Small Steps, Big Plans

Mar 30, 2003 (07:03 PM EST)

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It's fitting that Bill McDermott's first major product announcement as SAP America's president and CEO involved a set of applications for businesses with as few as 10 employees. At SAP, whose software is synonymous with megaprojects, the emphasis now is on smaller, faster, and cheaper engagements. The challenge for SAP America's new leader is to show other companies that SAP can help them become lean and limber, while the vendor bulks up its sales in the process.

The German software company's introduction in New York last week of SAP Business One--a suite of enterprise resource planning apps for small and midsize companies, delivered in partnership with American Express Co.--was a coming-out party of sorts for McDermott, who joined SAP six months ago from Siebel Systems Inc., where he was executive VP of worldwide sales operations. McDermott has been busy building an executive team to make SAP America a harder-driving, more customer-focused company. His latest hire is Oracle veteran John Nugent, who will oversee SAP America's sales team. "That's a big hire for us," McDermott said in an interview last week from SAP America's headquarters in Newton Square, Pa. "This exec had to understand the customer, enterprise apps, and had to be a person that fit into our culture--a person who values the customer."


SAP will help customers speed business processes, says McDermott, SAP America's president and CEO.
With his new team largely in place, McDermott is turning more attention to executing on SAP America's "triangulation" product strategy. It involves delivering even more targeted industry-specific applications (SAP already has products tailored for 22 vertical industries), adding functionality to existing product categories, and scaling applications for businesses of different sizes. "We're getting very focused on specific applications for specific customer requirements," he says. The 41-year-old McDermott, who was president of Gartner before joining Siebel and spent 17 years moving up the management chain at Xerox before that, believes there's pent-up demand among CIOs and CEOs to license applications following the two-year clampdown on IT spending. "They realize they have to be bold again," he says. "They have to innovate. Their business processes have to be faster."

All of which is true for SAP, too. Its application license revenue declined 6% last year and grew a measly 1% in 2001. As bad as that sounds, SAP has weathered the software-industry downturn better than others, and it's positioned to increase market share, according to Morgan Stanley analysts. They estimate SAP's license revenue will grow 10% this year, compared with an average 2% growth for a group of companies that includes J.D. Edwards, Oracle, PeopleSoft, and Siebel. And SAP's share of the enterprise applications market will grow to 55% from its current 51%, Morgan Stanley predicts. Working in SAP's favor, the company says, are a revamped U.S. subsidiary, improving margins, a solid Web-services and integration strategy, and a research and development budget--almost $1 billion--that's bigger than competitors'.

SAP's Business One applications, introduced in Europe last year, are an important part of its U.S. growth plans. Percentage growth in the small and midsize business market "will be at least double that of our core business," McDermott predicts. The suite, based on software acquired last year from TopManage Financial Solutions Ltd., is aimed at companies with no more than a few hundred employees that want a simpler, cheaper, and easier-to-implement product than the mySAP All-In-One midmarket suite.

American Express Tax and Business Services Inc., a subsidiary of the charge-card company, will create its own branded versions of the Business One apps--including industry-specific packages--and sell and support the software through a distribution network of partners it's still developing.

Duane Taylor, VP of finance for NextiraOne Federal, a $50 million-a-year subsidiary of NextiraOne LLC that sells telecommunication systems to federal agencies, attests to SAP's claim that the new apps can be deployed in two weeks, a huge change for a company long associated with multiyear rollouts. Fifteen sales consultants and financial managers were using the software in that time frame with American Express' help, he says.

McDermott is looking to alliances like the one with American Express to get more "feet on the street" selling SAP's software. But SAP needs to be careful not to rely too much on partners in its midmarket push. Jim Weston, CIO of Wolverine World Wide Inc., a footwear company with $826 million in revenue last year, wants to be able to reach SAP personnel directly as he adds SAP modules for demand planning, call-center management, strategic enterprise management, and Internet sales to core ERP apps. "It's important we have somebody in SAP connected to some of these implementations," Weston says.

Customers like Weston should expect more attention. McDermott plans to "redouble SAP's focus on the installed base." SAP is making it more practical for customers to take on projects without licensing its full-blown suite. Earlier this month, it introduced mySAP ERP, which provides the core ERP components of the mySAP Business Suite as well as the new NetWeaver application and integration software but not SAP's other applications.

SAP's scaled-down approach doesn't work for everyone. Air Products and Chemicals Inc., a multibillion-dollar company with operations in 30 countries, is entering the third year of a five-year, $250 million rollout of SAP software. The implementation started in Germany last June and will expand to five European countries this June and then to U.S. operations in August.


Fifteen employees were using SAP's software within two weeks, NextiraOne Federal's Taylor says.
"The driver behind the project is to standardize our business processes and business models globally in a common framework," says Cheryl Flannery, an IT program manager with Air Products. The company hopes to benefit from SAP's more adaptable architecture, Flannery says, by putting in "basic building blocks now in a way to easily add components later." Among the apps to be used first are sales and distribution, finance, and material management.

But Morgan Stanley analysts caution that new flexibility in how SAP delivers and licenses software has potential downsides. "The shift to a more component-oriented architecture means more moving parts and upgrade complexity," they wrote in a February report. In some cases, they warn, companies could end up paying for application extensions that, in the past, might have been included in maintenance upgrades.

Next, SAP plans to build on its fast-growing customer-relationship management offering. Within a few months, it will unveil a CRM upgrade that includes built-in analytical capabilities, works with wireless devices, and is tuned for different industries. The release represents SAP's biggest R&D investment ever, VP Darc Rasmussen says. An upgrade to its supply-chain management applications is also in the works (see "Supply On Demand," March 3, p.47).

Underpinning all this is SAP's NetWeaver platform, which combines application integration with portal, Web server, and electronic exchange functionality (see "Process Oriented," Jan. 20, p. 20). In the third quarter, SAP will add a layer to NetWeaver that helps companies get a more accurate and complete view of enterprisewide information. Called master data management, the software is based on SAP's earlier work replicating R/3 data and integrating business-to-business content. Key features will be a data repository and common object model that, in addition to providing centralized data control, support SAP's emerging line of composite snap-in applications called xApps.

SAP realizes that many companies have multiple ERP implementations, each with its own definition of materials and customers, says Jennifer Chew, an analyst with Forrester Research. "A single version of the truth becomes impossible," she says. "If you ever want to provide your suppliers or customers with an external view of your supply chain, master data is where it starts." Most enterprise-app vendors are taking steps to break down barriers that exist between applications, and Chew says SAP is one of the strongest in recognizing that it needs to coexist with best-of-breed and legacy applications.

SAP's challenges include tough economic conditions overseas, where the company does two-thirds of its business, and new products that are still in early stages of adoption, analysts say. Oracle, PeopleSoft, and Siebel remain fierce competitors, and Microsoft is moving into SAP's market, too.

And there's the loss of Hasso Plattner, an SAP co-founder who disclosed a few weeks ago he was stepping down as co-CEO at the parent company. That puts pressure on new executives such as McDermott and Shai Agassi, a technology strategist and member of SAP's executive board. Early signs are that McDermott is rising to the challenge. "There are indications the North America sales organization is executing better," says AMR Research analyst Jim Shepard.

An aggressive basketball player in pickup games at SAP America's gym (his grandfather, Bobby McDermott, was a star player in the 1940s), McDermott is Mr. Nice off the hardwood. "But that's what we need here," a colleague says. "Someone who's personable and able to get people excited."

When Morgan Stanley analyst Charles Phillips met with McDermott two weeks ago, he says, he found the CEO "more positive than I expected." But McDermott and SAP still have to translate good intentions into improved performance. For now, Morgan Stanley

isn't upgrading SAP's stock from its industry norm "equal weight" rating. Says Phillips, "We'll see what happens." --With Beth Bacheldor and David M. Ewalt

Photos of McDermott and Taylor by James Leynse/J Group