SAP is no household name. but if you work for a multinational corporation, chances are you're already using SAP software to file expense reports, manage customer data or monitor product deliveries. The only non-American firm among the world's top-10 software makers, SAP is also one of Europe's few high-tech success stories. A start-up founded by German engineers working for IBM, SAP is now worth $60 billion on the Frankfurt Stock Exchange. Last month SAP and Microsoft--which are increasingly competing with one another--announced they'd been in "merger" talks but called them off. CEO Henning Kagermann spoke to NEWSWEEK's Stefan Theil at the company's headquarters in Walldorf, Germany. Excerpts:

THEIL: How close were you to getting bought by Microsoft?

KAGERMANN: Microsoft approached us about a possible merger late last year [but] after a series of talks called it off because it would have been too complex. There was never a deal on the table.

No. 1 software company Microsoft almost buying No. 3 SAP, No. 2 Oracle battling to take over PeopleSoft--what's going on in the software industry?

We are now seeing the same kind of consolidation we saw in the auto industry. Size counts--the more important IT becomes in running companies, the more they look for reliable players in terms of size, innovation, R&D budget. When you have 50,000 users running 98 percent of a company's business on SAP software, that's a much closer relationship than when you have 500 users and are only running the accounting department. Companies are dependent on these vendors' being around in 15 years. In the end there will be two to six names, not more.


IBM and Microsoft are candidates, of course. We think we will be there; Oracle believes that, too. After that the list gets thin.

SAP is a gigantic company. Why does it take a takeover offer from Bill Gates to put you in the spotlight?

Unlike Microsoft, we don't deal with consumers. You won't find SAP at home on your PC. But we have 20 million users at more than 20,000 companies that run their operations with our software. In almost all industries, at least six or seven of the 10 largest companies run on SAP. In the oil industry it's 10 out of 10; pharmaceuticals, nine out of 10; we're still missing Pfizer. Now that we are moving into smaller and midsize companies, we will become better known.

Where you will be competing with Microsoft, the first time a European company is going head to head with the U.S. giant.

When you're already present in almost every office, like Microsoft is with its Office programs, it's no great surprise that you'll want to expand into small-business applications as well. We have big-industry solutions that we are scaling down and standardizing for smaller companies. The market is huge and fragmented, served by thousands of little software suppliers. That leaves plenty of room for both of us not to step on each other's toes right away.

Still, you are challenging Microsoft and IBM in the so-called platform wars.

We want to be the standard business platform on which our customers run their software, and be market leader the same way we are market leader in business applications. The crucial requirement is that the platform be open for customers to run other vendors' applications as well. We don't want to put the customer in a cage where he can only run our software; we're not afraid to compete over performance.

What will business software allow me to do in five or 10 years?

You will save time. Today, 17 or 18 percent of work time is still spent entering or finding data, filling out forms, exchanging information over the telephone. Much of that can be automated. You will no longer have to set up a meeting and bother 10 people and spend three hours, just to realize that a certain problem had already been solved a certain way before. Second, we will avoid even more human intervention; people are always the bottleneck. Embedded systems like RFID [radio frequency identification] chips will make it possible for things to identify themselves and pass on information. Humans will no longer have to tear open cartons or count shipping pallets; the entire supply chain will be automated. We have the first wave of automation behind us, where what used to take a week from order to delivery now takes 24 hours. There will be a second wave.

Growth, profits and IT spending are up. What kind of recovery is SAP seeing?

After two years of decline, the market is finally growing again. But we're not seeing a return to the growth rates of four, five years ago. Customers are more sensitive to the return on IT investment and don't want to see a new technological wave every year or two. The industry is now capable of introducing new technology in an additive manner instead of [asking customers] to throw all their old investments overboard.