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Silicon Valley On The Rhine (Int'l Edition)


International -- European Cover Story

SILICON VALLEY ON THE RHINE (int'l edition)

Germany's SAP has soared to global dominance with its powerful software that can run all aspects of a business--from order-taking to the factory to accounting

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, far from the fever pitch of their Silicon Valley offices, two of software's most powerful chief executives, Hasso Plattner, co-chairman of German software giant SAP, and Oracle Chairman Lawrence J. Ellison, were at it again. Ferocious rivals in corporate software, the two men square off regularly on the high seas. Ellison's 24-m Sayonara is lean. Stripped even of paint inside the cabin, its spartan black-tar interior saves 200 kilograms in weight. Plattner's Morning Glory is decked out with a personal computer and software the captain wrote himself to find the optimal sailing course.

Three days into the weeklong race, Plattner was reveling in a 30-second lead, when a line securing the mainsail to Morning Glory's mast snapped and the sail collapsed. Working at top speed, Plattner's crew rerigged the sail in 20 minutes flat. They made up much of the time and nabbed first place in the handicapped overall competition. But the snafu cost Plattner a win in his division, where he finished second to Ellison.

On land, however, Ellison is a distant second in Plattner's domain--the white-hot 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, come together as a powerful network that can speed decision-making, slash costs, and give managers control over global empires.

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-software and consulting business but also outstrips the next six contenders combined. Today, SAP's R/3 runs the back offices of half of the world's 500 top 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.

Indeed, SAP has joined the ranks of the software elite: It is the globe's fourth-largest software maker--behind Microsoft, Oracle, and Computer Associates International. SAP's stock, at 500 Deutschemarks a share (or $287), is worth 41 times its listing price in 1988. Today, the company's market capitalization is some $30 billion, making Plattner and Co-Chairman Dietmar Hopp worth $3.8 billion each. And after five years as the best-performing stock on Germany's DAX index, 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, but its closest business partners. A small team of SAP programmers is on the spot at Microsoft's Redmond (Wash.) headquarters to make sure SAP software runs smoothly on Microsoft's Windows NT and to explore new technologies. And Intel and SAP have formed Pandesic, an electronic-commerce joint venture (page 47). "The world," says Intel Chairman Andrew S. Grove, "is their market."

Now, Plattner and Hopp want to solidify their lead and make sure SAP's software becomes 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 and control one of the most strategic software fields.

CALLING SHOTS. Who are the masterminds behind this surprise powerhouse? And can they keep SAP ahead of such hypercompetitive rivals as Oracle, Baan, and PeopleSoft? SAP has come a long way from its humble beginnings two decades ago in a cornfield outside Heidelberg. Plattner and Hopp had been working as programmers at IBM's German development labs. But when Big Blue nixed their idea of creating off-the-shelf packages for big industrial jobs, in lieu of custom software, Plattner, Hopp, and three fellow programmers took the entrepreneurial plunge.

Plattner and Hopp soon emerged as the two founders who called the shots. The 54-year-old Plattner, who spends much of his time at the company's Silicon Valley offices, is SAP's visionary, a restless gearhead who won't take no for an answer when breaking new ground. "He's totally driven. He'll announce wild dreams at the user conference, and then the company has to scramble like hell to make them a reality," says one software developer. When he's not setting strategy, Plattner rolls up his sleeves in the development labs, where he encourages staffers to challenge him. "I prefer people who criticize me and respect me," he admits. "We get into big arguments."

Hopp, by contrast, is the cool, unflappable co-commander. He's the levelheaded math whiz who, at 16, breezed through his university entrance exam in 30 minutes--3 1/2 hours ahead of his classmates. By 20, he knew he would become a millionaire. It was Hopp who goaded the IBM programmers to leave the security of Big Blue. In the early days, Hopp dealt with everything from finance to parking spaces--earning him the nickname "Vater," or father. While Plattner pushed for perfection, Hopp drove products out the door. "It is not only the product, but the product and the market," says Hopp. Today, the 57-year-old remains the calm, steady influence with a sharp eye on managing the business.

Plattner, Hopp, and their three fellow founders (two have left the company, and the third, Klaus Tschira, heads personnel) shunned the buttoned-down atmosphere of IBM. Instead, they created an organization where all that matters are smart ideas and hard work. In short, they built a Silicon Valley-style company years before most people had even heard of the tech capital. Long-haired employees arrive at work at all hours in T-shirts and blue jeans. They are fueled with free meals from the company cafeteria--paying only the tax on the food--and with an endless supply of strong coffee. Those who bike to work can shower at the office. After three years, employees get a company car.

POLYGLOT PROGRAMS. But SAP has a distinctly European flair. Instead of Frisbee games and pizza bashes, employees blow off steam with soccer 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.

Despite its resemblance to a Silicon Valley startup, SAP didn't soar overnight. Its first products were developed for mainframes and had a mostly European following. But Plattner and Hopp had vision: While other software makers tackled manufacturing or personnel, SAP designed products to link every part of a company's operations. What's more, the SAP engineers made sure their software could handle different currencies, languages, and regulations--a big draw for multinationals. Industrial giants began snapping up software from the little-known German company as the backbone of their global operations.

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

For managers, SAP's software was like a lightbulb illuminating the dark recesses of their operations. Suddenly, they could scrutinize a business, identifying with a few taps at a keyboard where inventories had piled up, which plants ran most efficiently, what parts were out of stock, and which customers paid their bills. "For years, we wanted to manage our business globally, but we couldn't," says Bob Barrett, vice-president at Monsanto Co., which finished an 18-month rollout of SAP's accounting module in July, 1996. "If you can't see your worldwide inventory and you can't see what was produced today in any plant, it's ludicrous to say you manage globally."

SAP's software let Monsanto slash production planning from six weeks to three, trim inventories, reduce working capital, and increase its bargaining power with suppliers. Monsanto figures R/3 saves it $200 million a year.

Monsanto is just one of scores of SAP believers. Before installing SAP's software, Robert M. Rubin, chief information officer at Elf Atochem, a $1.8 billion U.S. subsidiary of the French chemical company, had a mess on his hands: some 27 different payroll systems, 17 order-entry systems, and 11 general-ledger programs. When Elf's chief financial officer needed information about earnings, Rubin would reply: "We have 11 ledgers. What would you like earnings to be?" Now, after spending tens of millions to install R/3, the streamlined software saves Elf hundreds of millions of dollars, says Rubin.

ARMY OF CONSULTANTS. SAP may be the Mercedes-Benz of business software, but it's not without drawbacks. R/3 is a complex set of programs that can take years and millions of dollars to roll out. It also requires all parts of a company to adhere to the same, precise processes--forcing a global reengineering. "Implementing this type of software is not a technological exercise. It's an organizational revolution," says management guru Michael Hammer of Hammer & Co. in Cambridge, Mass.

For that reason, installing R/3 often involves an army of high-priced consultants that can cost three to five times the software's price tag. Indeed, a $20 billion industry has grown up around SAP, comprising consultants, trainers, specialists, and hundreds of software makers who sell add-on programs. When you throw in the $7 billion to $10 billion in hardware and networking gear companies buy each year to run their SAP systems, it adds up to a $30 billion solar system. "SAP's not a company, it's an industry," says Katrina Garnett, CEO of Crossroads Software Inc., a startup developing software to work with R/3.

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

As stories like Westinghouse's surfaced in the mid-'90s, skeptics began predicting SAP's decline. An April, 1996, report by Forrester Research Inc. in Cambridge, Mass., declared that R/3 would be outdated by 2000. SAP's stock plummeted 9% in two days, only to come roaring back when the projected slide in sales and profits didn't materialize. SAP's stock is up 140% this year. Forrester analyst Bobby Cameron says SAP has addressed many of its shortcomings 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, its sales rose 61%, to $2.15 billion, with pretax profits of $471 million, up 64% from a year ago. That's a much faster clip than the 35%-to-40% growth of the overall enterprise-applications market.

STRONG LEAD. Such heady progress is being fueled by a growing realization among corporations that they need the type of software that SAP sells just to remain competitive. Roughly 50% of the world's largest companies still run on a tangle of incompatible software systems, which cost more than $100 billion a year to create, update, and maintain. And programming problems caused by the year 2000 changeover and the prospect of a new European currency make it more crucial for companies to modernize their systems.

Indeed, enterprise applications are emerging as a corporation's most strategic asset--possibly more so than any software sold by Microsoft. "Microsoft's applications are trivial compared to SAP's," says Hammer. "If all of Microsoft's applications got wiped out, we would have to type our documents manually. But if SAP's applications were to disappear, the worldwide industrial complex would grind to a halt." That logic is not lost on Plattner and Hopp, who are doing their best to capitalize on their lead and make R/3 the industry standard in enterprise software. "It's their market to lose," says Eric Keller, an analyst at Gartner Group Inc. in Stamford, Conn.

For the ultracompetitive Hopp and Plattner, ceding ground isn't in the game plan. Hopp will stop at nothing to win on the tennis court, the golf course, or in the software arena. Even more than Hopp, Plattner revels in the race. The harder he works, the harder he plays--a style that spurred him to become an expert surfer, a windsurfer, and a world-class regatta champion during crucial phases of SAP's new-product development. When the wind blows furiously outside SAP's Foster City (Calif.) offices, he hops in his four-wheel drive with his windsurfing gear and heads out to do battle against the forces of San Francisco Bay.

This take-no-prisoners style may be more critical than ever for SAP in the coming year. Although smaller by leagues, rivals such as Baan, PeopleSoft, and J.D. Edwards are on the move. They have been snapping up niche players, filling the gaps in their software portfolios, and expanding into cutting-edge areas such as E-commerce and supply-chain management. Fresh off its Sept. 24 initial public offering--which raised $363 million--Denver's J.D. Edwards plans to expand internationally. And in August, rival Baan paid $275 million for Aurum Software Inc., a Santa Clara (Calif.) maker of programs for managing customer relations--a hot new market.

"HIGH PRIEST." 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, inexpensive machines that rely on the server to do the heavy lifting. Ellison figures that NCs will make its applications easier and cheaper to install--especially in such places as factories, where full-blown PCs aren't needed. He's also building new applications for use with a simple browser, based on 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 brought out products that make it easier to set up an R/3 system. "SAP has so many options, it took a high priest to figure out which ones to use," says analyst Byron Miller, at the Giga Information Group. Now, "it takes less of a genius." The new tools make it possible to install SAP's basic modules in a few months, rather than years. In August, SAP launched "Ready to Run," a product for smaller companies that bundles a scaled-down suite of R/3 programs on a computer server that can be up and running in 25 days.

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

For a Goliath, SAP has been surprisingly 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 sailing race from Cape Town to Rio de Janeiro, Plattner's boat fell behind as the winds died down in the final 48-hour stretch. To pick up speed, Plattner pointed Morning Glory straight into a thunderstorm and rode the high-speed winds through to victory, coming in 12 hours ahead of his 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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