Software Savior?

When you think of technology visionaries, Hasso Plattner's name probably doesn't spring to mind. But it should. As the founder of the German company SAP, the world's third largest software maker after Microsoft and Oracle, Plattner has been every bit as influential as better-known peers like Bill Gates or Steve Jobs. Back in the 1980s and '90s, he and a few other former IBM engineers started doing for companies what Microsoft did for consumers--providing easy-to-use software that was accessible on desktop computers. It was a paradigm shift that changed the way corporations worked. Today, anywhere from 20 to 50 percent of the world's business transactions--inventory, accounting, human resources and the like--runs on SAP software, depending on whose estimates you believe. SAP was also important as a symbol: It proved that "slow Europe" could actually be an innovator in the digital age.

Now Europe's software giant is at the heart of another shift, as the rise of the Internet turns the software industry on its head. Tucked away in sleepy Walldorf (population: 14,445), SAP is busy building the next generation of corporate software--Web-based technology that will make current desktop systems look as slow and inflexible as the mainframes of old. CEO Henning Kagermann--a thoughtful former physics professor as far removed from the celebrity CEOs of Silicon Valley as bratwurst is from a California roll--has set ambitious goals for the $11 billion company. He wants to increase SAP's potential market from $30 billion to $70 billion by 2010, doubling the market cap and share price of the company in the process. To accomplish this, he's not only hired several key employees from competitors, he's also sweetened the compensation pot, American style. Any employee, from secretary to president, who has contributed in a special way to the targets will be eligible for perks like a doubling of salary.

The past two years of record revenue growth have given the company a great start. But competition is increasing as SAP's biggest rival, California-based Oracle, is beefing up through an acquisitions spree, and behemoths like Microsoft and Google zero in on the business-software market. SAP and Oracle in particular have been duking it out in aggressive ad campaigns. Still, while he's not given to boasting personally, Kagermann's pitch is aggressive: as the leading German growth company of the past decade, SAP has found a way to blend European corporate stability with U.S. entrepreneurial energy.

Once upon a time, SAP looked a lot more like a traditional German exporter. In 1990, it had $331 million in revenue, and only a few dozen U.S. employees. Since then America has become SAP's second biggest market, with clients like McDonald's, the Gap and Exxon bringing in some $1.1 billion in revenue in the most recent quarter alone (up 13 percent in a year). "We realized very early on that we'd have to globalize," says Kagermann. "We had to be where our clients were." SAP followed its multinational customers as they expanded into countries like India, China and Bulgaria, and built up a base of professionals that could service its software. By 1999, the company was riding the crest of the wave of global IT spending. Then it all came crashing down. Not only did the bursting of the dot-com bubble deflate spending, but companies began to wonder if all the snazzy technology they'd bought was relevant anymore. After all, hordes of cheap or free open-source programs were challenging expensive, proprietary software systems.

But SAP was well poised to adapt. Unlike so many entrepreneurs, Plattner had, in pragmatic German fashion, been nurturing the next generation of leadership, bringing up physicist Kagermann as his co-CEO. And unlike Oracle's Larry Ellison, or even Plattner himself--who are flamboyant businessmen with a propensity for giant yachts--Kagermann was more sedate. Notwithstanding his fondness for heavy-metal bands like Deep Purple, Kagermann was known as a get-it-done type, even in the toughest of environments. This was exactly the right tenor for someone trying to sell software to big companies after the dot-com crash.

Plattner also brought in a young Israeli named Shai Agassi to help the company respond to Internet change. A 38-year-old serial entrepreneur who sold his last company, software maker TopTier, to SAP for $400 million, Agassi was the self-proclaimed "retrovirus" that Plattner injected into the body of SAP in order to evolve its DNA. Agassi's appointment as head of technology development--in charge of creating the next generation of Web-based products--was one of several moves that SAP made away from German corporate culture. By the late 1990s, English had become the de facto language of the company. SAP also became one of the first European companies to start issuing stock options en masse.

As traditional "out of a box" software evolves into a product that is downloaded over the Web, the business models of companies like SAP, Oracle and Microsoft are being challenged. Some experts predict the death of software altogether, betting that computing power will become a utility, like water or electricity. Upstarts like already embrace the utility model, growing exponentially by offering products similar to those made by SAP and Oracle through cheaper monthly subscriptions. Industry giant IBM has practically turned its back on software altogether, focusing instead on consulting services.

SAP's own strategy is a hedge. While it's hoping software won't be quite as free-flowing as water, its next generation of products will be building blocks that customers can put together in different ways, rather than all-in-one systems. The products will often work with those of competitors, a nod to the realization that, in the new digital world, the walled-garden approach of software incumbents no longer applies. SAP is expected to unveil its new approach --Project Vienna (known internally as "A1S")--in the first quarter of 2008.

The company has also shrewdly entered into a partnership with Microsoft called Duet, which allows the two companies to tie their products together, giving Microsoft Office users access to some powerful back-office applications. In fact, the two companies had explored the possibility of a merger in the past, an idea discarded in part due to antitrust considerations. But the partnership presents a golden opportunity for SAP--which has about 33,000 customers--to meet its goal of increasing the customer base to 100,000 by 2010.

That's not to say that the growth of the past few years is a foregone conclusion for SAP. For starters, its existing domination of the big-company IT market means that future sales will likely have to come from small and midsize businesses. And the new crop of digital giants, like Google, are the wild cards that could reshape the industry. Google has begun putting some of its billions in cash into developing business software. With so many applications already migrating to the Web, many analysts see no reason that companies like Google--rather than Microsoft, IBM or SAP--couldn't own the space. Perhaps the most important question is whether SAP can top itself. It is a truism that most technology companies have only one great idea. SAP's genius was to bring the power of the mainframe to the desktop. Whether it can repeat that in the Internet age remains to be seen. But the fact that a German company is even in the race should make Europeans proud.