Caso 5 SAP AG

8/2/2019 Caso 5 SAP AG

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1160 PART FIVE: CONCLUSION: INNOVATION CHALLENGES IN ESTABLlSHED FIRMS

CASE V-2

SAP AG in 2006: DrivingCorporate TransformationSuccess COII be seductive. It can trick liS into

jocllsillg too rigidly 011 IOl1g-established patlerns oJtlwught. That 's IVhy it is ojten so tempting to recycleyeslerday's ideas loforl/l the guide/ines a/ld dogmasoftollJorrolV. 1hope that \Ve Call11Se the righ! visioll

alld strategy to avoid this trap.-Henning Kagermann. CEO, SAP AG

INTRODUCTIONOn a windy April evening in Walldorf, Gennany,Henning Kagennann took a sip of his tea and picked uplhe GO-page doeument Iying on his desk. Severa] monthsearlier, Kagermann, CEO of SAP AG, had tasked hisCorporate Strategy Group with p reparing a strategicanalysis, informally nicknamed the "Sun-Tzu document" in deference to the legendary Chinese general. Itoutlined the strategic opportunities and challenges thatSAP should expeet to faee between 200G and 2010, andexamined the prevailing forces shaping lhe cnlerpri sesoftware industry in 2006: lechnological change, consolidation, and shifting customer needs.Kagermann bel ieved thal emerging Inlernet-based

technologies alld standards known collectively as "Webservices" soon would transform the $79.8 billioll enterprise software applications industry, in which SAP heldthe leading market posit ion. 1 Although sales of SAP'sexis ting products had begun lo rebound in 2004 aftera mull i-year s lowdown, Kagennann had commit tedSAP t deploy new Web services-based technology on

SOllra: Thomas R. Federico prepared Ihis case under the supervisionof Professor Roben A. Burgclman as the basis for class discussionrather than to illustrate cither effective or ineffective handling ol' anadministrativc situalion. Thc aulbors extend their deepesl gratitude toMs. Anamarie Huerla Franc and Mr. Conrad Voorsanger 01' the SAPAG Corporatc Consulting Team and tbeir administrative staff for theirassistance and logistical supporl.Copyright 2006 by the Board al' Trus tees of the Leland StanfordJunior University. AlI rigbts reserved. To order copies or request permission to reproduce materials, e-mail the Case Writing Office al:[email protected] or write: Case Writing Office, Stanford Graduate School of Business. 518 Memorial Way, Stanford University, Stanford. CA 94305-5015. No pan o f this publication may be reproduccd,stored in ti retrieval system, used in a spreadsheet, or transmitted in anyform or by anymeans-electronic, mechanical, photocopying, recording, or otherwise-without the perrnission of the Slanford GraduateSehon} of Business.

a massive seale by lhe end of 2007. (See Exhibir I foran overview of SAP's financial performance.) He al50had announced several growth initiatives that hinged onlhe implementaran of SAP's recently defined Web services strategy, which was based 011 a framework SAPcalled lhe Enterprise Serviees Arehitecture (ESA). As heftipped through the report, Kagermann reflected upan thesweeping internal transformation 1hat SAP still needed locomplete in arder lo achieve his stated goals.

In addition lo requiring a costly rescareh and development efforl, capitalizing on SAP's new growth initiativesrequired far-reaching change thar would test the veryeore of the company: its leadership, its culture, its values,ils processes. On the one hand, Kagermann felr confidentthar SAP eventually would make the adjustments necessary to prolong its financia] success in a future dominatedby Web services; the company had weathered severaltechnology 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 tomarket was critical:

Execution is a question . How long wilJ it lake, how effi-cient and fast can we be? Can we actually be tbe first inthe market to deliver on the promises of the Enterprise Ser-vices Architecture? We do not have room to make manymistakes. We musl break clown lhe barriers imposecl by theolcl power structure.2By Mareh 200G, Kagermann and his leadership team

had laken many sleps lo overcomc the organizational andcultural impediments to achieving the corporate transformation required to deliver upon the new strategic growthinitiatives. Yet SAP had much left lo do lo achieve itss trategic goals. In the meantime, the company's hugecustomer base was generat ing an increasing stream ofdemands to enhance existing solutions, and investors,who had bid SAP's stock up ro new highs after the COIllpany reported record-breaking performance in 2005,expected sustained profitable growth throughout 2006and 2007. (See Exhibit 2 for graphs of SAP's stock priceperformance relative to its peers.)

llDC, Worldwidc Enterprise Applieations 2006-2010 Foreeast, Doc#201791. May 2006. Figure denotes 2006 estimated worldwide markelsizc bascd on software license, maintenance, and subscription revenuesbul excluding consulting, support, and lraining revenues. SAP leader-ship position determined by eomparing SAP's 2005 enterprise applications software revenue to competitors Oracle and Microsoft.2lnterview. 11/22/2005.


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PART F1VE: CONCLUSION: INNOVATION CHALLENGES IN ESTABLlSHED FIRMS 1161

2005 2004 2003 2002 2001 2000 1999 1998 1997Total 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&O Spending 1,071 900 832 898 866 857 705 572 363As % 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/aRevenue per Employee 0.237 0.233 0.237 0.257 0.258 0.259 0.238 0.224 0.235

'AII figures shown in millions 01 Euros; dala sourced from SAP annual reporls and SAP Web site (www.sap.com)."Before stock-based compensation and acquisition related charges."'Measured by total heads before 2000, and by fulltime equivalents (FTE) in 2000 and al! subsequent years.

EXHIBIT 1 5elected SAP Financial Results, 1997-2005*2005 2004 2003 2002 2001

TOTAL 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 AreaSoftware (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 466Olher 73 57 55 81 90

Revenue by Geographical RegionEurope, MiddJe East & Africa 4,513 4,223 3,970 4,048 3,786Americas 3,000 2,424 2,216 2,502 2,724Asta Pacific 1,000 867 839 863 831

Software Revenue by CategoryEnterprise Resource Planning 1,157 990 802 927 941Customer Relationship Mgmt. 603 501 440 473 445Supply Chain Mgmt. 509 480 477 464 583Supplier Relationship Mgmt., 352 223 273 259 416Business Intelligence, OtherProduct Lifecycle Mgmt. 162 167 156 168 196OPERATING 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 (DiJuted) 4.83 4.22 3.47 1.63 1.85

legacy business, how shollld he balance resource allocarion between short and long-term opportunities?

The Enterprise SOftware Applications IndustryEnterprise software applications helped companiesachieve cost efficiencies, make better decisions, andincrease customer value. They did so by automatingfonnerly manual business processes (e.g. recording and

INDUSTRY AN D COMPANY OVERVIEW

As Kagennann deliberaled his oplions, three questians recurred in his mind. First, how could he determinewhether the current pace of execution regarding lhe newgrowLh strategy was right? Moving too slowly wouldgive SAP's competitors precious time - but moving tooquickly could agitate employees and alienate customerswho did not share a sense of urgency toward SAP's newstrategic direction. Second, how should he sequence theroll011t of changes still required? And third, given lheindustry environment ane! the resurgent growth of SAP's


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1 1 6 2 PART FIVE: CONCLUSION: INNOVATION CHALLENGES IN ESTABLlSHED FIRMSEXHIBIT 2 SA P S t o ck P r i ce (NYSEl Perfonnance Relative to PeersFive year performance comparison: June 2001-June 2006

~ k \ ' \ C / ' & : " T - - - - - - - - - - - - , d - - - - - " - - - - - - - - - - - - 1

" " ; ~ = ~ = , _ ; : : i $ < = = = = : : J i I ! C = = = : : : : : ' - ' I ; ; : : = = = : : : : : $ : = = = = : ; ' - i I < : = : : : : j" tI

~ 1

Source: Yahoo! Finance.

EXHIBIT 2 (continued) SA P S t o ck P r i ce (NYSE) Perfonnance Relativet o PeersOne year performance comparison: June 200S-June 2006

Source: Yahoo! Finance.

paying invoices) and enabling access 1'0 and analysis ofdala from disparate corporate funcrions. Like populardesktop applications such as Microsoft Excel or AdobePhotoshop, enterprise applications contained logic lomanipulate data as well as graphical interfaces LO inter-act with users. Applications were a primary componentof Lhe "technology stack," a framework used to illustrarehow primary software and hardware technologies inter-operated. (See Exhibit 3 for a depiction ofthe technologystack.) Enterprise applications required both databasesoftware and middleware to run, and all three of these

software teehnologies ran on top of networks of powerfuleomputers cal1ed servers.

Enterprise applications constituted an approximately$80 bil1ion worldwide market in 2005, with compoundannual growth in the range of 7.5 percent projectedthrough 2010.3 The markel was typical ly segmentedby product category and by eustomer size. Primary

JIDC, Worldwide Enlerprise Applicalions 2006-2010 Forecast. [)oc#201791. May 2006.


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PART FIVE: CONCLUSION: lNNOVATION CHALLENGES IN ESTABLlSHED FIRMS 1163EXHIBIT 3 Depiction of the Technology Stack

IEND USERIApplication Application A p p ~ c a t i o nRecovery Availability PertormanceI I

I IISAP System HR, Financials, Manufacluring"e-enabied' mySAP.com a p p l ~ a t i o n s

Mlddeware Browser Pluins for Interne! Transacfions

Data bases Oracle, DEl2, Informix, MicrosotlSOL ServerUnix, Windows NT 12000Application Servers, Internet 8erversServersLANs, WAN& TCPAP ne!worksNelwork

leDRE INFRASTRUcrUREISource: BMC Software (www.bmc.com).

categories included enterprise resource planning), customer relalionship managernent (CRM), supchain managemenl (SCM). and analytics or businesslligence (BI). Primary customer segments includede enterprises (LEs), small to midsize businesses or

(SMBs or SMEs), and small off iee or homebusinesses (SOHOs). Each CUSlOmer segmenl fca-cuslOmers witll very different needs, and no one

dar dominaled all three segments. The SME segment,known as the "midmarket," was particularly broad,

by some vendors and analysts as including anyany with between 10 and 2,500 employees.

n 2005, SAP's share o f the worldwide enterpriselications market by lotal revenue was approximatelyreent, the largest of any industry player.' [n MarehSAP reponed thm ilS license revenues for business

ications over lhe most recent four quarters were morethree limes those of its c10sest eompetitor, Oracle.5ever, Oracle recently had made aggressive movesnsolidate the induslry. By purchasing PeopleSoftich itsclf had acquired another established vendor,Edwards, justtwo years earller) in January 2005 and2005 software and mainlenance rcvcnues divided by 2005

dwide market size cstimalc fmm lOe.2006 annual report.

Siebel Systems in January 2006, Oraeleeffeetively had ereated a duopoly with SAP in the LE segment6 In the SM Esegmelll, SAP and Oracle both eompeted with Mierosoft'sBusiness Solutions division and a host of other eompaniessucll as Sage Software and Lawson Software.7

In addition, new technological developments such assoftware as a service (SaaS) and open source software weregrowing in popularity witll SMEs and SOHOs, and upstartvendors such as Salesforce.com, NetSuite, Entelliul11,and SugarCRM were uttacking the enterprise applieationsmarket fram the low end.8 SAP statecl that based on soft-ware revenues it was the midmarkel segment leacler, butseveral Olher companies had a greater number of SMEcustomers than SAP.9 For example, Salesforce.com, acompany thal launehed its first services in February 2CXJO,already claimed 20.000 SM E aceounts; Sage Softwarec1aimed 4.7 million. lO Furthermore, millions of smallercompanies managed thcir operations using alternatives60 racle Web si te (www.oraclc.com).7Earlicr in 2004. Microsoft had initiated t a l k ~ lO


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1164 PART FIVE: CONClUSION: INNOVATION CHAllENGES IN ESTABlISHED FIRMS

'In millions 01 US dollars."Estimale based on Euro/dollar exchange rale as 01 March 1 01 each year."'Eslimale based on assumplion 01 ricense revenue percenlage 01 tolal revenue equal lo 40 pereent.Sources: SAP, Oracle, Microsoft annual reports; hltp:l/www.oanda.com/convertllxhislory

14hnp://www.sap.com/sol ul ions ti ndex .epx.ISSAP 1995-1999 annual reporls.

over 25 different target industries. 14 (See Exhibir 5 for amore detailed overview of lhe SAP solution portfolio.)For most of its history, SAP had focused on selling

complex, standardized applications lo lhe large enterprisemarket segment. (See Exhibit 6 for a sample of SAP eustomers, Exhibil 7 for SAP's sales model and Exhibil 8 forrecent deal size lrends.) Typically, companies paid SAPmillions of dollars for the rights to use rhe basic version ofa software application-a charge known as the "Iicensefee"-and tilen incurred additional costs 10 cLlstomizelhe software to their specific needs, deploy it within theirinformation technology (lT) infrastructure, and maintainand upgrade it in the future. In the majority of cases, systems inlegrators (SIs) such as Accentllre, 18M, 01' smallerregional firms performed rhe implementation and deployment of SAP software. SAP's besl-known enterpriseapplieation, an ERPSollltion named "R 13," had generatedbillions of dollars of license and service revenues fromlarge companies since ilS lallnch in lhe early 1990s. 15 As aresult, in several industries over 90 pereent of Global 500companies lIsed software from SAPo (See Exhibir 9 rol' aehart of SAP industry penetralion.)

111 the late 19905 and early 2000s, SAP had developedrhe mySAP ERP application as a sllccessor product toR13 and diversified into non-ERPareas sueh as CRM andSCM. Belween 1999 and 2001. SAP also Splll1 off twosubsidiary companies, SAPMarkets and SAP Portals, lofoclIs on building and selling Internet-based technology.SAP re-integrated bOlh ot"these subsidiaries back into lheparent eompany in 2002.lnternally, a seven member Executive Board gov-erned SAPo Kagennann, who took over leadership ofthe company fram his former eo-CEO and original SAPeo-founder Hasso Planner in May of 2003, also servedas the Chairman ofthe ExeCUlive Board. (See Exhibit 10for Kagermann's corporate biography.) Kagermann's first

EXHIBIT4 Total Applications License Revenue by Vendor, 2001-2005*2005 2004 2003 2002 2001

SAP" 3,303 3,126 2,683 2,474 2,243Grade 785 615 605 703 1,022Microsoft Business Solutions'" 321 267 227 123 42

sueh as desktop applieations (e.g., Microsoft Exeel andAccess) and/or human solutions such as bookkeepers.(See Exhibit 4 for more data on lhe eompelitive landscapein the enterprise applications market.)The dynamics of lhe enterprise software industry

were markcd by "coopetition;' primarily beeause manyvendors played in multiple areas of the teehnology slack.SAP, for example, did not have a significant presencein lhe database software arena, bUI Gracle did. Cansequently, despite the facl that SAP and Oraele were fiereecampelilars in the enterprise applicalions space, ayer 60percent of SAP customers used Gracle databases lO storelhe data used by lheir SAP applications." Furthermore,SAP and Oraele salespeople had been known to coJlaborate on joinl sales opportllnilies. In a similar fashion.IBM supplied its DB2 database software lo many SAPcustomers and provided applicalion hosting services loSAPo However, IBM also offered tools, leehnologies, andconsulting services lo help enterprise customers bllildlheir own cllslomized applications instead of buyingstandardized applieations from vendors like SAPo

l1hup://www.ewcek.com/article2/0. 1895.1790357 .OO.asp.12SAP 2006 annual report.l3SAP 2006 annual report.

SAP Company HistoryFounded on April 1, 1972, by five former IBM engineers, SAP employed over 35,000 employees worldwidein 2006." Headqllartered in Walldorf, Germany, thecompany served more than 32,000 business customersin l20 different counlries.13 SAP's product line consistedprimarily of a sel of appliealions ealled lhe "mySAPBusiness Suite" that included applications for enterpriseresouree planning (mySAP ERP), supply ehain management (rnySAP SCM), cuslomer relationship management (mySAP CRM), and several olher areas. SAP alsoolfered industry-specific functionality for companies in


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PART FIVE: CONCLUS10N: INNOVATION CHALLENGES IN ESTABUSHED FIRMS 1165IBIT 5 SAP Solution Portfolio, April 2006P provides a comprehensive range 01 applications and solulions to empower every aspect 01 your business operations.

ou gain the visibility to pinpoint inefficiencies - and the capabilities to transform them into competitive advantage. Theresight to identify new opportunities - and the agility to respond to changing business realities. The functionality totimize your operations - and resources to extend best practices to your entire value chain.

Applcatons and 50lutonsese enterprise software apptications and sotutions optimize every aspect 01 your business operations:

Business Applications and Solutions mySAP Business Suite Mendocino

mySAP Customer Relationship SAP AnalyticsManagement SAP Manufacturing mySAP ERP SAP Service and Asset Management

mySAP Product Ulecycle Management SAP Solutians far Mabile Business mySAP Supply Chain Management SAP xApps mySAP Supplier Relationship Solulion ExtensionsManagement

fo r 5ma" and Mdsze Enterprsessalutians far small and midsize enterprises deliver enterprise lunctionality and industry best practices in affardable,o-implement packages:

Solulions lo r Small and Midsize Enterprises mySAP AII-in-One SAP Business One

P provides a robust blueprint and technical foundatian far open and flexible business solutions:

Plalform Enterprise Services Architecture SAP NetWeaver Platform

SAP Web sile (htlp:l/www.sap.com/usa/solulions/index.epx)

ar as sole CEO had been a difficult one, largely onof a global economic recession and the contrac-

of JTbudgets in the United States after a boom periodat ended in 2001. 16 Afler a decade of explosive growth

hy the success of R/3, SAP's sales had stalled at7 billion by 2002 (see Exhibit 1). Then, for the

st time in more than 10 years, SAP reported al the end

of 2003 thal total revenue had declined (by 5.2 percent)fram the previous year. 17 Sensing that a structuraJ shift

16hl tP://www.washlech.org/reporls/AmcrkasHighTechBlIst/AmcricasHighTechBusI.pdf.11SAP annual reporl 2003.


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1166 PAAT FIVE: CONClUSION: INNOVAT10N CHAllENGES IN ESTABUSHED FIAMSEXHIBn 6 Examples 01 SAP Customers, 2005

OSRAM

Panasonic

NOK IA< "

PHILlPS#'ir Postbank P,.II& Whitney p&Gm Deutsche"J.." Telekom"

SHAR P 5IEUEII5 51n0AP0REAlRLlnE5"TExAsINSTRUMENTS . . . .K.

[J)C t U n s ~ i 1 I ! l t o l l post

CAT" Bv

1ZI

AlIIanz@JtAventisAIRBUSII ERTE LS MAN N

LJMETROGroup

ERICSSO

FufJTSUe lufthansaSource: SAP Inveslor Aelalions.

might be takillg place in lhe industry, Kagermann pUltogether a plan to reignile sales momentum.SAP'S NEW GROWTH STRATEGYAfter deliberating with his leadership team, Kagermanndecided to focus on three primary growth initiatives. First.SAP wOllld develop an innovative Web services-based'platform'-a collection of software lechnologies. tools,anel cOlltenl-lhat he believed wOllld deliver unparalleled

vallle lo Cllstomcrs and partners. Kagermann referred tolhis platform as lhe business process platform. or BPP for5hort, and it represel1ted the tangible product of SAP'sEnterprise Services Architeclure visiono Secolld, SAPwould intensify its fOCllS 011 the SME market segment bydevelopillg more streamlined alld flexible applicationsand expanding midmarket sales channels. Lastly, SAPwould broaden lhe relevance of its products by offeringfunctionality Ihat appealed to more corporate users andby improving user interfaces.


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PAAT FIVE: CONCLUS10N: INNOVATION CHALLENGES IN ESTABLlSHED FIRMS 1167

EXHIBIT 7 SAP Sales Model, April 200&

18SAP Invcstor Relations prcsenlation. Fcbruary 2005.19tJup://www.e\\cck.com/article2/0.1895.18!8485.00.asp.

into mySAP CRM. NetWeaver automatically triggeredan inventory replenishment arder within Fender's supply chain management applical ion. Addi tionally. theorder data al so incremented Fender's accounts receivable. which were tracked within a third system. mySAPFinancials. 2o Customers then could view data from lhesethree applications and from other non-SAl' systems allon one screen using etWeaver' s enterpr ise Web portaltechnology.21NetWeaver also served as the technology foundation

for a new c1ass of applicalions called xApps. Lhe first ofwhich SAP released in late 2002.22 xApps were composte applications tha! leveraged NetWeaver lo integratefunctionality across multiple SAl' (and potentially nonSAP) products.23 In addition to developing xApps, SAPalso launched a program to certify third party softwarepartners to build novel xApps and seH them to joint customers.24 As of April 2006, SAP had developed 7 xApps,and partners had developed an addit ianal 20.Despite the flexibility of NetWeaver and xApps, the

facl that dislinct SAP applications each addressed different business processes hindered overall extensibilily andinnovalion. For instance, if a potemial customer neededa solution that integraled 20 percent of the functionalityconlained within three different SAl' applications, lhatcuslomer needed lo buy all lhree of those applicationsand lhen use NetWeaver to integrale lhem. The licensefees. technological complexity. implementation time.and support coslS for such an initiative could be prohibilive. especially for a smaller business. Kagermann questioned the continued viability of this model:

We have a1l these different prodl1CIS-ERP, CRM, SCM,and so on-and they are not very tightly integrated. Whydo \Ve need these categories? Companies don't \Vant termslike ERP and CRM. They just \Vant produclivity and innovation. Ir you believe Ihis, you ask yourself, 'Whal shouldthe architecture 01" (he product of the future look like?' Andir you think about it a lil11e bit. you come to the idea of lheEnterprise Services Architecture-something IhaI is stable.pre-integrared, easier lO Sl1pport. and simpler to extend andinllovate around. But centered arollnd applicalion fllnctionality. becallse lha! is what dirTerentiates SAp'25

21)hup:11www.sap.com/compan yIprcssIpress.epx?press[D=2286.!Ihup:l/www.sap.com/solutions/nclweavcr/index.epx.!! h t I P://www.looselycoupled.cam Is ta r ie s12003/xa p ps-sa pbp0303.html.Bhttp://www.sap.com/so! ut ions/xapps1indcx.epx.Hhttp://www.1 oose 1ye oup Icd. eom Is to r ies 120031 xa pps - sa pbf.303.html.2.lntcrview. 11122/2005.

SEGMENTREPORTING

ENTERPRISE> 2,500 employees or> $1.5 billion revenue

SMALL&MIDSIZEDBUSINESSES< 2,500 employees or< $1.5 billion revenue

Diree!

lndiree!

CHANNEL

Source: SAPo

If Kagermann's corporale analyst s were correct ,executing 011 this lhree-pronged growth strategy wauldresult in the rcturn of slIstained double-digit sajes growthand net margins of more than 30 percenL I8 However.Kagermann believed that it would take until 2010 01'2011 before the BPP and other products of [he newgrowth slrategy achieved braad adoption acrass the SAPcustomer base. 19 Defending lhe legacy enterprise applications business was critical in Ihe interim.Growth Initiative One:The Business Process PlatformKagermann posilioned lhe Bpp as an extens ion of anexisting set of integration lechnologies collectivelycalled SAP etWeaver. The main purpose of etWeaver\Vas to help SAl' cUSlOmers integrate disparate SAP andnon-SAP applicalion5 so that they interoperated seamlessly. For example. ir a sales representative at lhe FenderCompany entered an order for 300 Stralocaster guitars


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4 th Quar te r2002 2003 2004

11 Oeals < 1 milI. EUR

3rd Quarter2002 2003 2004

2nd Quarter2002 2003 2004

o "- a 'J () f- E '" " "- 8 5) : "" "" I " " "" E " E " ""O w 0 o ;; ;;;al : " () " " '"- Fin.e? I Retail Discrete Process Services Services#1 #1 #1 111

## companies80 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -EXHIBIT 9 SAP Global 500 Customer Penetration by Industry, February 2005

70 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - SAP cuslomer

60 --------------------------------------------------------Global 500 company

50 --------------------------------------------------------

Notes:CP = Consumer Products, A&O = Aerospace and Defense, ME&C = Machinery, Engineering & Construction,HT = High Tech, Chem = Chemicats, Mili = Mili Products, O&G = Oil &Gas, Pharma = Pharmaceuticals, ServoP = Service Providers, Util = UtlliliesSource: SAP Inveslor Relations.

Deals> 5 milI. EUR _ Deals 1-5 mili. EUR

1st Quarter2002 2003 2004

SourCB: SAP Investor Relations.

EXHIBIT 8 SAP Deal Size Trends, 2002-2004

1168 PART FIVE: CONCLUSION: INNOVATION CHALLENGES IN ESTABlISHED FIRMS


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PART FIVE: CONCLUSION: INNOVATION CHALLENGES IN ESTABLlSHED FIAMS 1169

EXHIBIT 10 Henning Kagennann Corporate BiographyPral. Oro Henning Kagermann is chairman of the Executive Board of SAP AGand CEO. From 1998 to 2003, he wasco-chairman of the SAP Executive Boardand CEO together with Hasso Plattner.Following Plattner's election as chairmanof the SAP Supervisory Board in May2003, Kagermann became sole chainnanof the Executive Board and CEO.

Kagermann has responsibility forSAP's slralegy and business devefopment, and also overseesIhe areas 01 global communications, global intellectual property, internal audit and top lalent management. KagermannSource: Adapled from SAP Corporate Web Portal (internal).

The vision of the Enterprise Services Architecture\Vas to make il radically easier and cheaper for cuslomersane! partners lo do three things: create software applications thal did exaclly whal cuslOlners wanted, extend orhange applications when desired. and integrate SAP andnon-SAP applicalions and services. Over the past severa}ears, integrating the wide variety of enterprise syslemsnder lheir conlrol had developed into a critical painoint for CIOs. who were tradilionaJly SAP's primarynd customers. The ESA vision aimed to serve he ITocused needs of the CIO while simultaneously enablingto test and implement new business models.The Enterprise Services Architecture vision built

lpon etWeaver technology in two main areas. First. itan "applicmion platform" lhal eontained a reposi

of hundreds of individual business processes. SAPeferred to lhese application building blocks as "enterrise services." (See Exhibit II for examples of specificterprise services.) Second, ir added a "compositionform" consisting of 10015 that enabled customers lo

ombine individual enterprise services they wanted tose inlo full-featured enterprise applications. The SUI11 of

componenls-theNetWeaver integration platform,he application platform, and the service composition

the BPP. (See Exhibil 12 for a scheof lhe BPP.) Open and clearly defined interfaces

uld make il easy for customers 01' partners to extende pre-built enlerprise services included in the BPP, andAP intended to add new services to the reposilory on aquenl basis.The BPP embodied SAP's unique approach to whatany analysts termed "scrvice oriented architecture:'

joined SAP in 1982 and was initiaffy responsible for productdevelopment in the areas of cost accounling and conlrolling.Later, he oversaw Ihe 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 addilionto the management 01 all regions 01 SAPo Kagermann has beena member of the SAP Executive Board since 1991.As a professor of physics, Kagermann taught physics andcomputer science at the Technical University of Braunschweigand the University of Mannheim in Germany Irom 1982-1992while at SAPo He is also a Trustee of the Technical Universityof Munich.

01' SOA. Service oriented archilecture representcd anew software design paradigm that leveraged lhe InterneL to tie together disparare, loosely coupled, yel highlyinteroperable software functiolls known as Web services. While competitors such as Microsoft , IBM, andBEA SysLems all offered praducts that leveraged SOAlo integrate software from diverse vendors. Kagennannfeh that the inelusion of pre-defined enterprise servicesdifferentiaLed Lhe BPP:

Think aboLlt a model cal'. You !leed pans. tools, and inslructions lo build it. In the same manner. SOA-based technology plalronns like 118Ml WebSphere and {Microsoft] .NETgivc YOll 10015 and instrllctions to integralc applications, bUIthey don'l give YOll Ihe parts themselves. You slill have tobuy 01' build lhe actual applications. We will give YOll Ihe(0015, the instnlctions. and the actual parts you need ro compose and inlegrale highly lailored. unique applications.26To launch and supporl the BPP, SAP engineers

needed to undertake a significant and ongoing researchand developmenl effort. Mosl of the enterprise servicesLhaL would become part oflhe BPP already existed in oneor more SAP applications. so each of these business processes needed lO be decoupled from ilS "mother" applicalion and reconciled with olher similar processes thmexisled in other SAP applications. Furthermore, lO ensurecompaLibiJity with already installed SAP applications,the enlire mySAP Business Suite had to be enhanced inarder lo become interoperable with rhe service composition protocols and standards estabJished by the BPP.

2>lnlervicw. 11/22/2005.


11/34

Source: Adapted from SAP Product and Technology Group Presentation, SAPPHIRE May 2005.

29Intcrview. 10/3112005.

lhe long tai\." summarizcd Shai Agassi, SAP ExeculiveBoard member and president of lhe Product and Technology group.29 Jim Hagcmann Snabe, General Manager,lndustry Solutions, I iked to bring IIp the case of KMD,a firm lha t developed software thal lhe governments ofsmall towns in Denmark used to manage their day-to-dayoperations. Using the BPP, a campany like KMD eouldfocus solely on building functionality uniqucly relevantlo small lown governments in Denmark, and outsourcelhe development of more gener ic business applicationfunetionality (e.g. employee time traeking) to SAPo

ISVs, however, constitutcd just one parl of lhe partner ecosystem that SAP looked to cul tivate around lheshared slandards uf lhe ESA. Kagermann envisioned personal productivity venclors such as Microsoft developingwidely lIsed lools by inlegraling lheir desktop produclswilh SAP solutions. Suppliers lower in tlle lechnologyslack. such as networking gianl Cisco, could embed SAPfunctionality directly inlo lheir offerings. and major 11

CustomerAccountPaymentAdvieeDeleteRequestConfirmationThis serviee deletes aJready ereated payment advices for a givencustomer.CustomerAccountPaymentAdviceRequestConfirmationThis serviee assigns open items to payments. The assignment isdone on a eustomer aecount level and it rs used when the clearingof the eorresponding items is done in a following step.CustomerlnvoiceListOueryResponseThis serviee provides a list of invoices for a given paVero Furtherselective criteria are: date range for invoiees, all open invoiees.CandidateCreateRequestResponseThis inbound serviee reeeives resume-type nformation andgenerates a candidate. Detailed error dala is required in lheresponse.BankAccountStatementNotificationServiee to obtain the statement of aceount from your bank for allyour bank aceounts.CustomerlnvoieeDetailsQueryResponseThis serviee will provide a Iist of line items that belongs to agiven invojce. Its output conlains a header line for Ihe invoiee anda Iist of items.CustomerAceountPeriodBalancesQueryResponseServiee reading the period balance of a eustomer aceount. Thebalance is the amount resulting from the differenee between thedebt and eredit side of the aceounl.

EXHIBIT 11 Examples 01 Enterprise 5ervices (HR & Finance)

27lnlcrvicw. 1112212005.~ S c e hup://www.hollsingmap:..com/ufhup://www.chicagocrimc.orglfol" cxamplcs

1170 PART FIVE: CONClUSION: INNOVATION CHALLENGES IN ESTABLlSHED FIAMS

The Enterprise Services Architecture PartnerEcosystem SAP hoped to aLtracl a large eCOSYSlem ofproduct panners to build innovative new solutions on topof the BPP. As Kagermann put il, "We want lO e n c o u r ~age co-innovation on lhe platform.,27 Wilh its EnrerpriseServices Architecture slralegy, SAP was pursuing amodel similar lO (he one Google had developed with ilS"Google Maps" service in the consumer Internet space.By defining simple interface slandards and a llowingexternal programmers lO access ilS geographical mapping technology via lhe Internet, Google had sparked theindependent crealion of hundreds of new, specializedWeb siles that featured embedded Google Maps.18

With the BPP. Kagennall ll hoped lhar hundreds ofndependent software vendors (ISVs) would bui ld new,highly specialized business applications by leveragingtechnology and funclionality fram the BPP. "We willdo the big head of business pracesses and ISVs will do

CreditCommitmentNotificationServiee updating the eredit exposure of a eustomer from aninternal souree (e.g., sales department).CreditWorthinessChangelnformationServiee updating the ereditworthiness of a eustomer. Thenformation Is retrieved from an inlernal souree (e.g. the ereditmanagement department).CustomerBankAceountChangeRequestConfirmationThis serviee ehanges Ihe bank aeeount details that aremaintained in the eustomer master data.CustomerlnvoieeAeeountingCheekOueryResponseThis serviee checks whether billing doeuments resulting fromtransactions in logistics can be Iransferred into the aecounlingsystem.CandidateResumeOueryResponseSend unstruetured resume text and reeerve baek slrueturedcandidate data.CreditAgeneyReportOueryResponseThis service enables Ihe application to reeeive an externaleredit rating report via the Internet. The credit report isattached to the eustomer masler data.CustomerBankAccountListOueryResponseThis servlce provides a list of bank accounts that aremaintained in the eustomer master data. The servieeexpects a customer number as input parameter.


12/34

PART FIVE: CONCLUSJON: INNOVATION CHALLENGES IN ESTABUSHED FIRMS 1171EXHIBIT 12 Sd1ematic o, Business Process Platfonn

r ; ;..

BusPartnerSub-sidiary

RFIDffice*

ProcessComponents

Rendering Devices* *

SAP

Portal*

HomeGrown IISVSource: SAP Corporate Stralegy Group.

vendors such as Intel and EMe could design productsand services that featured "plug and play" integrationwith SAP solutions. Finally, systems inlegrators such asAccenlure and IBM would continue to playa core role inSAP's slrategy by using Ihe BPP lo compase applicationsfor customers. AH of these partners also could serve asost effective channel partners far SAP, especially in theME customer segment. (See Exhibit 13 for examples of

ESA ecosyslem partners.)he Dual Business Model: Application Platformrovider and Application Provider SAP did nolntend to abandon ilS legacy applicarions business. ateasl in the short term, in order lO become apure plat

vendor. The company's sizeable direcl sales forceould continue lO sell SAP applications even as olher

SVs began lO build their own applications on lOp of lheJust as Microsoft sold both operating syslems (e.g.

indows) and applications (e.g. Word) in lhe desktopoftware space, SAP wOllld sel! both a platform and

applications in the enterprise software space. othingwOllld prevent an ISV fram using the BPP to build asolution that competed with a similar application alreadybeing sold by lhe SAP sales force.Growth Init iative Two: Building Mal1


13/34

liM.

>accenture&!aringfbint

~ Ki So l u t i on .

CHANNEL

SERVICES

Deloitte

countries, was considered a midmarket customer bySAp33 This approach caused sorne oulsiders to questionSAP's true performance in meeling lhe lInique needs ofsmaller firms. "Microsoft considers any company withmore lhan SOO PCs or 1,000 employees lo be an Enterprise company, not an SME," said Anthony Cross, aleadProducl Manager for Microsoft. "1 would bardly calegorize a billion dallar campany as 'small ' or 'midsize.",)4

In addition, SAP's direct sales force still served as theprimary channel for acquiring midmarket customers-especially lhe larger SME cuslomers thal subslantiatedthe company's claim of being lhe market leader in thesegment (see Exhibil 7). To increase the volume of SMEsales, SAP needed to move funher down-market, wherechannels, customers, and competi tors were quite dif-ferenl. Allhough a huge growth opportunily for SAP,

J3Harley-Davidson Web sile (http://www.harley-davidson.com).}4lnlcrview. 10/15/2005.

11M:.

DeLLMiil:rosoiIt~ ~ +SUl1

TECHNOLOGYSource: SAPCorporate SlralegyGroup.

Model N

lllnterview.2/3/20CJ6.nSAP Corporate Strategy Group.

....8USIN(SSOBtlClS

.II'cIosoIt' IJ OrM ANoTfC'

vendavo

EXHIBIT 13 Example Of ESA Eco syste m Partners b y c a te g or y

PRODUCT

thought processes. "Oneoftherealities ofa softwarecompany is that whatever we deliver is never exactly what allof our cllstomers want or expect," he commented. "Ourlarger customers apply immense presslIre on LIS to clasethis gap as soon as possible, and they have more money.So guess what? We listen more carefully when they askus something. We always get pulled in the direction oflarge customers, so we need lo counteract this force inarder to be accepted in the lower end."31

SAP's tradit ional focus on large enterprises also ledit to define the SME segment more broadly than manyanalysts and compelitors did. SAP included companiesup to $1.5 billion in revenue in this customer segment.32Consequently, a company snch as Harley-Davidson,which reported $1.34 bill ion in revenue in 2005 andhad nearly 10,000 employees working in more than 20



14/34

PART FIVE: CONCLUSION: INNOVATION CHALLENGES IN ESTABUSHED F1RMS 1173

Defending and Building theCore Applications BusinessDespite the magnilude ofthe three new growth initialives,SAP could not afford to lose foeus on its eore business inthe near termo The market expected eontinued profitablegrowth fram SAP, and maintenance and service eonlraets with existing applieations customers provided lhebulk of the company's annual revenues. "We have morethan 32,000 eustomers," said Kagermann. "They haveinvested a lot of money in software fram SAP, and theyare nol just sit ting there waiting for a new platform. Soyou have to develop in parallel: some things to benefit usin the long term, and others to benefi t eustomers now.'>41Slill, he believed hal synergies existed between SAP'scurrent and fllture goals and products:

The BPP s key for several rcasons. Frst, il helps us in lhehigh end. Large companies never have only SAP systems.They need to inlegrale ourside of SAP. and Ihe platform willhelp Ihem do thal. For Ihe midmarket, Ihe plalform will helpus assemble tailor-tllade products and sel! them cheaply.And since (he enterprise services witl1in lhe platrorm willbe analYlical as \Vell as transaclional, tiley \ViII help us loattract more business users wilhin all c u s l O m e r s : ~ 2

company had significant opportunilies to deliver greatervalue by developing more broadly appealing softwareandJor packaging existing functionality and informationin ways more accessible to end users.

In 2004, SAP and Microsoft had formed a broad collaboration in th is arca eal led Projee t Mendocino, andset out developing a product to be launched under thebrand name Duet. The two sof tware giants agreed tocreate joint products that embedded functionality anddata from a eustomer's SAP applications (e.g., vaeationtime tracking) into Microsoft's Office suite of desklOpapplicalions.40 Both SAP and Microsoft would sell lhesepre-integrated solutions. Kagermann al so had commissioned an internal team to develop a Web-based, streamlined version of the mySAP CRM application. UnlikeaH other SAP products, SAP CRM on-demand wouldbe delivered over the Internet instead of being installedal a eustomer's sile. However, the service would bedesigned so that euslomers eould transit ion from an offsite to an on-si te solution should they desire to do so inthe future.

attracting smaller Cllstomers raised many questions. ZiaYusuf. Executive Vice Presidenl of Platform Eeosystemand lhe fonner founder and head of SAP's CorporateSlralegy Group, outlined some of lhem:

Firsl. \Ve need lO learn how lO acquire and manage channel partners. How do you se]] the product through the channel? How do YOll maintain the producl? Who's managing ?Then. \Ve have Ihe go lo markel side. h's a dilferent cuslomerbase. The pricing is different. The advertising is differenl.The competitors are differenl. They are folks \Ve never nminto in big deals: Microsofl, [ntuit, Sage. A sales organization like SAP Americas has to figure aH ofthal out. 35

Growth Initiative Three: Providing Value toMore Business UsersSAP's existing applicalions, with the exception ofmySAP CRM, typically catered to a small number ofhighly lrained users wilhin an organization. SAP hadbuilt enterpr ise sof tware applica tions since the ear ly1970s, and initially lhe casi and complexity of enterprisecomputing restr icled the broad use of business applications. Even by lhe year 2000, less than 10 percent ofemployees had access to their eompany's primary ERPsystem. 36 By the early 20005, however, the decreasingcost of personal eomputers and the proliferation 01' bOlhdesklop applieatiol1J and Lhe Internet had democratizedbusiness computing. In the United Srates a lone, 77 milhan people-representing 55 pereent of total nationalemployment-used a computer al work in 2003.37E-mail and instant messaging had become standardmeans of informalion sharing, and Web sites like Yahoo!and Google had set new standards of silllplicity in lherealm of computing interfaces.Compared 10 the average Web si te, the typical SAP

application required employees to receive significantlraining in order to understand how to use it. 3S Internetfocused cOlllpelilors such as Salesforce.com wereexploiting ease of use as a eompeli tive advantage overSAP, and simple Web-based services from the likesof Google, America Online , and Yahoo! were gainingincreasingly slrong adoption wilhin eorporations, primarily al lhe individual user, workgroup, and departmentlevels. 39 Despite SAP's large llulllber of eustomers, (he

, 1 ~ l n l e r v i e w . 11121/2005.- l 6 t t t l p J l w w w . c c o n o l l l i s l . c o m / d i ~ p l a y S l o r Y . C r m ? S t o r y_10=32281 l.31hup:llwww.bls.gov/ncws.releasc/ciuaw.nrO.htm._8Subslantialcd fmm data gathercd in intervicws with SAP executivcs.partners, and custorncrs.)'111tp:11www.pewintcrneLorg/pe!fs/PIP_lllst


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------------------11 74 PART FIVE: CONCLUSION: INNQVAT10N CHALLENGES IN ESTABLlSHED FIRMS

For these rcasans, Kagermann felt that lhe articulationofthe Enterprise Services Architecture vision would helpincrease sales of existing SAP solutions as lhe companybuilt out' its next generation of products. Larger custOI11-ers moved slowly, so they could buy from SAP knowingthat by lhe lime they decided how to transirion to serviceoriented architectures. SAP would have a solulion readyfor them. In addition, by 2004 SAP already had rolled outtwo new SME-targeled applicalions, SAP Business Oneand mySAP AII-in-One, and signed up dozens of newchannel parlners (including American Express) lo sellthese two products into companies with less rhan $200million in annual revenues.43 lncreased focus on the midmarket did not have lo wait for lhe BPP.

CORPORATE TRANSFORMAnON: CHANGINGSTRATEGY AND STRUCTUREAs he considered rhe new growth strategy, Kagermannfelt that developing new products was only part of thereqllirement for Sllccess. "We will not sllcceed with aproduct alone," he posited. "les product plus. We haveto change our processes, how we go to market, and howwe are organized:>44 To kick start the change process.Kagermann made several public announcements andimplememed a broad organizalional restructuring.Announcing th e New Growth StrategyIn January 2005, Kagermann began to unveil SAP's newgrowth initiatives to analysts.45 Over the enslling monlhs,he elaborated a roadmap that included complelion ofthe BPP and related initiatives by the end of 2007, andsel various financiai goals for SAP to achieve by 2010.These included generating 50 percent of total revenuefrol11 new products olltside of the mySAP Business Suite,increasing the share of software sales coming from theSME segment from 30 percent to between 40 percent and45 percenL serving 100,000 customers. and achieving 30percellt Ilet margills.46 (See Exhibit 14 for examples ofKagermann's roadmap and goals.)Several months prior to these initial announcements,

Kagermann had described his ideas abollt the growthstrategy and the BPP to SAP's top executives. Internaldiscussions about the proposed growth initiatives had

..hUp:/lwww.inlernelnews.comlent-ncws/arliclc.phpI217150 1.-wlnlerview. 11/2212005.45httr: /1www.sap.colll/cornpany/press/Press.epx?Pressll)=3850.4bSAP I n v e ~ l o r Relations presentalion. Fcbruary 2005. hllp:/Inews.Ldnct.coml2l 00-35 I3_22-6058685.html.

becn ongoing, and Kagermann's first public annoullce-ment caught sorne executives by surprise. The plan lopursue the BPP and a related partner ecosystem hadbeen developed al the Executive Board level, and manyemployees voiced uncerlainty about its scape, impact, andtiming. Although opiniolls about how radical a changelhe ESA vision represented varied widely, Kagerrnannstood firmly behind his rationale for a bold rcacticn:

You cannot say thal we saw alllhis coming five years ago.I don ', believe this. Back in 1999 \Ve had no idea that wewould choose to move downmarket so aggressively, and Ihalbecoming a volume business would become imperalive. ButYOll walch the statistics. Deal size starts going down. Software rcvenue slarts dec1ining. Evenlually YOLl realize thebuying panern has changed; it has become a buyer's market.You hope thal the revenue comes back. You cut costs in themeantime. Well. one year passes, and it doesn't come back.Another year passes, and il slill doesn"t come back. Youcannot continue lo cut costs , because eventually you reachan cnd. So Y0l! need to figure out what to do about itYPlattner, however, saw the growlh strategy as more of

a logicaJ evoiution:We always had a platform; we have been working on openintegration lechnology as far baek as the 199Os. Now we areevolving our software 10 allow outside parties lo developapplications that sit outside our platform, but are inlegratedas if Ihey are sitling on lhe inside. It is nol a radical change;\Ve already have over 1,000 panners. Rather, \Ve are revamping an exisling slralegy at a much larger scale. Frankly, Ihelechnology shift 10 c1ient/server eomputing architecluresin the ear ly 1990s posed a bigger lhreat 10 our culture andorganization lhan the one we race loday. Bul Ihe scale ofthe lasks involved in tbis change, now tbat we have manymore prodllCls and employees. is much biggcr. It"s harderto drive iL48As Apotheker began 10 address the new growth initia

tives within the SAP field organizations, Platlner lookedto Agassi to drive the expanded platform vision from adevelopment perspecLive. Several years earlier, in 2001.Agassi had convinced SAP of the potential value of afledgling enterprise portal technology that his formercompany, TopTier, had developed. SAP had acquiredTopTier and promoted Agassi to the Executive Boardin 2002 at the age of 34. "Shai's major contribution isthat he pushes with extra energy and accelerates things,'commented Plattner. "This is where SAP is traditionally

47lnterview. 11/22/2005.43lnterview. 2/312fXJ6.


16/34

PART FIVE: CONCLUSION: INNOVATION CHALLENGES IN ESTABUSHED FIRMS 1175EXHIBIT 14 SAP Roadmap and Goals, February 2005

ITFlexibility

Teo

Business ProcessPlatfonn

Composi ti on 105 )Platform J

Integration & '041Applicat10n JIPlatform

SAP will launch thefirst BusinessProcess Platformto the market by enriching theSAP NetWeaver

composilionplatform wilhready-Io-runbusinessprocesses

accessible IhroughEnlerprise Services

Connectivily Business Innovalion

100% Business Mix"Innovation"

MySAPApps(SCM, CRM,PLM, SRM)-50(>/0

100% Business Mix" Innovalion"

NewProducls

-50%

1999 200412005 2004/2005 2010

Today, SAP generales -50% of i ts business with solulions whichwere launched to Ihe markel 5 years ago

In 5 years from now, conlinuous innovation will al low SAP togenerate -50% 01 ils business wilh new solulions$ource: SAP Corporate Slralegy Group, SAP lnveslor Relalions.


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1176 PART FIVE: CONCLUSION: INNOVATION CHALLENGES IN ESTABUSHED FIRMS

weak. Th e strategy itself is nol as challenging as generaling lhe energy level and the velocity 10 execUle il.'049"Best-Run SAP" and cascading th e StrategyHaving been at SA P since 1982. Kagermann had experienced firslhand the company's rapid headcouI1l growth(which had increased more than 30-fold since his arrival),as well as its steady transilion from a single-produclcompany into a mulli-line, multinational software giant.Yet sueh growth had eome with a priee. SAP's highlyaulonomous culture traditionally de-emphasized structured processes and cross-organizational collaborationin favor of functional excellence and speed to market.Now lhat SAP had become a large and complex organization, coordinated execulion across groups and regionswas proving an increasing challenge. Kagermann reaJized that company-wide understanding and implementation of the new growth strategy would be impossiblewithout better communication, planning, management,and employee engagement. Throughout 2004 and 2005,he kicked off a ser ies of internal process initiatives collectively known as "Best-Run SAP" to communicale lhenew growth strategy 10 all levels of lhe organization andto strenglhen the "culture or execution" within SAP. sO

Kagermann identified six specific process focus areaswith Best-Run SAP ancl allocatecl resources-incluclingExecutive Board memb ers -t o suppon each one. A keyprocess element of Best-Run SAP was the "Cascade"eITorl, whereby SAP intended to propagate understandingof the corporate strategy throughout the organization. Bydoing so, lhe Cascade projecL aimed to tie strategy 10 execulion within each business unit, align business unils Ihatneeded lo execute together, and generate feedback regarding the push for strategic change. As a pa n of Cascade.each Board area and business unit developed its own strategic business plan (SBP) that identified and documentedorganizational goals, an execution plan, success measures,and eritical dependencies. Eaeh SB P also had to c1arifylinkages 10 and suppon of the Corporate S8P.

To enhance high-Ievel communicat ion around theSB r and other key topics, Kagermann added an anllUaltwo Lo lhree haur session wilh each business unit leader(in addition to existing quarterly review sessions witillhe Executive Board) as a pa n of rhe stralegic management process. Funhermore, he crealed a dedicated Corponlte Slrategy Management team to assist in Slrategy

.I911llCrview. 2/3120CJ6.~ S A P CEO Briefing Presentalion. July 2005. London.

evaluation, strategic business planning, and strategy communication. Finally, Best-Run SAP defined new requirements of SAP's cultural values and placed increasedemphasis on evaJuating manager performance. (SeeExhibit 15 for a schematic of lhe Best-Run SAP framework.) To measure progress toward the goals of Best-RunSAP, a survey-based mechanism called "Pulse Check"was created to solicit periodic feedback from employees.The GOAL ReorganizationIn 2003, Kagennann and Plattner had implemented amajor organizational redesign called SCORE, shon forStrategic Cross-Organization Realignment. SCOREattempled to increase the efficiency of lhe SAP organizalion by grouping SAP's 17 industry and product unitsinto three Business Solulion Groups (ESGs) and byintroducing more structure into the product developmentprocess. Although many of the process change iniliatives undertaken as part of SCORE were still not fullycomplete by 2005. Kagermann nonetheless \Vent forwardwith anolher significan! restructuring. (See Exhibit 16for more information 011 SCORE.)In March 2005, Kagermann announced GOAL, short

for Global OrganizaLional Alignment. Starting at theExeclltivc Board level, GOAL reorganized SAP alongfive segments of the valuc chain: Research and Breakthrough Innovation (new lechnology development),Products and Technology (existing technology andapplications. as well as solution marketing), Produclion(solution testing, deploymenl, and release), Global Service and Supporl (producl suppon, consulting, education,and hosling), and Custorner Solulions and Operations(sales. field services. and field marketing). GOAL alsoestablished t\Vo support functions that cut across the fivevalue chain focused groups: Finance and Adrninistration,and Human Resources and Processes. A specific boardrnember managed each of the seven new organizationalgroups. (See Exhibit 17 for a diagram of the GOAL organizational structure.)

As part of GOAL, Peter Zencke, an Executive Boardmember ancl one of the original lcchnical architects ofSAP R13, took on leadership of the Research and BrcakLhrough Innovation unit. In this role, Zencke was sol elyresponsible for building and packaging Lhe applicalionplatform and the pre-defined enterprise services embedded in ii. In addition, Zencke and his leam sel oul todefine and build specific prolotypes and modules thatexploited the unique benefits of the Enterprise ServicesArchitecture. 80th before and during the implernenta[ion of GOAL, Kagermann transitioned resources from


18/34

PART FIVE: CONCLUSION: lNNOVATION CHALLENGES IN ESTABLlSHED FIRMS 1177EXHIBIT 15 Best-Run SAP Six-Tier Schematic

Vision

SAP Strategy

IT "embedded" in business

.. ESA" - the next b ig thing

Structure Policies KPIS ' ) The organizational framework

Core Values &New Requirements

Behaviors and Capabilities

Strategic Performance Management

Source: SAP CEO Briefing Presenlalion. July 21, 2005, Landon.

any differenl SAP product. industry, and suppart leamsZencke's group in arder to accelerate momentum onese initiatives. Kagennann had stated publicly that thewould be made accessible to ISVs by lhe end of

06. and Ihe Breaklhrough Innovalion group played ailical role in achieving lhis mileslonc.Kagermann named Agassi as rhe leaderOrlhe Producls

In his llew role Agassi maintained sale responsility for lhe NetWeaver technology platform, and alsook over leadcrship of a1l of SAP's prodllcl teams,uslry teams, and existing applications. Kagermannarged Agassi wilh conlinuing lo improve NelWeaver.

lhe prodUCI partner ecosyslem. and making aHSAP applicalions interoperable wilh lhe BPP.

e Producls group was SAP's largest organizationalil, and by lale 2005, Agassi 's NetWeaver team aloned grown from 1,500 members in 2002 into a 2.500

group.51Apotheker was nallled hcad al" the Custolller Solutionsd Operations unir. and was charged with transforming's sales funclion inlo a rllore volume-driven l110dellhat

pported Ihe cOl11pany's goal of acquiring tens of thouof ncw l1lidmarket customers in the next five years. In

\Vith Shai Agassi. l/311200S.

-+ The winning culture

Global Management &Leadership; Talent Management

Cascading Strategy and Goals

this posilion, Apotheker would playa crilical role in defining the value proposition of the business process platforl11in such a way that both large and SME cuslomers found ilcompelling. Kagermann was also relying upon Apolhekerand his team to convincecustomers to adopt SAP solutionsin broader internal usage scenarios. Together, Apothekerand Agassi served as co-presidents under Kagermann.Agassi led lhe Producl Leadership Team (PLT), a groupof senior development executives, and Apotheker led lheField Leadership Team (FLT), the PLT's collnlerpart onthe customer-facing end of the business.Board member Claus Heinrich, who previously led

the Manufacturing Industries BSG under the SCOREstructure, took over lhe Production group and the HumanResources and Processes group. Gerd Oswald. anolherkey player in lhe development of SAP R/3, asslImedownership of Global Service and SUPPOrl, and CFOWerner Brandt headed Finance and Adminislration.After he implernented the changes, Kagerlllann

described sorne of his reasoning behind GOAL:In lhe old slrueture. it was extremely ehaLlenging to achievealignmcnt across producI groups. supporl groups, and fie1dunits. Now, within ea eh box eaeh Jeader can really optimize.For eXJmple, \Ve would no l be able to exeeute on Ihe BPP ifone person managed applicalions and another person mallaged ISV panners ane! Ihe plalform. The platform guy \ViII


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11 78 PART F1VE: CONCLUSION: INNOVATION CHALLENGES IN ESTABLlSHED FIRMSEXHIBIT 16 SCORE Organizational Structure, 2004

Office 01the CEO Global Field Organization

Global Comm.Corp. ConsultingInternal AuditGlobar IP

Global Service and Support

Business Solution GroupsSAP

Consulting

ManufacturingIndustries

ServiceIndustries

Financial &Public Services

Finance &Administration

SolutionManagement ApplicationDevelopment

Solut ionManagement ApplicationDevelopment

SolutionManagement Appl icat ionDevelopment

Application Platform & ArchitectureGlobal

MarketingHumanResources

Technology PlatformSolution Management

Business Solution GroupSolution Management

Solution Managementineludes capability for bothindustry specific solutions andcrossindustry solutions

Application Development

Industry-Specific DeveJopmentCross-industry Development

Appl. Sol. Mgmt 1

lnduslry Business Unit (IBU) Application SolutionManagement (ASM)Application Developmentcombines Ihe developmentexeculion capability of both theindustries and the cross-industry solutions

Global Market ing andGlobal Communicationswill provide shared services lothe Sorulion Managementfunction of the BSGs (format Idelivery mechanism)

IBUn

Appl. Sol. Mgml n

IBU3

IBU2

IBU1

Source: SAP Corporale Communlcations Team.


20/34

PART FIVE: CONCLUSION: INNOVATION CHALLENGES IN ESTABLlSHED FIRMS 1179EXHIBIT 17 GOAL Organizat ional Structure, 2005

Offiee 01 the CEO HENNINGCustomerSolutions &OperationsLO

Finance & Administration WERNERHuman Resources & Processes CLAUS

Benefits o, th e Realignment

Clear handoffs f rom one group to thenext Consolidation of industries Consolidation of the business suite

Source: SAP Corporate Strategy Group.

to please the ISVs, and the applications gllY hates thebecause he partly competes with them. So Shai ownsth. Similarly, in services, if you have one person owning

tom development and another person who is supposed toild more productized services, it creates friction. And inrms of sales and marketing, Leo can now implement, veryickly, worldwide strllctures and programs targeting the

We are in a big lransition wilh the Enterprisevices Architecture, and the hope is thar GOAL offersfriction and more speed within each unil. 52

TRAN5FORMATIONIN 2005

ugh he believed that GOAL would help lhe coo1-inerease alignment anel execution efficiency,ermann knew that executi ng on the new growth

gy posed several challenges that he could not solveorganizational restrucluring alone.

01 the 5trategy and01 Employeesrmann needed SAP employees to understand and

the growth initiatives, and especially the vision

11/21/2005.

Single face to the market SAP Labs responsibil ity in oneorganization Strong ownership to develop andmanage ecosystems

of the Enterprise Services Architecture. The new growthstrategy involved uncertainty, ehange, and the sacrificeof clear short-term opportunities, and he knew that notaH employees wOllld agree with his decision and timingto pursue it. Kagermann and Heinrich were particularlyconcerned with keeping veteran employees engaged."The veterans have 10, 15 years of deep integrationknowledge," stated Heinrich. "They are not the peoplewho instigate change, but they make success happen ifyou can align them in lhe right direction. 1t's interestingfrom an HR perspective. You have to tell the people whoare too aggressive, 'This is an evolution,' and the peoplewho are too slow, 'This is a revolution.",53

Kagermann was cognizant that thousands of lowerlevel implementation issues lurked beneath the sur-faee of the three growth initiatives, and that he neededstrong commitment from al1 of his employees in orderfor SAP to have any chance at achieving its goals . AsHerberl Heilmann, Senior Vice President, Global Commllnications, remarked, "At the board level, it is ofteneasy to achieve an agreement. The tough part starts whenyou are in the implementation proeess and nobody hastold the rest of the organization that there is a need forchange management. Why are we doing this and why are

531nterview, 11/22/2005.


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1180 PART FIVE: CONCLUSION: INNOVATION CHALLENGES IN ESTABUSHED FIRMS

these changes necessary?"54 To build understanding andmaintain engagement, Kagermann committed himself todiscussing the new growth initiatives with employees asmuch as possible, and foctlsed resources on the Cascadeinitiative.Development of New Sales andSupport ModelsSAPhad built its fortune by selling complex software systems to lhe world's largesl organizations. This businesswas rife with complexities: developing highly advancedand reliable software, c10sing mullimillion-dollar deals,maintaining 2417 support for lhousands of softwareinstallations across the globe. Despite the fact that il soldslandardized software solutions, SAP acted, in the wordsof one executive, Iike a "build to order company."55uSAP has been set up for large dea ls," sa id Yusuf, "andnow lhe fabric of lhe company is being tesled."S6

SAP needed 10 bui ld substan ti al infrastructure 10achieve its goal of attracting hundreds of partners andlhousands of new midmarket customers. "We need to putin place a very sophist ica(ed go-to-market approach;'observed Apotheker.


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PART FIVE: CONCLUSION: lNNOVATION CHALLENGES IN ESTABL1SHED FIRMS 1181

ded application funclionality, and the partner ecoem served ancillary CUS10mer needs lhal SAP's prodcould not salisfy either efficienlly or technically.had a culture where we said, 'Partners are good asas we need them. But otherwise they only take awaynue opportunilies for LIS:" noled Heinrich.63stering an environment in which SAP employeesaced a broader ecosystem of partners (and in whiche parlners trusled and feltsupported by SAP) requiredctural, technological, and cultural change. StructurSAP's sprawling Illatrix organizalion of produclinduslry groups had created many overlapping rolestechnologies over the years. Doug Merritl, Executivee President and General Manager, Suile OptimizationProgram Office, provided one example. "Many difnt internal groups within SAP deal with security,"aid. "Which one does a partner talk to when an issues?"64 Technologically, SAP also needed to improvescope, funclionality, and documental ion of its devel

10015 for third parties. Nevertheless, Merritleved that the structural and technological challengesore partnering were secondary to the cultural. "Wean emotional jump to make in embracing produclners," he said. ''There is a pride and quality issue hereoing thal. SAP product developers are a very proudh. They Imow that wiLh enough time and resources,can build anything, which can make the conceplrtnering for product functionality very difficult forto swallow.,,65

Ihe same time, Apotheker envisioned potentialfrom the perspeclive of lhe field. "It's a chal

e for us because we need lo transform bolh oures and Lhe SAP brand from a high-end applicationdar into a world-class provider of applications andastructure-'applistructure' as many analysts call it.we need to put into place aH of the foundations forrtner ecosystem, and build channels ror the midmarand for lhe smaU end of lhe markel. Also, we need lOupto the notion that compelitors. or vendors that weperceive to be competilors, can actually fun on ourform. That is a big cultural change.,,66 Apolheker andteam also had to figure out successful revenue sharingels andjoint sales processes that would provide incenand slructure for partners who wished 10 engage cusers jointly with SAP's sales force or on SAP's behalf.

lerview, 11/22/2005.

11/22/2005.

As pan of GOAL, Apolheker and Agassi had restructured SAP's parlner engagement model, first by creating a new partner management organization. Agassi 'sProducts group handled producl partners, Apotheker'sCustomer Solutions grollp managed implementationand service partners, and a joint partner board managedcross-organizational parlnership issues.67 Agassi and hisleadership team, with the help of SAP's internal consulting and competitive intelligence groups, also had begunIllore strategic evaluation of SAP's partnership OPPOrlll-nilies. "We have built scenario maps that outline SAP'scoverage across all of the business processes of a givenindustry" noted Fritz Neumeyer, a senior member of theCorporale Slralegy Group.68 SAP managers had begunto use these scenario maps to crystal1ize future productplans. "In my organjzalion, we are trying to becomemore proaclive in terms of the solution roadmap," commented Snabe. "What are the slrategic areas where weneed to compete, and what are the other areas where weshould encourage co-innovation?,,69To establish greater transparency with ISV partners,

SAP intended 10 share its producl developmenl planswilh them on a regular basis. "We are opening up thekimono 10 our partners," Agassi declared, "and showingthem clear areas of opportunity where SAP will nol go forat least the next few years.,,70 Several pOlential partners,though, still sought more tangible evidence thal SAP wascommitted to becoming a partner-focused organization:Zencke commented on the lension lhat arose from SAP'sdual presence in both the platform and applications businesses: "There is some overlap. We aren't saying t ISVs,'Hey, you have a safe area here; and that we never willgo lhere. Over time, it makes sense for innovations to beabsorbed into the core platform.,,71

In May 2005, SAP scored a major publicily bOOSIwhen several of the world's largest ISVs and IT services companies (including Cisco, Intel, EMC, Adobe,Symantec. and VERITAS) publicly endorsed lhe Enterprise Services Architecture vision. 72 Heitmann recalledIhe pivotal day leacling up to those announcements:I had Ihe ltlck to parlicipate in Ihis one day in Palo Altowhere il seemed like every hour anol.her corporale

t>7Jnterview with Zia Yusur, 10/3112005.MIlllerview. 911 9/2005.69lnlervicw. 11/21/2005.7OInlerview.10/31/2005."/llnlcrview. 1112212005.nS ee hnp:lIscllrchsap.tcchlargcl.comloriginaIContenI/O.289142.sid21_gci I089462,OO.html.


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strategist from a huge technology company came in, andusing their own terminology each one explained their slralegy to us. It was as if somebody has pre-designed it. Atone point J said to one of them, 'We use different terms butwe have the same perspeclive on how things will evolvehere. How can it be thal you are now the fifth person coming in here and telling us the same thing?' J looked at Shaiane! wone!ered whether he hae! e!one some magic. But (heresponse was pretty simple: 'We all have the same customers.' They hae! all come to the same conclusion, ane! oncethis fact becomes visible lo olhers, it has extremely important convincing power. From a timing perspective, that dayhappened t\Vo \Veeks prior te SAPPHIRE Boston 2005.7]So 200 ine!ustry analysts ane! another 200 media representalives all witnessed all these big, well known companies saythat enterprise services are the future. 74

Increased Need for Development Al ignment,Efficiency, and AgilityThe move lo the BP? meant thal existing SAP applications and any solutions SAP built in the future had toshare architectural standards and common software com-ponents. "For a long time, the percentage reuse of com-ponents across our software products was close to zero,"said Herberl IIlgner, Senior Vice President, ApplicationPlatform Operations. "Now the question is, how can wedo everything just once?,,75 In addition to rationalizingredundant technologies, executing on the B?? demandedthat product cycles be shortened and that processes suchas release planning and scheduling be coordinated acrossformerly autonomous groups. To Archim Heimann,Senior Vice President, ESA Adoption, achieving theseefticiencies meant that SAP needed to practice what itpreached regarding the ideals of the Enlerprise ServicesArchitecture:

We say that (he ESA means speed and flexibility, and weneed lo prove it ourselves. We have te convince out" parlnercommunity Ihal we can e!eliver on that promise. If a partnerwanls to builcl a new application on the platform but oneof the services required to do it is missing, it is not K forus to say, 'Sorry, you have to wait two years until our nexlrclease' like we do now. It wil! not work.76Most SAP senior executives felt that in arder

to deliver upon the EPP strategy, the development

73SAPPHlRE was SAP's premier eustomer eonferenee and was generally he Id twiee per yeal".74lnterview, 11/23/2005.75Interview,9/20/2005.7('lnterview, 11/22/2005.

organization needed to be more controlled, predictable,and market-driven. Furthermore, roles needed to be moreclearly defined and segmented. "With a platform strategy, sorne people need to focus on bui lding services,while others need to compase applications consumingthose services," explained Snabe, "and the decision ofwhich services to build must be driven from the outsidein.,,77 This increased industrialization of the development process ran counter to the high levels of empowerment traditional1y offered to individual developers anddevelopment managers at SAPo Kagermann elaboratedon this dilemma:

SAP cmployces identify themselves very much with thecompany. This high level of engagement creates ineffi-ciency because everybody believes thal they are an expertin everything. People are always qucstioning what the lead-ers are saying. Still, that's how you create engagement, andengagement is positive. We are not a hierarchical, rnilitarystyle of organization. We can't just force decisions down-ward. We need lO set up many meetings to explain every-thing, and even then aH sorls of complexity come up. Still,it's bener to have engaged people.7sDevelopment of New Skills and CompetenciesSuccess with the new growth strategy required skilis andcapabilities that SAP traditionally did not deem critica!.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 similarformula for Sllccess: listen to customers, build the mostadvanced product on the market, aggressively sell it aHover the world, and repear. Until the early 20005, SAP'sExecutive Board was 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 unchartedwaters. The business model s till was nol fully defined.Profit opportunities varied widely by industry, and ongoing strategic aJertness would be required to exploit them.The entire spectrum of how SAP developed, sold, andsupported software needed to change, especially giventhe important role SAP wanted externa] par tners toplay.so Given the challenges at hand, Merritt observeda potential competency gap. "SAP has great lechnicalexpertise at the bottom of the organization, and a great

77Interview, 11121/2005.78lnterview, 11/22/2005.79See Exeeutive Board biographies in SAP 2000 annual reporto80lnterview wilh Zia Yusuf, 10/3112005.


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PART FIVE: CONCLUSION: INNOVATION CHALLENGES IN ESTABLlSHED FIRMS 1183

understandi ng of customer needs al lhe top." he noted,"bUl very few people in the middle who understand whatbeing a platform company really means. We are lacking

b I h ..8Igeneral management enc 1 s trengt .Executives across nearly aH functional groups pointed

lo ski 11 developmenl needs. "The Iraditional SAP prnduclmanager used to be very SAP-centric:' noted Neumeyer."He 01' she thought in terms of, 'This is what we can do,this is what we can solve for a eustomcr.' In lhe future,they will have to think as Illueh aboul who and what in the

S P l ,. " D' kcosystem can complemenl A so lIllons. Ice mannnoled how SAP SUPP0rl s taff would have to go to customers with a Illore holistic approach: "In the flllure, \Vewill have to 3nalyze a \Veb of interconnected systemsowned by a customer. complemented by Web servicesfrom different providers. and get an impression of howthese systems and services support the customer's business processes. Thal requires another level of thinking,. d ' , ,8]analysls, an perceptlon. .On [he sales fronl, Chakib Boudary, Senior Vice Preso

ident. Value Engineering, cxplained lhal "functionalitydemos are not enough anymorc. We have to demonstrateend to cnd business processes capabil ir ies sllpported bybusiness mClrics, induslry best praclices, and a clearroad map to value realization."s4 Apothekcr concurred."We are no longer selling technology:' he nolcd. "We areselling business opportllnity, and \Ve have to prove lhebenefi.ls. At the same lime. we're changing the businessmodel for consulting fmm selling people to selling intellectllal capital. To do a1l of {his suCCCSSflllly, we need to

. k f I .."hange the genellc ma cup o our peop e. ,Establishing lhe right mix oftechnical expertise. cus

lomer value focus. strategic visiono and induslry experience conslituled a primary challenge for Kagermann,who believed he knew the root cause of many exislingeompetency needs:

There is an ongoing tension belween lhe field and engineerino Enoineers don'l realize the complex sel of skilisrequir:ci to ~ I o s e big deals; they think thal good produclsjusI sel1 themsclves. Salespeoplc don't understi.lncl how hure!ir is 10 manage u developmcnt tcam


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1184 PART FlVE: CONCLUSION: INNOVATION CHAllENGES IN ESTABLlSHED FrRMS

is indeed foreign to SAP," admitted Plattner. "BUI mybiggest worry is lhat SAP gels too old. Even myself, Icould have hung on as Co-CEO after lhirly plus years, bUIevery year you hang on, you block somebody else.'t92Nonetheless. Heimann was concerned aboul Ihe moti

vational implications of all lhe hiring. "1 think we have tobring in new people, but we need lO think abolll it carefully, and we need to conti llue lo invesl in our own peopie," he worried. "If we don 'l , then we run into severalproblems. Firsl. we will create confrolltat ion betweennewcomers and velerans. Secand, we will lose productivity. We need to filld a way for people who have beenworking al SAP for a long lime to become much moreenthusiastic than they are today.'mAdapting Culture and ValuesHistorically, SAP had been an engineering-driven company. One executive even compared SAP's pursuit ofsoftware engineering perfection to how a skilled Germanl'orlagel1hmulH'erker, 01' master craftsman, approachedhis art. Since prodllcing standardized software wasalways the goal, SAP developers worked to ensure thatIheir applicalions were configurable enough lo handle ahuge range of patential use cases across many industries,even if this approach added layers of complexity. Focuson technical aptiwde extended all the way lo the Executive Board.Executing on the BPP, on the other hand, required a

difTerell( culture and mentality. Besides the willingnesslO embrace external product partners and willingly ofrerthem revenue opPorlllnities, slIccess required a host ofchanges to traditional SAP thought processes and values.As Snabe said, "We need a pragmalic approach Ihat isbusiness driven and open, nol a theoretical approach thatis driven cxclusively by IT Ileeds."\)-\

To help overcome resistance, Kagermann and lhe restof the Execulive Board reaffirmed SAP's foundationalvalues but al so specified several new behaviors necessary lO achieve SAP's new growth goals as part of theBesl-Rull SAP initiative. (See Exhibit 18 for a list or thefoundational values and desired changes.) Torsten Busse.Vice Presidenl, Global Communications, describedsome of lhe tools developed as part of lhis project: "Wedeveloped all interview guide to get people to reflecltlpon Iheir typical behaviors. What a re the behaviors

92Interview.2/3/2005.9Jlnterview. 11/2212005.9-tlntcrview.ll/21/2005.

thal really don't lead anywhere? How do l promote theright behaviors? For example , \Ve talked a IOl aboutsimplifying things, which \Ve !leed lo do becallse we havea very complex business,,,lJ5Afler spending months talking wilh employees about

new skills and behaviors. Busse renected upon lhe feedback he \Vas getting: "The commoll queslion, regardless offuncLion al' rank, is 'How do \Ve manage lo stretch betwcenlhe old world, existing products and ERP, and Lhe newworld of lhe BPP and the partner ecosyslem? Do 1 haveLO generalize al' specialize. al' do 1have 10 do OO1h?' Ide-ally, you have to do both, bul that's really difficult for mostpeople Lo do; a person always has a preference. So lhemostcomITIan reaclion s. 'Oh my God. l've gOL to prepare forlhe future and ('m entirely caught up in lhe p a s t . ~ > 9 6Heilmann also sensed a regional cultural bias. From

my perspective, ir is much eas ier to win the hearts andminds of the employees in lhe Sil icon Valley for newtechnology than in Germany;' he observed. "In Germany,they sometimes have a tendency lo say, '15 lhat lhe fiflhpropaganda stream frorn Sil icon Valley now promising heaven on earth? Tllat will go away. Let's wailand see:,,97 Underscoring Heitmann's poinl, an Augusl2005 anicle in MClllIlheimer Margen, a local newspapel' printed near SAP's primary German campus,opened with the following line: "The employees at theWalldorf headquarters of the software company SAPfear an 'Americanization' of lhe corporate group:'98The anicle went on t cite an employee who complainedabout lhe increasing "Palo-Alto-izalion" of SAP's d e v e l ~opmenl strategy. Kagermann viewed the issue of workforce globalization as a cri tical evolulion process lhatwas only just beginning:

We come from an organizalion whereWalldolfwas lile center of lhe \Vorld, and the other SAP localions were just planets revolving around that sun. Sorne pcople in Walldorf stillbehave like this. And no\\ 'you have lO telllhern you are nolIhe sun, Y0l! are jusI one of Ihe planels. There is no cerllerof gravity any longer. Tllis takcs time for US, and all you cando is repea! . repcat, repcal the message. And remind lhemthat Walldorf will sti ll be the largest development ccnterevcn in five years . We simply cannot h ire lhat quick ly inother locations.99

'JSl ntervicw.9120/2005.96lrllcrview, 9/20/2005.97lnterview. 11/23/2005.'l8MlI1m/eimer Morgen. 8/212005: SAP Employees Fe'lr Loss ofPower:' Anide tmnslation by SAP Global Communicalions.99lnterview. 11122/2005.


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PART FIVE: CONClUSION: INNOVATION CHAllENGES IN ESTABlISHED FIRMS 1185EXHIBIT 18 SAP Foundational Values and Desired Changes

2010 Vision Requires Transformalion lo NewRequirements and Conlinued Commilmenl t o Core Values

Foundational Values Customer focus Integrity Ouality Commitment Engineering Excellence PassionChange from Protecting status qu o to ... ... Agility Complexity to ... Simplicity Pockets of execution to ... ... High performance "Not invented here" to ... .. Global collaboration Employee management to ... ... Talent development

Source: SAP Corporale SlralegyGroup.

ASSESSING THE SITUATlON IN EARLY 2006As 2005 came to an end, Agassi summarized SA p' ssituation:Fifly percent or our R&D spcnt tociay goes into the plalform, which is not yel monelizing even lO five percent ofnew license revenue. It's like Pfiter puning half or lheirR&D resources into a drug Ihat's not in Lhe markel yet,while simultaneously Irying lO grow margin and revenue by15 to 20 percent, in a markel hat 's going through price crosion, comprcssion, and discount battles. And \Ve also have acompetitor. Graele, Ihat thrc\V a $20 bil1ion attack at llS withits acquisitions. So we need lO mainlain shorl-term momenlum. grow sales. and grow the margino aH while we build awhole new wave of innovalion. This is as big a problem asi! can get.1OO

Progress on Developing th e Business ProcessPlatfonnZencke's and Agassi's groups were both making progress on the BPP. Ho\Vever, as SAP engineers delveddeeper inlo def in ing and plal1ning phases, more andmore qllestions a rase . For example , so me of Zencke'sarchitects now posited that mulliple versions of lhe BPPwould be required to serve the needs of SAP's diverserange of customers. IOI Even the question of which

lOOInterview. 10/31/2005.101lntervicw wih Pcter Zenckc, I 1/2212005.

specific enterprise services to include in the first releaseof the BPP was provoking l11uch debate. Zencke illustrated some of the tradeoffs: "1 think lha t we have a conf1ict of three dimensions. Big clI stomers versus smallcustomers, which are the prior ity? ls the market trulydeciding which services to produce in this first i teralion.or do we think we know? And sh ould \Ve give lSVs orcustomers the highest priority?,,102Externally, Kagermann, Apotheker, and Agassi werereceiving diverse feedback about the Enlerprise ServicesArchitecLure. Some SAP customers, such as ntel , hadendorsed [he ESA vis ion and were a lready preparing toadopt the BPP. lOJ Most customers. such as oil and gasgial1l Chevron, were still debating how exactly to planhe shift: to Web services-based technology architectures,and the role that SAP would playas part of an overallarchitecture strategy. [0 4 Besides, many exist ing customers had more immediate demands for SAPo Merrittrecalled the experience of the first SAP conference heattended arter being hired in 2005: "Shai spent almost anhour talking abour the platform vision and the innovationit could help customers generate, and lhe resu It was poi ite

I02lnterview. 1112212005.10'S ee h1I P :llwww.Slpteched.com/ernea/lheater_ppts/session.lurn?sid=IOO4.I ~ l n t e r v i e w wilh Don Paul, Vicc Presiden[ and Chief TechnologyOfficer, Chevron Corporalion, 3122/2005.


27/34


applause. After Shai's presenlalion_ a few SAP developers demonslrated a new debugging feature in one of ourexisting tools. The crowd wenl absolutely wild.'J05

SAP slHI had significant work to do lO turn the conceptof the BPP into a reality. Several technologies, such aslhe Visual Composer tool lhal cnabled partners to combine anel configure enterprise services, required majorenhancements. At the same t ime, potential ISV partnerswere applying pressure on SAP lO demonstrate what wasreal about lhe BPP and what \Vas nol. Determined to lurothis pressure into opportunity, Agassi had spearheadedseveral special projecls lo demonslrale SAP's determinalion to cater to partners. 106 He reflected on lhe situation: "We've made great progress on lhe BPP. We justneed to cOJllinue to make mislakes and correcl them veryquickly. Some things you can do in theory, but otllerthings you have to do in praclice. The main issue here islhe agilily of the organization. If we can slay agile andopen-minded, \Ve're going lo TUn through lhe decisionslhal arise preuy quickly. because they"re preuy obviousonce you see them in the customer conlext:' 107

After some initially frUSlraling experiences. HeinzHaefner, Senior Viee President, SAP NetWeaver Opera-tions, summarized SAP's overall progress: "We're learning, adjusting, and learning and adjusting again. Evenlhe idea of having l\Vo platforms we couldn't even haveimagined ayear ago, because we hadn't thought throughall the implications of customer needs. I am now confident lhat within a few cycles we \ViII deliver on the platform vision:,IOllProgress on Growing Market5hare i n the Midmarke tBy OClOber 2005, McDerll10tt had created a new salesorganization in SAP Americas to focus exclusively onlhe SME segmento "We hacl been real ly vague at where\Ve drew the lille between midmarket and [arge enterprisesales until lhis year," commenled Purcell, "bUl lhe hnesof demarcation are now very c1ear. Also, we're hiringa lon of reps lo focus on lhe midmarket. 'I09 Efforls lObuild the indirect sales channel and proactively manageanticipated channel conflict were still in progress. "2006

IOSlnterview.912112005.I06Most notably. Agassi hall commissioned a fnst-track projeet in 2005lo make aVllilable lO ISVs 500 basie enterprise scrvices for applieation composition on SAP's existing NetWcaver (prc-BPP) teehnologyplatform.107lnterview. 10/3112005.lallnterview.912312005.IOOlnterview. 121212005.

is a crilical year for us to invest in multi-channel salesmodels," eommented Apolheker. "1 don'l lhink lhat youare ever fully done with it, as building channels is morean ongoing process , but I bel ieve that by the end of 2006\Ve will have put the foundation in place to have SAPprospering,,,IIO

On lhe support side, the responsible parlies were stil1discussing many key issues. "We have top managemenldirections;' said Dieckmann. "We have aH the strategic figures and performance largets for 2007 lO 2010,The task is now to develop the service and supportportfolios that enable us lO reach these figures."lll TheGlobal Service and Support group also \Vas implementing mySAP CRM internally to help streamline theiroperations. Despi te the overall progress, Dieckmannnoted the need rOl' more tangible use cases ror the as yetunreleased BPP to facilitate lhe preparations rOl' its widescale adoption, I12Progress on Appealing toMore Business UsersEff

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