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Change at the top emphasizes SAP’s new focus: its bottom line

Change at the top emphasizes SAP’s new focus: its bottom line
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First Published: Tue, Aug 26 2008. 12 59 AM IST

Passing the baton: SAP chief executive and a former physics professor Henning Kagermann is slowly turning power over to his co-chief, Leo Apotheker, who is seen as more profit-driven. Photograph: Rolf
Passing the baton: SAP chief executive and a former physics professor Henning Kagermann is slowly turning power over to his co-chief, Leo Apotheker, who is seen as more profit-driven. Photograph: Rolf
Updated: Tue, Aug 26 2008. 12 59 AM IST
WALLDORF, Germany: The long-time chief executive of SAP AG, Henning Kagermann, wants you to know that he is more than just a software geek. Kagermann, CEO of the giant maker of complex computer applications for business, is in the middle of a slow transition in which he will yield the top job entirely to Leo Apotheker, the co-chief executive, in March.
Passing the baton: SAP chief executive and a former physics professor Henning Kagermann is slowly turning power over to his co-chief, Leo Apotheker, who is seen as more profit-driven. Photograph: Rolf Oeser / IHT
Apotheker rose through the ranks of the SAP sales force, a notably different career path than Kagermann, a former physics professor who made name as a developer.
The handover has fed an irresistible narrative in financial markets: the software egghead who shovelled cash into new projects is yielding to the uncompromising moneymaker. It is also a story that Kagermann dismisses with an unprintable word and a terse reminder that he can do more than write code.
“People forget that I was head of sales for a few years,” Kagermann said in an interview. “I was not always the tech guy.”
There is some truth to the tale, to be sure, but the reasons run deeper than a mere change of chief executives. The company is indeed shifting towards more of a focus on the bottom line, and less on the multibillion-dollar investments in technology that helped make it the market leader in the lucrative field of business software.
The goal, it seems clear, is for SAP to show that it can not just produce sophisticated software that companies depend on to run their businesses but also do as well as its American arch-rival, Oracle Corp., in satisfying the demands of investors.
Oracle achieved a pre-tax profit margin of about 35% last year, well ahead of the 26.7% operating margin that SAP managed in 2007. That is one reason SAP’s stock price has languished in spite of years of sales growth.
“The only reason SAP is focused on that number is because Oracle is focused on that number,” said Joshua Greenbaum, analyst at Enterprise Applications Consulting in Berkeley, California. “They are efficient and get great margins. There is flat-out envy on SAP’s part.”
SAP can take heart that it controls a larger market share than Oracle, according to Albert Pang, an analyst with IDC, a Boston-based technology consulting firm.
In 2007, SAP had about 10% of the $88 billion (Rs3.8 trillion) market in revenue for business software, while Oracle lagged with 6.6%. In subsets of the market—such as enterprise resource planning, which tries to oversee many basic operations—SAP laid claim to 22%, almost twice of Oracle’s 12%.
But, analysts said, investors have seized on the question of margins, and SAP has fed the story unabashedly.
Speaking at a technology conference in Las Vegas in February, Kagermann seemed to suggest SAP would achieve a 35% operating margin quickly, an utterance that sent its stock up, surprising SAP officials. So in May, executives seized on the subject at Sapphire, SAP’s annual analyst conference, and people who attended recall Apotheker giving a full-throated endorsement to the goal of higher margins.
Knut Woller, a software analyst at UniCredit in Munich, said having a numbers-oriented executive at the top has electrified SAP watchers eager for a trimmer company. “Apotheker will make it more about sales, simply by virtue of the reason that SAP has to compete,” he said.
Kagermann has also left his successor a good amount of wiggle room, analysts said. By promising to reach a margin of 35% “in the medium term”, he is saying it could take as few as three years, or as many as six, while still dangling a juicy target in front of analysts.
“There is no fundamental reason not to achieve it,” Kagermann said.
Kagermann joined SAP in 1982 as a software developer, working out of what is now Building 6 on an enormous company campus that looms over the village of Walldorf. The work force has exploded from about 100 then to more than 51,000 now.
At the time, the mystique of software grabbed hold of Kagermann enough that he worked at SAP between semesters, mastering a shift from academics to business programming languages, before giving up his teaching position to work there full time.
“Software was hot,” he said. “Physics was not that hot.”
Kagermann got into software in time to watch a revolution unfold in the business world. Large companies first bought SAP products to manage inventories, track sales leads and handle vacation requests. Later, SAP clients ramped up their use of software for more analytical tasks, like divining sales patterns or ferreting out kinks in global supply chains.
By and large, SAP developed the products itself, eschewing the big acquisitions that were a signature of Oracle. SAP invested slightly more than the industry average of 10% of its revenue in research and development (R&D). In the last three years, R&D spending ballooned to 14% as SAP raced to bring new products to the market. In particular, it invested heavily in Business ByDesign, an online software suite aimed at expanding the market by appealing to very small businesses that cannot afford a pricey IT department.
Last year, SAP also departed from the organic growth strategy to buy Business Objects, a French maker of business intelligence software, for €4.8 billion (Rs30,816 crore at present).
“We had a phase of transition between 2003 and now,” Kagermann said. “It was part of the strategy for a limited number of years to over-invest.” Now, SAP is betting that it can raise its profit margins without conjuring up, as is often the case in Germany, the specter of mass layoffs to contain costs. Kagermann said SAP would keep hiring, while curbing its costly use of outside developers. “We can continue to hire people because we continue to grow at double digits,” he said. “You just have to invest less than in the past.”
©2008/INTERNATIONAL HERALD TRIBUNE
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First Published: Tue, Aug 26 2008. 12 59 AM IST