SAP's TomorrowNow Troubles

Damage caused by inappropriate employee actions at one of the German software giant's divisions won't be easy to undo

by Aaron Ricadela

SAP took pains to blunt the impact of its admission of inappropriate behavior by employees at one of its divisions: The German software giant demoted the head of a U.S. unit and said further action against the executive could come. But the moves, outlined in a March lawsuit filed by archrival Oracle (ORCL), may already have dulled the edge of a key weapon against SAP's biggest competitor—damage that won't be easy to undo.

SAP's 20-page filing in U.S. District Court in San Francisco acknowledges that employees of its TomorrowNow unit in Bryan, Tex., inappropriately downloaded software code and documents from Oracle computers. "Some support materials by customers named in Oracle's complaint were not licensed—that's a fact," says SAP CEO Henning Kagermann in a July 3 interview.

But Kagermann says the downloads—which were the subject of a wide-ranging complaint filed by Oracle on Mar. 22 (see BusinessWeek.com, 3/23/07, "Oracle Files Suit Against SAP")—never fell into the hands of the developers and support staff who work on its business software products. "It's an independent, separate organization, with their own systems and their own management, so no SAP employee can come into contact with materials downloaded by TomorrowNow," he says.

TomorrowNow CEO Under Scrutiny

Still, as SAP (SAP) prepares to report results for its second quarter on July 19, the company risks losing the advantage of owning a business that has helped convert more than 540 Oracle customers to SAP products. An expanding investigation could also sully SAP's reputation as a well-governed, by-the-rules company. The U.S. Justice Dept. subpoenaed documents from SAP in late June, the company said.

As a result, TomorrowNow's CEO, Andrew Nelson has been demoted. He'll report to SAP America Chief Operating Officer Mark White, who takes charge of the unit that sells technical support for Oracle software. Kagermann isn't ruling out further action against Nelson and says heads could roll. The executive says he told White to "take all consequences, including, if needed, firing people." SAP's internal investigation didn't turn up evidence that Nelson knew about the improper downloads, but Kagermann says White will "look at all places" where TomorrowNow may have overstepped its legal boundaries, with continued scrutiny of its CEO.

Oracle's legal fight with SAP is the latest chapter in a fierce rivalry between the companies. Oracle has spent more than $25 billion to acquire PeopleSoft, Siebel Systems, and nearly 30 other makers of applications software to compete with SAP, the world's No. 1 supplier of applications that help businesses carry out key tasks, such as managing payroll. Through TomorrowNow, SAP offers cut-rate support for those systems, then tries to sell customers on SAP products when their contacts with Oracle expire. As part of its support agreements, TomorrowNow employees can download materials from Oracle Web sites on behalf of customers. But in its lawsuit Oracle said SAP overstepped those bounds and accused it of "corporate theft on a grand scale." The complaint said SAP used information illegally taken from Oracle servers to unfairly compete.