Chairman and chief executive of Germany’s SAP AG, Henning Kagermann, stepped into the top job at the world’s largest business software firm in 2003, a time when tech spending was yet to recover from the downturn that followed the 9/11 terror attacks in the US. From that tough environment, Kagermann has managed to return SAP to double-digit growth in revenues.
Kagermann, a former physics professor who joined SAP in 1982, now faces another challenge from a dogged rival Oracle Corp., which is acquiring customers by taking over other software products companies such as Peoplesoft Inc., Siebel Systems Inc. and also India’s i-flex Solutions Ltd. In a freewheeling interview with Mint, Kagermann talks about the new competitive landscape, SAP’s relationship with Microsoft Corp., and explains his acquisition philosophy.
SAP held its annual board meeting here followed by a meeting of all its top 100 executives. Edited excerpts:
How’s been the board meet and why India?
Fine so far, since Monday and Tuesday we had members of the senior leadership team. India because it’s the third largest subsidiary at SAP. This is the first time that we are doing this anywhere in Asia. Twice a year we have these senior executive meetings, mostly around strategy and alignment. We used to have around 60 leaders, now the numbers has gone up to 100, so more people are coming from across many countries. We have a development meeting on Friday in Bangalore.
Focused moves: Kagermann heads the world’s third largest business software firm
What have been some of the significant shifts you have seen at SAP since 2003? Also, how have you steered through an environment with competitors such as Oracle pushing consolidation?
As you said 2003 was critical because we wanted to get back to double-digit growth. The economy was going down, IT industry was going down. We felt at that time that it’s always the best to have organic growth, followed by a long-term vision and strategy about what you really want to achieve. We are delivering now on what we discussed more or less at that time. The commitment to enterprise SOA, for instance. (SOA refers to a loosely tied collection of software applications designed to carry out individual tasks that communicate with each other. Each application is self-contained and works with another piece of software depending on the need. The architecture reduces the cost of deployment and increases flexibility in use of software that run businesses.)
Some of the large clients we met on Sunday expect more openness so that they can plug and play, but on the other side if something goes wrong there is someone to step in and solve the problems. And that means you need a very strong management around this ecosystem.
Organic growth will only work in the future if we combine (it) with co-innovation, and co-innovation means to build and even stronger ecosystems. We have lots of experiences with many partners. In future, we will also have more partners in co-development of products (and will come) to a model where it’s a win-win situation for both sides, where we can clearly define what SAP is doing, (what) partners are doing and still have won a guaranteed support ability for our customers.
From the technical side, the challenges are less because we have proven from product and architecture. Now it’s more about getting business model around these.
What are your ambitions in the SOA space, and how far have you progressed?
We are on track that we deliver in 2007, end of this year our entire suite (will be) on SOA. I promised this in end of 2003 and we are on track.
On the other side, the adoption (of SOA) among clients is very fast. It’s interesting that last year, in 2006, it was very low... might be because they had not seen the delivery and then we announced that our new ERP is SOA-based, very stable, long-term support ability etc. and since then we have a huge adoption.
I think we have 4,000 ‘lives’ (industry speak for the software installed and running) in large enterprises. That’s really surprising.
It’s funny, you could change licensing but market is not keen to have a different licensing model. We still have a price model based on users on the ’engines’, and engines are closed groups because here you automate certain processes and charge. But this is something you could do without SOA. With SOA you could argue that you could charge on number of services consumed, but it’s too abstract for a customer -- they don’t know. They are (customers) more concerned about whether we are predictable.
While you compete with Microsoft in the mid-market for enterprise software, you also have joint product development alliance with it. What’s the rationale?
Yes. There would be more such partners. Take an industry... let’s say retail. We cannot develop everything so there is always, even say some local partner who is a point solution provider, who knows something very well. And then we look at adding some of that to our portfolio.
Microsoft thing is easier to handle because it’s very organized name everybody knows. I know they are competition. But companies of this size know how to handle it; you cannot be entirely complimentary. We have a good, trusted relationship with Microsoft since some piece can work together, even as other teams fight against each other; that’s possible.
One of the biggest shifts software industry has seen recently is this new model of offering applications through a hosted mode, wherein clients pay a subscription fee. What are your strategies for this space?
We have two types of strategies here. We have added, for example, SRM (supply relationship management) on-demand. ERP on-demand is offered in a way to large companies, but it’s too early days and there is no demand in the market.
Where we see demand is from mid-size clients, and we have initiated the launch of a new mid-market product suite entirely on-demand, you cannot get it in a different way. So from a business model point of view, it’s like Salesforce.com, but you cannot compare because what Salesforce.com is doing is just supporting certain people in an organization, for certain functions, which is not mission critical. If we do that now, for smaller companies, for their entire business -- it’s a different take.
But, we have to work very carefully because if our system crashes down, the business stops. So if you really want to bring on-demand to the next level, not just taking certain activities, (you have to) really see if you can offer to run the entire business. If that works for the lower end of the market where we really have demand from a price and risk point of view, then it could be -- though I am not quite sure -- that larger clients will come and want a similar model. We will see. Then we are prepared to offer that flexibility end of the day, which is more important for us.
We even try to avoid names like CRM (customer relationship management) on-demand because we feel it’s a old world and such categories are no longer important for the future because what you are looking is an end to end processes that include CRM, ERP and supply chain management. If you look at order-to-cash kind of solution it even goes in ERP and CRM, so we want to focus more on these end-to-end kinds of solutions to highlight to people that “They (SAP) know all this”.
You have stayed away from making large, big-ticket acquisitions, and have focused on smaller ones. What is your acquisition philosophy?
You cannot be the best in everything. The market is so large for enterprise applications. This is where we look for some acquisitions, where we feel that it either takes too long to do it yourself. So from a market point of view it’s a pressure, or you just don’t have the expertise or capabilities. For example, we did two acquisitions in retail -- one was more because of timing and another one was because of domain expertise in the area of price optimization, which we had never done before. We did recently a small one for CRM, which enabled us to do decentralized call centres. So you might ask, who needs this? In future, there will be demand for this. We feel that people work differently on different cases.
What gaps in your current portfolio could be filled with these niche acquisitions?
We have normally a portfolio of industries where we know we are extremely strong, then we have 5-6 industries where we have ‘white space’. There’s always public sector and still in financial services. I would say some segments in communications, billing solutions could be an example... and finally healthcare.
Lots of these buyouts are not been very big--$400 million has been the biggest. Is that because you don’t have an appetite, or you don’t feel the need to go for those big ticket acquisitions?
The ticket has to fit. Some of the big tickets in spaces where we want to extend, there is significant overlap. Now we have to ask, “Okay, do we want to be like Oracle, where we offer two or three similar products in parallel?” I don’t think that’s a good strategy.
In this case, we have shown that we can partner. For example, we have recently partnered with Sungard in financial services, which is pretty large company and has a good business model.
How does India look as a market for your financial services products? Also, what do you think of one of the biggest ERP (enterprise resource planning) tenders -- a $1 billion purchase by Indian Railways to be floated soon?
We have not much experience in the Indian financial services space, and what’s surprising is that it took off faster in China. But we are strong in other industries in India, for example retail, manufacturing and utilities.
For Indian Railways, I think we are the perfect choice; we have nearly all big railways in the world. In this case, it’s not a solution, which is just public, but relations such as public procurement.
Last four years as the chairman, what have been the big events for you and what’s left?
We have a few things to do on the enterprise SOA, which we will deliver this year. But I would see it complete if we see a change in minds of all our clients. So for me, it will be complete not when we deliver, but when I see a better fit in terms of the clients’ side.
We have seen another large project, which is mid market offering for the first time in history of our company. We are adding a new business based on a new business model. These are two major things I am focusing on.
What about succession planning especially after your heir apparent Shai Agassi left SAP earlier this year?
Here we have a good answer because we felt that there was too much speculation before on succession -- without need. It’s not necessary to speculate again and repeat the same mistakes.
Will SMEs ever contribute, say, over half of your revenues?
No. Today it’s 32% (to SAP’s revenues), so it’s growing slowly. Our target was 40% in 2010. If you want to grow in double digits and outperform the market, we have to go to new markets as well. And it’s better to focus on your core expertise, which is enterprise applications instead of doing something entirely different.
Does that put pressure on profits as you expand more into price sensitive markets such as SMEs?
No, that’s a concern of financial analysts. It’s some investments in the beginning because it’s a new business model. But it’s a good investment because it gives us higher margin later. It’s kind of subscription model and that is not good in the beginning but it’s very good after three to four years.
You sit on the board of Deutsche Bank. Do you see an economic turnaround happening in Germany?
If you come to Germany you will see a good, healthy environment. That’s a surprise for some people, but it was not so surprising for us because all large companies had done a good job in Germany with restructuring. If you look at unemployment rates, it has decreased dramatically. A part of recovery is because of small and mid sized companies. Europe was always when the US economy went down and then US and Asia came up, Europe stayed back. Now, (the turnaround) is good for everybody.