.

CORPORATE TRANSFORMATION:CHANGING STRATEGY AND STRUCTURE

As he considered the new growth strategy, Kagermann felt that developing new products wasonly part of the requirement for success. We will not succeed with a product alone, he posited.

Its product plus. We have to change our processes, how we go to market, and how we areorganized.44 To kick start the change process, Kagermann made several public announcementsand implemented a broad organizational restructuring.

Announcing the New Growth Strategy

In January 2005, Kagermann began to unveil SAPs new growth initiatives to analysts.45 Overthe ensuing months, he elaborated a roadmap that included completion of the BPP and relatedinitiatives by the end of 2007, and set various financial goals for SAP to achieve by 2010. Theseincluded generating 50 percent of total revenue from new products outside of the mySAPBusiness Suite, increasing the share of software sales coming from the SME segment from 30



43Patricia 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).


12/54


percent to between 40 and 45 percent, serving 100,000 customers, and achieving 30 percent netmargins.46 (See Exhibit 14 for examples of Kagermanns roadmap and goals.)

Several months prior to these initial announcements, Kagermann had described his ideas aboutthe growth strategy and the BPP to SAPs top executives. Internal discussions about the

proposed growth initiatives had been ongoing, and Kagermanns first public announcementcaught some executives by surprise. The plan to pursue the BPP and a related partner ecosystemhad been developed at the Executive Board level, and many employees voiced uncertainty aboutits scope, impact, and timing. Although opinions about how radical a change the ESA visionrepresented 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 dont believe this.Back in 1999 we had no idea that we would choose to move downmarket soaggressively, and that becoming a volume business would become imperative.But you watch the statistics. Deal size starts going down. Software revenue startsdeclining. Eventually you realize the buying pattern has changed; it has become a

buyers market. You hope that the revenue comes back. You cut costs in themeantime. Well, one year passes, and it doesnt come back. Another year passes,and it still doesnt come back. You cannot continue to cut costs, becauseeventually 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 technologyas far back as the 1990s. Now we are evolving our software to allow outsideparties to develop applications that sit outside our platform, but are integrated as ifthey are sitting on the inside. It is not a radical change; we already have over1,000 partners. Rather, we are revamping an existing strategy at a much largerscale. Frankly, the technology shift to client/server computing architectures in theearly 1990s posed a bigger threat to our culture and organization than the one weface today. But the scale of the tasks involved in this change, now that we havemany more products and employees, is much bigger. Its 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 fledglingenterprise portal technology that his former company, TopTier, had developed. SAP hadacquired TopTier and promoted Agassi to the Executive Board in 2002 at the age of 34. Shaismajor contribution is that he pushes with extra energy and accelerates things, commentedPlattner. This is where SAP is traditionally weak. The strategy itself is not as challenging asgenerating the energy level and the velocity to execute it.49

46Dawn 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, February 3, 2006.49

Ibid.


13/54


Best-Run SAP and Cascading the Strategy

Having been at SAP since 1982, Kagermann had experienced firsthand the companys rapidheadcount growth (which had increased more than thirty-fold since his arrival), as well as itssteady transition from a single-product company into a multi-line, multinational software giant.Yet such growth had come with a price. SAPs highly autonomous culture traditionally de-emphasized structured processes and cross-organizational collaboration in favor of functionalexcellence 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 growthstrategy would be impossible without better communication, planning, management, andemployee engagement. Throughout 2004 and 2005, he kicked off a series of internal processinitiatives collectively known as Best-Run SAP to communicate the new growth strategy to alllevels 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 allocatedresources including Executive Board members to support each one. A key process element ofBest-Run SAP was the Cascade effort, whereby SAP intended to propagate understanding ofthe corporate strategy throughout the organization. By doing so, the Cascade project aimed to tiestrategy to execution within each business unit, align business units that needed to executetogether, 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 identifiedand documented organizational goals, an execution plan, success measures, and criticaldependencies. 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 addedan annual two to three hour session with each business unit leader (in addition to existingquarterly review sessions with the Executive Board) as a part of the strategic managementprocess. Furthermore, he created a dedicated Corporate Strategy Management team to assist instrategy evaluation, strategic business planning, and strategy communication. Finally, Best-RunSAP defined new requirements of SAPs cultural values and placed increased emphasis onevaluating manager performance. (See Exhibit 15 for a schematic of the Best-Run SAPframework.) To measure progress toward the goals of Best-Run SAP, a survey-based mechanismcalled Pulse Check was created to solicit periodic feedback from employees.

The GOAL Reorganization

In 2003, Kagermann and Plattner had implemented a major organizational redesign calledSCORE, short for Strategic Cross-Organization Realignment. SCORE attempted to increase the

efficiency of the SAP organization by grouping SAPs 17 industry and product units into threeBusiness Solution Groups (BSGs) and by introducing more structure into the productdevelopment process. Although many of the process change initiatives undertaken as part ofSCORE were still not fully complete by 2005, Kagermann nonetheless went forward withanother significant restructuring. (See Exhibit 16 for more information on SCORE.)

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


14/54


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 valuechain: Research and Breakthrough Innovation (new technology development), Products andTechnology (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, fieldservices, and field marketing). GOAL also established two support functions that cut across thefive value chain focused groups: Finance and Administration, and Human Resources andProcesses. 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 technicalarchitects of SAP R/3, took on leadership of the Research and Breakthrough Innovation unit. Inthis role, Zencke was solely responsible for building and packaging the application platform andthe pre-defined enterprise services embedded in it. In addition, Zencke and his team set out todefine 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 teamsto Zenckes group in order to accelerate momentum on these initiatives. Kagermann had statedpublicly that the BPP would be made accessible to ISVs by the end of 2006, and theBreakthrough 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 maintainedsole responsibility for the NetWeaver technology platform, and also took over leadership of allof SAPs product teams, industry teams, and existing applications. Kagermann charged Agassiwith continuing to improve NetWeaver, expanding the product partner ecosystem, and makingall existing SAP applications interoperable with the BPP. The Products group was SAPs largestorganizational unit, and by late 2005, Agassis NetWeaver team alone had grown from 1,500members in 2002 into a 2,500-person group.51

Apotheker was named head of the Customer Solutions and Operations unit, and was chargedwith transforming SAPs sales function into a more volume-driven model that supported thecompanys goal of acquiring tens of thousands of new midmarket customers in the next fiveyears. In this position, Apotheker would play a critical role in defining the value proposition ofthe business process platform in such a way that both large and SME customers found itcompelling. Kagermann was also relying upon Apotheker and his team to convince customers toadopt SAP solutions in broader internal usage scenarios. Together, Apotheker and Agassi servedas co-presidents under Kagermann. Agassi led the Product Leadership Team (PLT), a group ofsenior development executives, and Apotheker led the Field Leadership Team (FLT), the PLTs

counterpart on the customer-facing end of the business.

Board member Claus Heinrich, who previously led the Manufacturing Industries BSG under theSCORE structure, took over the Production group and the Human Resources and Processesgroup. Gerd Oswald, another key player in the development of SAP R/3, assumed ownership ofGlobal Service and Support, and CFO Werner Brandt headed Finance and Administration.

51From interview by authors with Shai Agassi, October 31, 2005.


15/54


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

In the old structure, it was extremely challenging to achieve alignment acrossproduct groups, support groups, and field units. Now, within each box each leadercan 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 andthe platform. The platform guy will try to please the ISVs, and the applicationsguy hates the ISVs because he partly competes with them. So Shai owns both.Similarly, in services, if you have one person owning custom development andanother person who is supposed to build more productized services, it createsfriction. And in terms of sales and marketing, Leo can now implement, veryquickly, worldwide structures and programs targeting the midmarket. We are in abig transition with the Enterprise Services Architecture, and the hope is thatGOAL 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 executionefficiency, Kagermann knew that executing on the new growth strategy posed several challengesthat 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, andespecially the vision of the Enterprise Services Architecture. The new growth strategy involveduncertainty, change, and the sacrifice of clear short-term opportunities, and he knew that not allemployees would agree with his decision and timing to pursue it. Kagermann and Heinrich wereparticularly concerned with keeping veteran employees engaged. The veterans have 10, 15

years of deep integration knowledge, stated Heinrich. They are not the people who instigatechange, but they make success happen if you can align them in the right direction. Its interestingfrom an HR perspective. You have to tell the people who are too aggressive, This is anevolution, and the people who are too slow, This is a revolution.53

Kagermann was cognizant that thousands of lower level implementation issues lurked beneaththe surface of the three growth initiatives, and that he needed strong commitment from all of hisemployees 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 toachieve an agreement. The tough part starts when you are in the implementation process andnobody 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 maintainengagement, Kagermann committed himself to discussing the new growth initiatives withemployees as much as possible, and focused resources on the Cascade initiative.





16/54


Development of New Sales and Support Models

SAP had built its fortune by selling complex software systems to the worlds largestorganizations. This business was rife with complexities: developing highly advanced and reliablesoftware, closing multimillion-dollar deals, maintaining 24/7 support for thousands of softwareinstallations across the globe. Despite the fact that it sold standardized software solutions, SAPacted, in the words of one executive, like a build to order company.55 SAP has been set up forlarge 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 ofpartners and thousands of new midmarket customers. We need to put in place a verysophisticated go-to-market approach, observed Apotheker. There is a big difference betweenmanaging a direct sales channel and managing indirect channels. We need to do both. Thatrequires channel development, organizational changes, personnel changes, and re-education.57Although 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 applicationplatform 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 theright models and processes to manage the anticipated tensions between its own salespeople, ISVpartners, and other channel sales partners.

Aside from potential channel conflict, the push to support greater sales volume also presented anumber of tactical issues. Yusuf elaborated on the problem from an ISV partners perspective:

Its okay to take three days to book a $10 million contract. Its not okay to takethree days to book a $200,000 contract. The process of sales is important tosimplify. Our typical contract can be several pages long. A small ISV maystruggle with it. Its not a nice little click on an I accept button on our web siteand boom, youre done. A partner might need to come to Walldorf to meetpeople. Well, two flight tickets to Germany and some of these smaller ISVs feelthe pinch on their budget for the year.58

At the same time, SAPs compensation structure favored larger deals. For example, Ted Purcell,an Account Executive in the USA Western Region, had switched roles several years earlier froma midmarket to a large enterprise focus. His reason: LE is where the money is. Its strictly afinancial 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 ofGlobal 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 beimpossible to send people on site to do quality assurance for all of these projects. We have to

55From interview by authors with Doug Merritt, September 21, 2005.




59Interview by authors, December 2, 2005.


17/54


think about some new ideas: remote servicing, automatic error data evaluation, automaticupdating, and so on.60 The new ideas Dieckmann mentioned largely involved building moresupport functionality into the BPP, which deepened the dependency of support staff on SAPsproduct 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. Ifthe customer changed something in the software, we said This is custom code. We can offerconsulting to fix the problem, but for a charge. We cannot do that in the future when we askISVs to develop on the BPP. We have to define clearer accountabilities. In the end, if it turns outto be a platform problem, we have to solve it.61 Yusuf concurred. At the end of the day, wemay 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 whos going to take responsibility?62 SAP also needed toexpand 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 SAPapplications. SAP provided application functionality, and the partner ecosystem served ancillarycustomer needs that SAPs products could not satisfy either efficiently or technically. We had aculture where we said, Partners are good as long as we need them. But otherwise they only takeaway 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, SAPs sprawling matrix organization of productand industry groups had created many overlapping roles and technologies over the years. DougMerritt, 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 toimprove the scope, functionality, and documentation of its development tools for third parties.Nevertheless, Merritt believed that the structural and technological challenges of more partneringwere secondary to the cultural. We have an emotional jump to make in embracing productpartners, he said. There is a pride and quality issue here in doing that. SAP product developersare a very proud bunch. They know that with enough time and resources, they can buildanything, which can make the concept of partnering for product functionality very difficult forthem 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, October 31, 2005.63



Interview by authors, September 21, 2005.


18/54


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 apartner 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 becompetitors, 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 thatwould provide incentives and structure for partners who wished to engage customers jointly withSAPs sales force or on SAPs behalf.

As part of GOAL, Apotheker and Agassi had restructured SAPs partner engagement model, firstby creating a new partner management organization. Agassis Products group handled productpartners, Apothekers Customer Solutions group managed implementation and service partners,and a joint partner board managed cross-organizational partnership issues.67 Agassi and hisleadership team, with the help of SAPs internal consulting and competitive intelligence groups,also had begun more strategic evaluation of SAPs partnership opportunities. We have builtscenario maps that outline SAPs coverage across all of the business processes of a given

industry noted Fritz Neumeyer, a senior member of the Corporate Strategy Group.

68

SAPmanagers had begun to use these scenario maps to crystallize future product plans. In myorganization, 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 theother areas where we should encourage co-innovation?69

To establish greater transparency with ISV partners, SAP intended to share its productdevelopment plans with them on a regular basis. We are opening up the kimono to ourpartners, Agassi declared, and showing them clear areas of opportunity where SAP will not gofor at least the next few years.70 Several potential partners, though, still sought more tangibleevidence that SAP was committed to becoming a partner-focused organization. Zenckecommented on the tension that arose from SAPs dual presence in both the platform andapplications businesses: There is some overlap. We aren't saying to ISVs, Hey, you have a safearea here, and that we never will go there. Over time, it makes sense for innovations to beabsorbed into the core platform.71

In May 2005, SAP scored a major publicity boost when several of the worlds largest ISVs andIT services companies (including Cisco, Intel, EMC, Adobe, Symantec, and VERITAS) publiclyendorsed the Enterprise Services Architecture vision.72 Heitmann recalled the pivotal day leadingup to those announcements:


67From interview by authors with Zia Yusuf, October 31, 2005.

68Interview by authors, September 19, 2005.




72Robert 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).


19/54


I had the luck to participate in this one day in Palo Alto where it seemed likeevery 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 asif somebody has pre-designed it. At one point I said to one of them, We usedifferent 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 thesame 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 hadall come to the same conclusion, and once this fact becomes visible to others, ithas extremely important convincing power. From a timing perspective, that dayhappened two weeks prior to SAPPHIRE Boston 2005.73 So 200 industry analystsand another 200 media representatives all witnessed all these big, well knowncompanies 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, saidHerbert 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 asrelease planning and scheduling be coordinated across formerly autonomous groups. To ArchimHeimann, Senior Vice President, ESA Adoption, achieving these efficiencies meant that SAPneeded 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 itourselves. 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 ofthe services required to do it is missing, it is not OK for us to say, Sorry, youhave 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 developmentorganization needed to be more controlled, predictable, and market-driven. Furthermore, rolesneeded to be more clearly defined and segmented. With a platform strategy, some people needto focus on building services, while others need to compose applications consuming thoseservices, explained Snabe, and the decision of which services to build must be driven from theoutside in.77 This increased industrialization of the development process ran counter to the highlevels of empowerment traditionally offered to individual developers and development managers

at SAP. Kagermann elaborated on this dilemma:

73SAPPHIRE was SAPs premier customer conference and was generally held twice per year.






20/54


SAP employees identify themselves very much with the company. This high levelof engagement creates inefficiency because everybody believes that they are anexpert in everything. People are always questioning what the leaders are saying.Still, thats how you create engagement, and engagement is positive. We are not ahierarchical, military style of organization. We cant just force decisions

downward. We need to set up many meetings to explain everything, and eventhen all sorts of complexity come up. Still, its 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 didnot deem critical. In the past, technical aptitude and strong customer relationships were toppriority. Many of SAPs senior managers in 2006 had spent their careers following a similarformula 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, SAPs Executive Boardwas composed almost entirely of company founders and former engineers who had risen upthrough the company ranks.79

With the BPP, SAP was now venturing into uncharted waters. The business model still was notfully defined. Profit opportunities varied widely by industry, and ongoing strategic alertnesswould be required to exploit them. The entire spectrum of how SAP developed, sold, andsupported software needed to change, especially given the important role SAP wanted externalpartners 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 understandingof customer needs at the top, he noted, but very few people in the middle who understand whatbeing 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 shethought in terms of, This is what we can do, this is what we can solve for a customer. In thefuture, they will have to think as much about who and what in the ecosystem can complementSAP solutions.82 Dieckmann noted how SAP support staff would have to go to customers with amore holistic approach: In the future, we will have to analyze a web of interconnected systemsowned by a customer, complemented by Web services from different providers, and get animpression of how these systems and services support the customers business processes. Thatrequires another level of thinking, analysis, and perception.83

On the sales front, Chakib Boudary, Senior Vice President, Value Engineering, explained thatfunctionality demos are not enough anymore. We have to demonstrate end to end business


79See 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





21/54


processes capabilities supported by business metrics, industry best practices, and a clear roadmap to value realization.84 Apotheker concurred. We are no longer selling technology, henoted. We are selling business opportunity, and we have to prove the benefits. At the same time,were changing the business model for consulting from selling people to selling intellectualcapital. 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, andindustry experience constituted a primary challenge for Kagermann, who believed he knew theroot cause of many existing competency needs:

There is an ongoing tension between the field and engineering. Engineers dontrealize the complex set of skills required to close big deals; they think that goodproducts just sell themselves. Salespeople dont understand how hard it is tomanage a development team and to build reliable solutions quickly. If you haventbeen on both sides, you cannot understand the others situation. The issue wehave 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 successionplanning 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 recruitingmany new employees from outside the organization. Agassi quickly earned a reputation forattracting executives to SAP from competitors, and he created a wide array of new, senior-levelpositions within the Products group that he filled with outsiders. Many of these roles addressedtopics 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 hiredmore than 200 new employees from its competitors over the past 18 months, with the majority ofthem working in the companys Palo Alto, California location.89 These hires complemented otherearlier, high profile talent acquisitions such as SAP Americas President and CEO BillMcDermott, who had left Siebel Systems for SAP in 2002.90

The influx of new outside hires stirred diverse feelings throughout the organization. Purcelldescribed his thoughts: User experience is not in SAPs DNA, so were bringing people onboard to change that, and thats good. Whats not so good is that three years ago SAP was a lean


85

Interview by authors, November 22, 2005.86Ibid.

87Information provided to authors by SAP Corporate Strategy Group.

88SAP 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).


22/54


company, but today, there are all these VPs and SVPs and new titles coming in. It makes SAPfeel 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 allof this hiring.91

Never before had SAP recruited so many senior executives from outside the company, and themoves cultivated a sense of uncertainty in many veteran employees. In the past, onlyachievement and tenure resulted in increased management responsibility; rarely were seniorpositions offered to outsiders. The concept of going outside the company to hire somebody whocomes in at a high level is indeed foreign to SAP, admitted Plattner. But my biggest worry isthat SAP gets too old. Even myself, I could have hung on as co-CEO after thirty plus years, butevery year you hang on, you block somebody else.92

Nonetheless, Heimann was concerned about the motivational implications of all the hiring. Ithink we have to bring new people, but we need to think about it carefully, and we need tocontinue to invest in our own people, he worried. If we dont, then we run into several

problems. First, we will create confrontation between newcomers and veterans. Second, we willlose productivity. We need to find a way for people who have been working at SAP for a longtime 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 comparedSAPs pursuit of software engineering perfection to how a skilled German vorlagenhandwerker,or master craftsman, approached his art. Since producing standardized software was always thegoal, SAP developers worked to ensure that their applications were configurable enough tohandle a huge range of potential use cases across many industries, even if this approach addedlayers 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 thewillingness 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 Snabesaid, We need a pragmatic approach that is business driven and open, not a theoretical approachthat is driven exclusively by IT needs.94

To help overcome resistance, Kagermann and the rest of the Executive Board reaffirmed SAPsfoundational values but also specified several new behaviors necessary to achieve SAPs newgrowth goals as part of the Best-Run SAP initiative. (See Exhibit 18 for a list of the foundationalvalues and desired changes.) Torsten Busse, Vice President, Global Communications, describedsome of the tools developed as part of this project: We developed an interview guide to getpeople to reflect upon their typical behaviors. What are the behaviors that really dont lead






23/54


anywhere? How do I promote the right behaviors? For example, we talked a lot aboutsimplifying 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 reflectedupon 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 newworld of the BPP and the partner ecosystem? Do I have to generalize or specialize, or do I haveto do both? Ideally, you have to do both, but thats really difficult for most people to do; aperson always has a preference. So the most common reaction is, Oh my God, Ive got toprepare for the future and Im entirely caught up in the past.96

Heitmann also sensed a regional cultural bias. From my perspective, it is much easier to win thehearts 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 propagandastream from Silicon Valley now promising heaven on earth? That will go away. Lets wait andsee.97 Underscoring Heitmanns point, an August 2005 article in Mannheimer Morgen, a local

newspaper printed near SAPs primary German campus, opened with the following line: Theemployees at the Walldorf headquarters of the software company SAP fear an Americanizationof the corporate group.98 The article went on to cite an employee who complained about theincreasing Palo-Alto-ization of SAPs development strategy. Kagermann viewed the issue ofworkforce globalization as a critical evolution process that was only just beginning:

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

ASSESSING THE SITUATION IN EARLY 2006

As 2005 came to an end, Agassi summarized SAPs situation:

50 percent of our R&D spend today goes into the platform, which is not yetmonetizing even to five percent of new license revenue. It's like Pfizer puttinghalf of their R&D resources into a drug that's not in the market yet, whilesimultaneously trying to grow margin and revenue by 15 to 20 percent, in amarket 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


96Ibid.


98SAP Employees Fear Loss of Power,Mannheimer Morgen, August 2, 2005. Article translation by SAP Global

Communications.99



24/54


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

Progress on Developing the Business Process Platform

Zenckes and Agassis groups were both making progress on the BPP. However, as SAPengineers delved deeper into defining and planning phases, more and more questions arose. Forexample, some of Zenckes architects now posited that multiple versions of the BPP would berequired to serve the needs of SAPs diverse range of customers. 101 Even the question of whichspecific 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. Bigcustomers versus small customers, which are the priority? Is the market truly deciding whichservices to produce in this first iteration, or do we think we know? And should we give ISVs orcustomers 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 ESAvision and were already preparing to adopt the BPP.103 Most customers, such as oil and gas giantChevron, were still debating how exactly to plan the shift to Web services-based technologyarchitectures, and the role that SAP would play as part of an overall architecture strategy.104Besides, many existing customers had more immediate demands for SAP. Merritt recalled theexperience of the first SAP conference he attended after being hired in 2005: Shai spent almostan hour talking about the platform vision and the innovation it could help customers generate,and the result was polite applause. After Shais presentation, a few SAP developers demonstrateda 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 configureenterprise services, required major enhancements. At the same time, potential ISV partners wereapplying 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 specialprojects to demonstrate SAPs determination to cater to partners.106 He reflected on the situation:Weve made great progress on the BPP. We just need to continue to make mistakes and correctthem 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, 2005.101From interview by authors with Peter Zencke, November 22, 2005.


103Information provided by SAP.

104Interview by authors with Don Paul, Vice President and Chief Technology Officer, Chevron Corporation, March

22, 2005.105


Most notably, Agassi had commissioned a fast-track project in 2005 to make available to ISVs 500 basic

enterprise services for application composition on SAPs existing NetWeaver (pre-BPP) technology platform.


25/54


we're going to run through the decisions that arise pretty quickly, because they're pretty obviousonce you see them in the customer context.107

After some initially frustrating experiences, Heinz Haefner, Senior Vice President, SAPNetWeaver Operations, summarized SAPs overall progress: Were learning, adjusting, and

learning and adjusting again. Even the idea of having two platforms we couldnt even haveimagined a year ago, because we hadnt thought through all the implications of customer needs. Iam 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 focusexclusively on the SME segment. We had been really vague at where we drew the line betweenmidmarket and large enterprise sales until this year, commented Purcell, but the lines ofdemarcation are now very clear. Also, we're hiring a ton of reps to focus on the midmarket.109Efforts to build the indirect sales channel and proactively manage anticipated channel conflictwere still in progress. 2006 is a critical year for us to invest in multi-channel sales models,

commented Apotheker. I dont think that you are ever fully done with it, as building channels ismore an ongoing process, but I believe that by the end of 2006 we will have put the foundation inplace to have SAP prospering.110

On the support side, the responsible parties were still discussing many key issues. We have topmanagement directions, said Dieckmann. We have all the strategic figures and performancetargets for 2007 to 2010. The task is now to develop the service and support portfolios thatenable us to reach these figures.111 The Global Service and Support group also wasimplementing mySAP CRM internally to help streamline their operations. Despite the overallprogress, Dieckmann noted the need for more tangible use cases for the as yet unreleased BPP tofacilitate 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 ERPapplication and the Microsoft Office application suite that both companies intended to makegenerally available in mid 2006.113 In February 2006, SAP formally announced the debut of itsCRM on-demand solution, although it launched only the first of three modules the companyexpected to release over the next six months. The announced price point for the service was in







113Al Sacco, SAP: Office Delay Won't Affect Mendocino, CIO, March 28, 2006,

http://www.cio.com/blog_view.html?CID=19655 (July 20, 2006).


26/54


the range of $1,000 per user per year.114 Several other innovation projects involving usercollaboration 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 SAPs growth strategy, especially from a sales and marketing standpoint.Almost by definition, a platform means something that is open and universally applicable, heremarked. You can't be in the platform business and then say, By the way, the users can onlybe 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 fordeveloping or integrating solutions using the NetWeaver integration platform, and Kagermannstated that SAP had formed over 500 channel partnerships.117 (See Exhibit 19 for examples ofNetWeaver partners.) However, since the next-generation BPP had not yet been released, itremained to be seen how many ISVs would develop solutions on top of it. Yusuf, who was

responsible for SAPs efforts to develop and enable the partner ecosystem, emphasized theimportance of succeeding in this area: Driving successful economics of our ecosystem based onan open platform and co-innovation is critical for SAPs future growth.118

Companies such as Virsa Systems and Vendavo had built businesses around the NetWeaverplatform, but both of those companies had made significant investments to establish closereseller 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 manycan we handle? What we need is one model for the many ISVs with whom we

dont interact that much, and another model for the more integrated ISVs, wherein some cases we even OEM or resell their solution or they do the same for ours.Were at a stage now where we understand that its probably two differentorganizations, one focused on scalability and another on close relationships.120

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

114Dawn Kawamoto, SAP Debuts Hosted CRM Service, ZDNet, February 2, 2006, http://news.zdnet.com/2100-

3513_22-6034319.html (July 20, 2006).115Information provid

Caso5 Sap Ag

Documents

Transcript of Caso5 Sap Ag