SAP’s Kagermann sees lagging Europe recovery

It has been over a year since Henning Kagermann assumed the mantle as SAP AG’s leader after Hasso Plattner, its founder and co-chief executive officer, stepped down. In that time, Kagermann has led the company through a tough business environment in 2003 to the solid first-quarter results SAP recently reported on the back of strong growth in sales of its enterprise resource planning software products in the U.S.

Kagermann joined Dell Inc. Chairman and Chief Executive Officer Michael Dell on stage at the Nasdaq Marketsite in New York Wednesday to highlight an expanded partnership between the two companies. Kagermann and Dell are embracing the “scale-out” strategy of enterprise computing, where more nimble and less expensive two-way and four-way servers take the place of the larger symmetric multiprocessing (SMP) servers that dominated data centres over the last decade.

While in New York, Kagermann sat down with the IDG News Service to discuss the expanded relationship between Dell and SAP as well as the general state of the economic recovery in Europe and the expansion of the European Union from the perspective of the German software vendor.

IDGNS: What does today’s announcement mean for your company?

Kagermann: This was more to highlight what the partnership in place already has achieved. It’s important to show sometimes what it has been like.

This is for me more the proof point that the (scale-out) strategies work. You’ve seen the customers, you’ve seen the proof points in TCO (total cost of ownership) reduction in the migration results, and you’ve seen the proof points in that it works even in an environment in which the customers didn’t think it would work.

That’s what this was about, to show to the market that these are not ideas; it works. This confirms our strategies for the workforce to scale out, it confirms our strategy that there is TCO savings. This is normally the way partnerships should work.

IDGNS: Are you drawn more to Dell as a hardware partner because they don’t have their own application business?

Kagermann: No, I would say the speed to focus on this specific topic was very high at Dell because it was one of their key focuses. So we were talking to the others are as well, but he (Michael Dell) was very focused on this so we could make this announcement very early.

That doesn’t mean that others will not do similar things.

IDGNS:What is the current state of the technology market in Europe?

Kagermann: Fundamentally, it’s true that Europe is lagging, there’s no doubt. If you look to SAP and SAP results, there is distortion. People look to 65 per cent increase on a constant currency basis on software (revenue) in the U.S., and then the two to three per cent down in Europe. This is too big (a discrepancy). Our execution in the U.S. is now after the last year much better than it was two or three years ago. So therefore, I think here we are in a catch-up mode. Europe was very strong (when looking at) market share.

If you look to the market, it’s true that the U.S. companies are more open for investment than in Europe. They are more enthusiastic, and that’s not a surprise. We indicated at the beginning of the year that would happen, we saw Europe was lagging two quarters behind. We expect license growth in Europe this year. But we definitely see the U.S. as driving that growth.

IDGNS: That seems to be the case, historically, when looking at past recoveries.

Kagermann: This is not the first time. I remember we had years where the U.S. went up, and then everybody said in the investment community that Europe has to catch up, and Europe didn’t.

We at SAP had quite a stable business in Europe, but Europe was not catching up. So now everybody is waiting, and the U.S. economy is picking up again. You see people were more optimistic here, and Europe follows. That’s a pity, but that’s always how it goes.

IDGNS: Do you think it’s different this time around in that the European Union (E.U.) has been formed (and shares a common currency)?

Kagermann: That’s true, it’s a little more homogenous. But still, the environment in the countries is different. I would still view Europe as a bunch of 30 countries. You can see there are countries that are doing quite well and others that are not doing well.

The time until you can really view Europe as one entity is 10 to 20 years (away.) Europe has to invest a lot in Europe to make it happen first, that’s my theory.

One of the reasons why Europe is still struggling in economic terms, and we see it in Germany, is that we have had a big unification (effort) for over 10 years. You look to the issues Germany has, and I think its partially because of the big investment and the big struggle in order to unify these two countries (East Germany and West Germany).

Now look to Europe, and now we get eight or nine or 10 countries on a very low level. (Ten new countries will join the E.U. on Saturday.) Now, it’s much better there than 10 years ago. If you go there, like to Hungary, things are much better there than in the 1990s.

But still, the salary level (in those countries) is 20 to 25 per cent that of Germany. It’s a big discrepancy. We get a lot of the labour force coming in which works for 20 per cent of the German average worker.

You cannot say this is one big entity. It will over time become closer, but we are not there yet.

IDGNS: Do you see that as an opportunity for your company, in that you can tap into a less expensive labour force right in your backyard?

Kagermann: I see it as an advantage. We did the same as U.S. companies, we have invested in China, and we will continue. But the east of Europe is another place for us. It’s closer, it’s the same culture. But we have done more in India and China so far, so we have to ramp up in the east of Europe. Like in Bulgaria, we will do more there.

In India we have over 1,000 people, and we’ve been there five years. We did it very carefully, and we know how to manage it now so we can, to some extent, scale.

It can be an opportunity for us to invest in low-cost areas of the E.U. right now. The risk is lower because the currency is the same. You cannot invest only in India, the risk is too high. The next big piece will be the east of Europe.

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