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The Case for Cautious Optimism

Sept. 15, 2008 will remain firmly etched in my mind. I was on my way to Moscow for meetings with SAP's customers and partners when I heard the news that Lehman Brothers had collapsed. By the time I reached the Russian capital and switched on my BlackBerry, I realized from the sheer number of incoming reports that this would trigger a worldwide domino effect. My meetings were interrupted again and again as the assistants of my business partners came in to deliver notes and whispered messages. Margin calls were coming in from brokers, and heavily leveraged businesses and people were in deep trouble. In the ashen faces of my business partners, I saw that their business plans were ruined as the credit markets seized up. By the end of the day, we had entered a new, starker world—a world of uncertainty, mistrust, and unpredictability, a world where optimism seemed in short supply.

I immediately responded by sending an e-mail to the most senior SAP (SAP) managers, calling for a contingency plan. I knew that no time could be lost. The last critical days of the quarter were ahead of us. Then, as now, I do not believe that hoping for the best by crossing one's fingers is a viable strategy. I always want to be prepared for the worst-case scenario, but remain optimistic that once we assess the situation realistically we can act.

Business people by nature are optimistic because they want to create new products, create jobs, open new markets, build brands, and sell the entire package. A recent SAP-sponsored online poll by the Economist Intelligence Unit that surveyed more than 1,000 executives worldwide concludes that global business conditions are expected to improve within 12 months. This sentiment is truer for the Americans surveyed than it is for their counterparts in Western Europe. (On a scale from 1 to 10, the North Americans surveyed put their expectations at 6.3, while the Western European respondents rated their expectations at merely 5.0.) In my view, these results reveal the historical experience of Europeans: We tend to be more skeptical and easily disillusioned. The sobering effects of the last century have wiped out the willingness to get overexcited about anything. Personally, I am cautiously optimistic that we will have a new business order when we emerge from this crisis.

Crisis Creates Opportunity Of course, the big question is when we will recover from this crisis. I think we will experience a W curve before that happens. Right now, we're in the middle of the W. From what I am seeing, it will be well into 2010 before a real recovery occurs.

But times of crisis can also be times of opportunity. One can use such times to build "muscle mass" in organizations, as it were. We now have an opportunity to change the old ways of business, working hand in hand with governments. We must make sure that we have an adequate amount of regulation, but not too much. Given the huge recovery packages provided by governments, there will be intersecting—sometimes competing—interests of business, government, and people. Governments and business leaders now have the responsibility to get it right. Why? Because we have a moral responsibility that our children and grandchildren don't see a repeat of this, and that we leave behind a better, more sustainable planet.

In general I support the idea of stimulus packages, especially as some governments use the opportunity to invest in infrastructure. Any investment designed to increase the competitiveness of the market—broadband, Internet access—and not just protect the investments of the past is, to my mind, a sound strategy. IT can actually accelerate all elements that improve competitiveness, helping economies and societies gain better business environments. In the health industry, the U.S. is much more highly regulated. The so-called free market is not as free as it is cracked up to be.

Lack of Sustainability an Issue This crisis showed us that some of the world's best recognized financial institutions had insufficient risk management and faulty price-risk methodologies. It showed us that our public reporting standards were lacking. And it underscored that many of the businesses we had built were not sustainable—in the broadest sense of the term.

This lack of sustainability bothers me, and many business leaders have come to share it. My discussions with other CEOs reveal that we will not go back to our merry, pre-crisis ways of limitless consumption and exuberant investment fueled by excessive liquidity. The consensus is that we need better models for capitalism in the 21st century. This crisis has laid bare the need for more clarity in business practices, greater transparency in reporting standards, and above all, the dire need for more sustainable business models.

As I deal with this crisis, I remember lessons from uncertain times in the past.

Intelligent Optimism Works A year after I joined SAP in 1988, the Berlin Wall fell. The Chancellor of West Germany at the time, Helmut Kohl, wanted to realize his vision of a united Germany. He took a huge political risk that potentially could have upset the four allies by pushing for reunification. I recall this here because it is a strong example of the unique nature of our political environment in Europe. Unlike in the U.S., our governments, societies, and economies are highly interconnected and networked. Rocking the boat is frowned upon. But Kohl took a risk, and we succeeded. Thinking back to the reactions of business people, they went both ways: The smarter ones saw the opportunity that reunification presented, and acted on it. The lesson in this is that established orders can change under the right leadership. And intelligent optimism works.

I also have reason to be optimistic today remembering how we dealt with the crisis of the dot-com bubble. In 2002, I was asked to lead SAP America. It was at the point of what was then the worst downturn in the IT industry's history. Confidence in the industry was at an all-time low. My mission was to unsnarl the U.S. organization from the tangled grip of the post dot-com slowdown. There was no dearth of naysayers. But even with the surrounding pessimism, I was cautiously optimistic this could be achieved. At the time, to be honest, I felt many people in the U.S. had been spoiled by low-hanging fruit, had lost touch with reality, and were unaware of the tougher business times ahead. They thought that good times would return without much effort. Turning the tide at a moment like that hinged on one decisive factor: getting the right people in place. It may sound trivial but it is not. A surgeon general is not the best to do a heart transplant. A wartime leader is often not a good peacetime leader. Similarly, the right business people need to be at the helm in turbulent economic times.

In the U.S., getting the right people in place is a relatively simple human resources exercise. In Germany or in France, it is a process that is stymied and highly regulated by restrictive local labor laws. In Europe, domestic consumption has been kept steady so far thanks to job protection. (Less regulation would make the labor market more elastic, which businesses would greet and labor unions would not. Will the labor market in Europe's two leading economies recover from the slump? Or will businesses look to other, less restrictive markets when the hiring begins again?) European political leaders need to keep this question in their mind as they work on policies for the coming years. Like some of the Americans I had encountered in 2002, they may be misled. They may be too optimistic that good times will return on their own. I am cautiously optimistic we can come out well, but we will have to act decisively.

A Chance to Reinvent I'm a big believer in the theory of creative destruction advocated by Joseph Schumpeter, and predict smart businesses will trigger a process of innovation as the crisis bottoms out. Witness how laser printers replaced dot matrix printers; DVDs and flash disks, the floppy drive. Kodak's recent decision to end Kodachrome film due to the prevalence of digital photography is an acknowledgment of this inexorable change in business. While I appreciate the economic stimulus from governments, governments should be careful in their support of companies through bailouts: It interferes in the natural competitive environment in which healthy business breeds and where wealth creation for the future lies. In the boardrooms of many of our customers, innovative strategies are already being debated. New technologies are emerging and early adopters are harnessing them to cement their leadership in their product segment, industry, or region. As with every major crisis, the smartest will seize the opportunity to reinvent themselves and come out stronger. This time though, the recovery should be supported by clarity and sustainability, with sufficient regulation against systemic risks and irresponsible behavior.

Still, I'd like to caution against becoming complacent and relaxing our guard as the recovery eventually occurs. There will be the urge to declare victory and get back to "business as usual" activities once the recovery starts.

I am reminded of Voltaire's pithy statement, "One day everything will be well, that is our hope. Everything's fine today, that is our illusion."

The new reality is that we cannot afford any illusions—in America or Europe or anywhere in the world. Many of the business leaders I deal with around the world realize this. And that in itself is cause for optimism. It will take work, but I am optimistic that we will come out of this economic crisis with stronger businesses than before.
Apotheker served formerly as the CEO and member of the Executive Board of SAP.

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