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Silicon Valley On The Rhine


Information Processing: SOFTWARE

SILICON VALLEY ON THE RHINE

How Germany's SAP soared to global dominance with its software for managing vital business operations

A warm Mediterranean sun beat down on a fleet of the world's fastest sailboats as the Maxi World Cup championship began off the coast of Sardinia on Sept. 8. There, two of software's most powerful titans, Hasso Plattner, co-chairman of German software giant SAP, and Oracle Chairman Lawrence J. Ellison, were at it again. Fierce rivals in the software market, the two men square off regularly on the high seas. Ellison's 80-foot Sayonara is lean, stripped even of paint inside the cabin to save precious weight. Plattner's Morning Glory is outfitted with a personal computer and software the captain wrote himself to find the optimal course for sailing.

Three days into the weeklong competition, Plattner was reveling in a 30-second lead over Ellison, when the rope securing Morning Glory's mainsail snapped and the sail collapsed. Plattner's crew rerigged the sail in 20 minutes flat--making up enough time to nab first place in the handicapped overall competition. But the snafu cost Plattner a win in his division, where he finished second to Ellison.

RUNNING THE OFFICE. On land, however, Ellison is a distant second in Plattner's domain--the market for enterprise-application software. These are the programs that manage a company's vital operations, from order-taking to manufacturing to accounting. SAP's tightly interwoven programs, called R/3, act as a powerful network that can speed decision-making, slash costs, and give managers control over global empires at the click of a mouse.

On this turf, SAP, based in the German town of Walldorf, is a giant. With one-third of the $10 billion enterprise-applications market, it not only dwarfs Oracle's $1 billion applications business but also outstrips the next six competitors combined. Today, SAP's R/3 runs the back offices of nearly half of the world's 500 largest companies--scheduling the manufacture of washing machines at General Electric Co. and shipping soda pop on time at Coca-Cola Co. "SAP is as much a part of the fabric of global business today as IBM was in the 1980s," says market researcher Tony Friscia, president of Boston's Advanced Manufacturing Research Inc.

No question, SAP has joined the ranks of the software elite: It is the fourth-largest software maker--behind Microsoft, Oracle, and Computer Associates International. The company's market capitalization is some $30 billion, making Plattner and Co-Chairman Dietmar Hopp worth $3.8 billion each. It has been the best-performing stock for five years on Germany's DAX index, and the company plans to list next year in the U.S.

Never before has a software company outside the U.S. had such success. Indeed, powerhouses such as Microsoft Corp. and Intel Corp. are not just SAP customers: They are its closest allies. A small team of SAP programmers is on the spot at Microsoft's Redmond (Wash.) headquarters to collaborate on software development. And Intel and SAP have formed Pandesic, an electronic-commerce joint venture (page 166). "The world," says Intel Chairman Andrew S. Grove, "is their market."

Now, Plattner and Hopp want to solidify their lead and make SAP's software the standard for enterprise applications, the way Microsoft's operating systems and Intel's chips are for PCs. If successful, SAP could ride a tidal wave of growth into the next century and control one of software's most strategic markets.

Who are the masterminds behind this unlikely powerhouse? And can they keep SAP ahead of rivals such as Oracle, Baan, and PeopleSoft? SAP has come a long way from its humble beginnings two decades ago in a cornfield outside Heidelberg. Plattner, Hopp, and three colleagues left their programming jobs at IBM's German development labs and founded SAP. When most software was still custom-developed, their idea was to create off-the-shelf packages for big industrial jobs.

Hopp and Plattner soon emerged as the two who called the shots. The 54-year-old Plattner, who spends much of his time at SAP's Silicon Valley offices, is the visionary. "He's totally driven. He'll announce wild dreams at the user conference, and then the company has to scramble like hell to make it a reality," says one developer. When he's not setting strategy, Plattner rolls up his sleeves in the development labs.

Hopp is the cool, unflappable co-commander. A math whiz, he breezed through his university entrance exam at age 16 in 30 minutes--31/2 hours ahead of his classmates. In SAP's early days, he dealt with everything from finance to parking spaces--earning him the nickname "Vater," or father. Today, Hopp, 57, remains a steadying influence with a sharp eye on operations.

LAID BACK. From the start, the co-founders shunned the buttoned-down atmosphere of IBM. Instead, they created an organization where the only things that matter are smart ideas and hard work--building a Silicon Valley-style company years before most people had heard of the tech capital. Long-haired employees arrive at work in T-shirts and blue jeans and are fueled with free meals and an endless supply of strong coffee. Those who bike in can shower at the office. After three years, employees get a company car.

But SAP has a distinctly European flair. Instead of Frisbee games and pizza bashes, employees blow off steam with soccer skirmishes and the company's symphony orchestra. (Plattner, though, has been known to pick up an electric guitar.) "It's almost like speaking to a Microsoft group--young, enthusiastic, and hardworking," says Microsoft Chairman William H. Gates III of a visit to SAP's Walldorf headquarters.

Unlike many Silicon Valley startups, SAP didn't soar overnight. Its first programs were for mainframes and had a mostly European following. But Platt-ner and Hopp had vision: While other software makers focused on a single area, such as manufacturing or personnel, they designed software to link every part of a company's operations. They also made sure it could handle different currencies, languages, and regulations--a big draw for multinationals.

LIGHTBULB. But it was the "client-server" revolution of the early 1990s that catapulted SAP into the big leagues. The new computing approach--which relies on networks of PCs linked to servers--freed up corporate data, letting it be sliced and diced in new ways. SAP adapted its software to work in client-server setups. And R/3, introduced in 1992, was an instant hit. Sales shot from less than $500 million that year to $1.5 billion by 1995. This year, analysts expect SAP sales to top $3 billion.

For corporate managers, SAP's software was like a lightbulb illuminating the dark recesses of their business operations. Suddenly they could scrutinize a global business, identifying where inventories had piled up and which plants were running most efficiently. "If you can't see your worldwide inventory and you can't see what was produced today in any given plant, it's ludicrous to say you manage globally," says Bob Barrett, vice-president at Monsanto Co., which finished installing R/3's accounting module in July, 1996. The software allowed Monsanto to slash production planning from six weeks to three, trim inventories, reduce working capital, and increase its bargaining power with suppliers. Barrett figures R/3 saves the company $200 million a year.

Monsanto is just one of scores of SAP believers. But although it may be the Mercedes-Benz of business software, SAP has its drawbacks. R/3 is a complex set of programs that can take several years and millions of dollars to roll out. It requires far-flung outposts of a company to adhere to the same, precise business processes--forcing a companywide reengineering. "Implementing this type of software is not a technological exercise, it's an organizational revolution," says management guru Michael Hammer, president of Hammer & Co.

Installing R/3 often involves an army of consultants that can cost three to five times the software's price tag. A $20 billion industry has grown up around SAP, comprising consultants, trainers, specialists, and hundreds of software makers who sell add-on programs. Combine that with the $7 billion to $10 billion in computer and networking gear that companies buy each year to run their SAP systems, and you have a $30 billion solar system. "SAP's not a company. It's an industry," says Katrina Garnett, CEO of Crossroads Software Inc.

DOOMSAYERS. Companies ill-prepared for such change can wind up with a disaster. When Westinghouse Electric Corp. began installing R/3 in 1994, it projected total costs of $65 million, with a payback in 2 1/2 years. But some of the company's divisions resisted the change, and, without strong support from top management, the project slowed to a crawl. "We purchased all the SAP modules," says Donald Janson, vice-president for business process analysis at Westinghouse/CBS. "In some cases, we ended up not installing many of them."

As stories like Westinghouse's surfaced in the mid-'90s, critics pounced. An April, 1996, report by Forrester Research Inc. in Cambridge, Mass., declared that the rigid R/3 software would soon be obsolete. SAP's stock plummeted 9% in two days, only to come roaring back when the projected slide in sales didn't materialize. SAP's stock is up 140% this year, and Forrester analyst Bobby Cameron says SAP has addressed many of its problems and is "heading in the right direction."

The German giant has weathered those attacks and emerged even stronger. For the first nine months of 1997, sales surged 61%, to $2.15 billion, with profits of $471 million, up 64% from the year-ago period. That's a faster clip than the 35%-to-40% growth of the overall enterprise-applications market.

Behind the momentum is a realization among corporations that they need the type of software SAP sells just to stay competitive. Many companies still run a tangle of incompatible software systems, which cost industry some $100 billion a year to create, update, and maintain. And looming problems caused by the year 2000 make it even more imperative to modernize aging systems.

STRONG LEAD. Indeed, enterprise applications are emerging as a corporation's most strategic asset. "Microsoft's applications are trivial compared to SAP's," says Hammer. That logic is not lost on Plattner and Hopp, who are doing their best to capitalize on their lead and make R/3 the standard foundation for corporate enterprise systems. "It's their market to lose," says Eric Keller, an analyst at Gartner Group Inc.

For the ultracompetitive Hopp and Plattner, ceding ground doesn't come easy. Hopp will stop at nothing to win on the tennis court, the golf course, or in the software arena. Even more so, Plattner revels in the race. When the wind blows outside SAP's Foster City (Calif.) offices, he grabs his windsurfing gear and heads out to do battle against the forces of San Francisco Bay.

This take-no-prisoners style will be more critical than ever in the coming year. Although smaller by leagues, rivals such as Baan, PeopleSoft, and J.D. Edwards are on the move. They have been buying up niche players, filling gaps in their product lines, and moving into cutting-edge areas such as supply-chain management. Fresh off its Sept. 24 initial public offering, which raised $363 million, Denver's J.D. Edwards is bent on global expansion. And in August, Baan jumped into the hot customer-management software market with its $275 million acquisition of Aurum Software Inc.

For now, though, Oracle remains the clear No.2. The company is developing a new generation of software applications to work with network computers (NCs)--stripped-down, low-cost machines that rely on the server to do the heavy lifting. Ellison figures that NCs will make his applications easier and cheaper to install--especially in factories, where full-blown PCs aren't needed. The programs will work with a simple browser and Sun Microsystems Inc.'s Java software. "It gives us a huge advantage over SAP," boasts Ellison.

Not likely, says Plattner. In the past year, SAP has made its R/3 software easier to set up--cutting installation time from a few years to as little as a few months. "SAP has so many options, it took a high priest to figure out which ones to use," says analyst Byron Miller at Giga Information Group. Now, "it takes less of a genius." For smaller companies, SAP in August launched "Ready to Run," a scaled-down suite of R/3 programs preloaded on a computer server.

SAP also is pushing into cyberspace. It has adapted R/3 to work with the Net, so companies can share data with customers and suppliers. Applesauce maker Mott's Inc. is using R/3 to give distributors access to its network, so they can check the status of orders, and eventually place them, over the Net.

For a Goliath, SAP has been quick on its feet. "The challenge is to permanently question ourselves, to be awake, to be agile, to learn," says Plattner. "When you see you have to do something, you have to react quickly and not fight it."

Like the time in 1993, when, in a race from Cape Town to Rio de Janeiro, the winds died and Platt-ner lost momentum in the final 48-hour stretch. To pick up speed, Plattner pointed Morning Glory straight into a storm--and rode the high-speed winds to victory, coming in 12 hours ahead of rivals. "SAP's ability to correct course is a real strength," says Giga Group's Miller. "Whenever SAP has stumbled, it hasn't fallen." Just ask Ellison.By Gail Edmondson in Walldorf, Germany, with Stephen Baker in Pittsburgh and Amy Cortese in New YorkReturn to top


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