SAP CEO: Learning to live with co-opetition

Business application vendor SAP AG faces plenty of challenges these days.

Competition is intensifying from rival Oracle Corp., especially after its acquisition of PeopleSoft Inc., and even partner Microsoft Corp. is expanding into business analytics, an area in which the German company also aims to be a major player. In addition, new open-source offerings are emerging in the area of CRM (customer relationship management), while hosting companies, such as Inc., continue to make inroads.

The list of challenges facing SAP Chief Executive Officer (CEO) Henning Kagermann appears endless, indeed. Despite a heavy workload, the friendly, straight-talking executive found time to discuss these challenges in a brief but informative interview with IDG News Service.

How has the Oracle buying spree affected you so far? Are customers who use the Oracle stack to run their SAP applications in jeopardy of being caught in a competitive crossfire?

Our customers have no disadvantages. We will continue to support products from competitors as we have done in the past. We are professional enough to handle to co-opetition, a situation we have not only with Oracle. In applications, we’re strong competitors but, on the other hand, our software runs well on Oracle databases.

And the impact of Oracle’s acquisitions?

The acquisitions were forced by market changes. Over the past four years, we gained market share and created a bigger distance to Oracle. So Oracle bought some market share to reduce this distance. As a result, they now try to compete on price.

You held merger talks with Microsoft, but these amounted to nothing. Are there ways for you to cooperate over and above your new joint product Mendocino?

Nothing has changed. We have a good working relationship with Microsoft, Mendocino being a prime example but there are others, such as improving the interconnectivity of .Net and NetWeaver. We have a relationship that works well and we have no intent to change it.

How serious is the threat of hosted services? And are you still planning to launch the hosted service announced earlier this year?

We said in June that some announcements will come, and this is still true. Today, we already offer hosted services after having started more than a year ago to partner with hosting companies.

What portion of revenue do these services generate?

I would say less than 5 per cent. Most customers still prefer to buy a licence and give it to their hosting company.

But what about the new service? What is it?

We will be offering a service that will help customers deploy certain functions of our software products much faster. This is similar to what Salesforce does. The real benefit of Salesforce is not the hosting opportunity, but rather the fact that the company has selected some functionalities that it can deploy very fast. This is what we’re planning.

Will customers able to run SAP on virtual environments?

Virtualization is about separating the underlying hardware infrastructure so users can switch resources dynamically. Initially, we offered it as a separate capability, with Fujitsu Siemens as a development partner. Then we extended the offering for other key players in the market and their hardware. Finally, we decided to make it a standard feature of NetWeaver because this is our platform for running all applications.

SAP is expanding its business intelligence functions in NetWeaver. How does this impact your partnership with Business Objects and others?

This is another example of co-opetition. We have extended our analytics capabilities with SAP Analytics. We have made it very clear to the market that embedded analytics is the future, and that analytic capabilities are part of end-to-end business processes. On the other hand, there are specialists, such as Business Objects, who are interested in working closer with SAP because we have joint clients. We’re not fighting them in this area. Although we will continue to bring more and more of our own analytics to the market, we are committed to openness and not closing our products to others.

And what about Microsoft’s recent move into this area? Reason to be concerned?

This isn’t a surprise. We treat Microsoft like any other partner. In fact, I see a good opportunity for us to embed some analytic capabilities in our joint offering Mendocino. Analytics is just another area were we have some overlap with Microsoft, but it’s not an area that will stop us from continuing to cooperate.

Some people are still struggling to get their heads around the ESA [enterprise services architecture] and NetWeaver concepts. Would you agree?

No. I give lots of talks, which aren’t technical, but rather more business oriented, and explain how business will look four to five years from now. Companies will compete more on business model innovation, which is empowered by IT. The question many of them ask is how they can differentiate themselves from their competitors? I tell them that such differentiation can’t be achieved with today’s architectures without considerable investment and sometimes modification to applications.

How about ESA adoption?

It’s very good. We have a target this year; we expect to have road maps with between 200 and 300 customers by the end of the year. When I talk about road maps, I mean workshops where we discuss with customers their future business and IT strategy, and define jointly an architectural blueprint and road map. Some customers start their deployments immediately. Others wait a couple of years. But our target is to get the message to customers that they need a road map and that we are the right partner to help them.

If you’re so ESA-based, where does value-add come in? Where’s the competitive differentiation?

If you compare SAP with others from a competitive differentiation perspective, the most important differentiator is our broad experience in the area of applications. We are the leader in nearly all industries and have a very broad footprint with key companies in world. We know how they do business today and have a good idea of how their business will look in future. This knowledge is important for us to design and implement services in the right way. In addition, we are running the most advanced and demanding implementations in the world. We know how to provide services that perform and scale. These are some of our unique differentiators.

Some vendors including IBM have announced an Enterprise Service Bus for managing multiple services in a services-oriented architecture. How about you?

To some extent, we already do because we have NetWeaver as a bus. We can support the integration of non-SAP services and products with ours. So our customers have choice. If they want a second platform and want to connect the two, they can. And if they want to integrate non-SAP applications using the integration capabilities of our platform, they can do that, too.

How are you dealing with new open source players, such as SugarCRM, which are offering low-cost software to smaller companies?

I don’t believe business applications are a field for open source. Why do I say this? The Linux operating system is one thing. It’s well defined and developed by a community used to programming. Applications are another story, particularly business applications. Designing applications to run business processes requires very strong governance. And I have my doubts if a community can achieve this. You need strong guidance and expertise to convince customers that the way you design business applications is the right way for the future.

Are some customers using your value-based pricing scheme?

Let me explain something first, to avoid confusion. Value-based pricing is not about going to customers and asking them to measure the benefits they get from using our software and then having them give us a certain percentage of these benefits. This won’t work. No customer will accept this method of pricing because we would be essentially asking them to share internal information about their business success. What we plan to offer are different price tags on different modules depending on their impact on business success.

How do you see the ERP [enterprise resource planning] market evolving over the next couple of years? What changes do you expect?

The first change is that ERP is now really a product. If you look back, most companies used ERP as a portfolio of products and implemented HR, manufacturing and finance applications from different vendors. I see ERP increasingly as one single product. Second, we shipped the first service-enabled ERP to the market last year. It wasn’t entirely service-oriented but it was ERP on the NetWeaver platform. We have extended this with mySAP ERP 2005, offering hundreds of enterprise services. It’s an ERP product that addresses not only the business needs of the future but also runs on the architecture of the future.

There’s a big debate in the European Union about opening up markets to globalization or keeping strong protection for older industries and workers. What’s your view on Europe? And will Europe ever have another SAP?

I’m a friend of open trade. We shouldn’t have restrictions and we shouldn’t have governmental subsidies. We need openness and not protection because if we start with protection, then the others start with protection, and that’s bad. But IT, in particular software, is too important for Europe to have only one SAP. Where I see opportunities for Europe in future is, for example, in the area of embedded systems. In Europe we have a strong culture of companies in various manufacturing sectors, such as automotive. There are many people with talents in mechanics, electrodynamics and complex physical systems. European manufacturers are hiring more and more software developers. Take car makers, for instance. Look at how much software is now required to run cars. Embedded systems will be a big opportunity for Europe. It combines software development and the other areas in which Europe is strong.

SAP has been moving into growth markets, such as China and India. Will you be building up your development resources there?

We are investing in China and India. In China, our focus is more on support; in India, it’s more on development. This will continue.

How is your small and medium-size business offering developing?

We are growing faster in this segment than in the others. That’s good news. Hosting is definitely one direction, but what the market really needs is a pre-integrated, predefined software stack. We’re doing exactly this. Instead of giving customers the entire flexibility and choice, we’re offering a few pre-integrated and predefined solutions. It’s simpler and cheaper. That’s what these customers want.

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