The appointment of Leo Apotheker as co-CEO of SAP signals much more than the impending retirement of incumbent CEO Henning Kagermann in 2009.
It signals a sea change in the company’s business plans as it shifts its effort from making huge investments in new software products and acquiring companies to reaping the highest possible profit margins from those investments.
SAP’s executive shuffle itself comes as no surprise. It’s been expected that Apotheker, who was appointed deputy CEO in March 2007, would take over sole possession of Kagermann’s CEO role when his contract expires in 2009.
It’s also been expected that SAP would appoint several new executives to its Supervisory Board as the company changes its business focus.
But the appointment of Apotheker, whose roots run deep in sales and marketing, is perhaps the best indicator that the company is shifting its focus from software development to sales and customer service.
SAP, the world’s largest business applications company by revenue, is well-known for its engineering expertise. The company was founded by five former IBM engineers; Kagermann received his doctorate in theoretical physics.
Apotheker, who holds a degree in international relations and economics rather than engineering, lives much more in the customer world. A member of SAP’s Executive Board since 2002, Apotheker has since then been responsible for all of SAP’s customer operations-consulting, education, training, sales, marketing, small and midsize business, and field services. Prior to that assignment he ran EMEA (Europe, Middle East and Africa) sales for SAP.
Given SAP’s strategy to grow the company by revenue-versus chief rival Oracle’s strategy to grow by profit through acquisition-Apotheker seems to be the best candidate for the top spot, analysts say.
“[SAP] is all about growing revenue. So in a sense having a guy who spent his life in a field organization makes a lot of sense,” said AMR Research analyst Jim Shepherd. “I don’t think this signals any kind of strategic shift. SAP handles these transitions better than anyone I’ve seen. They’re very transparent. Can you imagine any other company having co-CEOs? They would tear each other apart. SAP will do this very elegantly.”
Technology No Longer Leading the Charge
Joshua Greenbaum, principal at Enterprise Applications Consulting, said there is no doubt SAP will continue to be a development company, but technology is not leading the charge, as it was several years ago.
“The issues in front of customers today are not about some new technology that they haven’t heard about that they’re going to have to adopt in the next five years to be competitive,” Greenbaum said. “The most that market could possibly absorb is already in the market today. In that sense, Leo [Apotheker] is well-positioned. He fits the requirements for the market quite well.”
But SAP has a lot riding on its growth strategy that, in large part, centers on the success of Business ByDesign. Announced last year, Business ByDesign is an on-demand, fully integrated ERP (enterprise resource planning) suite. Beyond its SAAS (software-as-a-service) status, Business ByDesign is also the basis for SAP’s next-generation architecture.
“It’s entirely model-based development, entirely services-based from the ground up. It’s broken into a series of logical, relatively fine-grained, separately installable and purchasable components with a very modern, task-based user interface. And yet it’s built on top of this very sophisticated data model based on the SAP Business Suite,” said Shepherd. “It is the product of the future.”
It’s also the revenue hope of the future-if not in its current form, then as the next-generation code base, according to some analysts. But SAP has also said that by moving to a volume-based business-a SAAS model, essentially-it plans to double its customer base by 2010 and increase its margins significantly.
At a Feb. 26 Goldman Sachs technology conference Kagermann said that through the planned decrease in spending around products and research and development-SAP will complete its investment in Business ByDesign this year-the company should be able to get to a 35 percent operating margin, closer in line to competitors Oracle and Microsoft.
“It’s a question of timing,” said Kagermann. “With our base business behind our investments, now it’s about showing in -08 we can integrate Business Objects [acquired earlier this year] and improve their margin. I am confident in them.” Furthermore, Kagermann said he expects that 2008 will be the last year for major investment in Business ByDesign development. “Given all this … and we get our act together, then clearly we can improve our margin much faster than we have done in the past,” he said.
In its fourth-quarter earnings report Jan. 30, SAP said its operating profit rose 2 percent, to 1.112 billion euros, or $1.65 billion. The company said its margins will creep up in 2008 to between 27.5 and 28 percent of revenue.
Following Kagermann’s keynote, Goldman Sachs analyst Sarah Friar released a research note characterizing SAP’s margin efforts as a reach, at best.
“A key area of focus for investors, Business ByDesign, remains on track in terms of spending, revenue goals and product readiness. SAP is taking a thoughtful approach to bringing the product to market country by country,” wrote Friar. “We believe the current goals are quite a stretch, but in the event of a further slowing macro environment and its potential negative impact on core application sales, SAP can probably rein in some of the BBD investment to protect the bottom line.”
Ramping Up Around Business ByDesign
But at the same time SAP is ramping up its selling capabilities around Business ByDesign, which is still in controlled release at this point. In addition, the lead developer on the project is leaving. As SAP announced its co-CEO plans April 2, officials also announced that Executive Board member Peter Zencke will not renew his contract when it expires at the end of this year.
Zencke will, however, maintain a consultancy role with SAP for the following year.
There are conflicting reports as to who will take over the development of Business ByDesign. Some industry watchers point to Jim Hagemann Snabe, who on April 2 was promoted to the head of research and development for the Business Suite-ERP 2006-and the NetWeaver platform.
“Having Snabe in charge speaks to his ability to succeed on the industry solutions aspect [of SAP’s strategy] and to some disappointment in Peter Zencke’s progress on new areas of R&D including Business ByDesign,” wrote Forrester analyst Ray Wang, in an e-mail to eWEEK.
“What’s interesting is the expansion of more non-Germans to the overall board, reflecting SAP’s global presence. The new COO [chief operating officer] appointment is significant as SAP is trying to raise margins and there are many process efficiencies to address-from R&D as well as other ways to better deliver on customer service and other touch points more effectively.”
Others suggest that Executive Board member Gerhard Oswald and Global SME President Hans-Peter Klaey will take over development responsibility for Business ByDesign as Zencke transitions his roles at the company. (SAP’s Global SME unit was developed in 2006 to oversee sales, marketing, operations and alignment of resources around the SMB market, according to the company’s Web site.)
In a press conference April 2, Apotheker suggested that much of the engineering work around Business ByDesign-at least for the midmarket suite-is behind the company.
“It took massive engineering to deliver BBD; we are seeing the end of that effort,” said Apotheker. “Now we want to balance more toward bringing it to customers. It might [seem] in the future that we are not focused on R&D-quite the contrary-but the percentage will not be as much.”