If any lingering doubts remained that German software giant SAP (SAP
) has vanquished its dot-com-era rivals, the company's 2002 results laid them to rest. In a sluggish market shadowed by war fears and economic uncertainty, SAP managed to gain market share, increase revenues 1%, to $7.8 billion, and log its largest-ever net profit in the year's final quarter. Investors are enchanted: They've bid up SAP shares 19% since the start of 2003--far more than those of arch rival Oracle Corp. (ORCL
) or any other software company. "We executed well despite the unsettled environment," said co-Chief Executive Henning Kagermann at SAP's Jan. 30 earnings release.
Buried in the financial news, though, was a nugget that speaks volumes about SAP's direction. In mid-January, the company quietly dropped the .com suffix on its flagship business software package, known since 1999 as mySAP.com, and renamed it mySAP Business Suite. In one flick, SAP swept aside an entire epoch in software--the e-business mania that raged from the mid-1990s until the crash of 2000. The company, based in sleepy Walldorf, Germany, is in fact signaling a return to its no-nonsense roots: Delivering tightly linked bundles of software programs for automating everything from accounting to supply-chain management. "When customers are running critical parts of their businesses on your software, you can't afford to give them hype," says Leo Apotheker, president of SAP's global field operations and a member of its executive board.
The change is far from cosmetic. During the heady days of the Net boom, software startups took the market by storm with "best-of-breed" Web-based products that did one thing well. Dallas-based i2 Technologies Inc. (ITWO
), for instance, jumped to an early lead in software for managing far-flung networks of suppliers. Siebel Systems Inc. (SEBL
), of San Mateo, Calif., virtually invented the booming category of software that lets companies keep better tabs on their customers. SAP scrambled to keep up, arguing that programs in its soup-to-nuts "suite" linked together better and cost users less in the long run.
That claim sounded defensive in an era of wild experimentation and unchecked IT spending. But these days anxious buyers yearn for more certainty. "They want SAP to play the role of a trusted adviser," says software researcher Derek Prior of Gartner Inc. in Egham, Britain. With some 20,000 customers, including half of the world's 1,000 largest companies, SAP is already woven deep into the fabric of global business. Now, it's winning back old clients and courting new ones with products that equal or better those from younger rivals. Recent wins include U.S. telecom equipment maker Lucent Technologies Inc. (LU
) and German specialty chemicals giant Degussa. The result? SAP has grabbed the lead in categories such as customer and supply-chain software, says market watcher AMR Research Inc. of Boston, Mass. "The suites have won," says analyst Richard Leggett of Goldman, Sachs & Co.
The challenge is to make sure SAP keeps winning. Hasso Plattner, 59, who shares the chairmanship and CEO job with 55-year-old Kagermann, has been the company's visionary since launching SAP 30 years ago with four fellow IBM engineers. Yet nowadays Plattner seems more interested in spending time aboard his yacht than in chairing SAP board meetings. As he edges toward retirement, Plattner is passing the baton to a younger generation of software whizzes. Most prominent among them is Shai Agassi, a 34-year-old Israeli who was CEO of a San Jose (Calif.)-based company called TopTier Software Inc. that SAP bought in 2001. Agassi was appointed to SAP's executive board last year. He currently heads SAP's nascent Collaborative Solutions Group unit in Silicon Valley, which develops technologies for linking workers and tasks across various software systems.
With Plattner's blessing, Agassi is leading the charge into a new generation of SAP software. The company is rolling out an array of add-ins that let customers link SAP and non-SAP software into systems for data warehousing and workgroup collaboration. Analyst Bruce Richardson of AMR Research is bullish on these applications: "I think they'll be the next billion-dollar category," he says. SAP is also planning to offer software, called NetWeaver, that bridges the technical gap between rival factions led by Microsoft Corp. (MSFT
) on one side and IBM (IBM
) and Sun Microsystems Inc. (SUNW
) on the other. "It would have been easier to choose one camp," says Apotheker, "but this way our customers can run what they want."
That's a different tack for a company long known for requiring customers to adapt to the SAP way. Now, with IT spending slack, the German giant realizes that peaceful coexistence is sometimes the only way to land new business. The approach seems to be working. Goldman Sachs predicts that thanks to modest 1.5% sales growth and tightfisted financial management, SAP will enjoy its first year of $1 billion-plus net income in 2003.
What's missing is robust top-line growth. Take SAP's core franchise, so-called enterprise resource planning software that handles accounting, order entry, manufacturing, and personnel tasks. These systems can cost tens of millions of dollars to license and implement, and purchases by large corporations--those with $1 billion-plus annual sales--will decline between now and 2006, predicts researcher ARC Advisory Group Inc. in Cambridge, England. That's worrisome because SAP still gets 90% of its revenues from large enterprises. It's restarting a failed effort to capture clients in the small-business sector, but that calls for mastering an unfamiliar sales channel and wooing customers not acquainted with the brand.
SAP's business in the U.S. is another trouble spot. Sales in the Americas fell 17% in the fourth quarter. One reason: SAP faces much stiffer competition in this region from both best-of-breed products and other suite sellers such as PeopleSoft Inc., J.D. Edwards & Co., and its fiercest rival of all, Oracle.
The newest threat on the horizon is Microsoft, which in the past two years, spent $2.6 billion acquiring two small providers of business software packages, Great Plains Software of the U.S. and Denmark's Navision. Their products are now being rolled into a package that analysts figure could one day become a competitive threat to SAP--especially if Microsoft uses it as a stepping-stone to bigger-ticket items. No question, the German company is cruising. Plattner, however, might have to sit out a few sailboat races to keep his creation on its steady course.
By Andy Reinhardt in Paris, with Steve Hamm in New York
Get BusinessWeek directly on your desktop with our RSS feeds.
Add BusinessWeek news to your Web site with our headline feed.
Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video.
To subscribe online to BusinessWeek magazine, please click here.
Copyright 2003, by The McGraw-Hill Companies Inc. All rights reserved.
Printer-Friendly Version
