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Ibnbatutaa--I think this is the WSJ article you referred to------->
Sap AG
Dow Jones Newswires -- June 22, 1999
WSJE: SAP Is Struggling To Give Its Lineup A New
Dimension
By Matthew Rose
Staff Reporter
Two springs ago, SAP AG held a splashy presentation at the Hyatt San Francisco to
show off a new range of products crucial to its future. There was only one hitch: The
software wasn't ready.
As 1,000 current and potential SAP customers milled around a hotel ballroom that
March, developers ran a demo that looked like the real thing but, in fact, had been built
specially for the conference and could only perform limited functions. "It was a fake,"
recalls Greg McKee, a former SAP consultant who was involved in the demonstration.
"No one was supposed to know what was behind it."
Peter Zencke, a member of SAP's executive board, denies there was any deliberate
attempt to deceive. "We clearly differentiated between the live bits and the new bits," he
says, contending the company was merely trying to show the market its future plans and
never pretended to have a fully operational product.
Either way, the episode showed that a company made famous by its development
prowess was stumbling in the creation of its most important product in years.
The conference was held to promote New Dimensions, the German giant's strategy to
prolong its status as Europe's most successful software maker. SAP is hoping the New
Dimensions series will propel it into the fast-growing market of efficiency-boosting
products that link companies with people in the outside world, such as sales forces,
suppliers and customers. Within as little as three years, New Dimensions could
contribute as much as 30% of its revenue, the company says, replacing sagging sales of
its flagship product, R/3, which automates internal operations such as accounting, payroll
and human-resources management.
Yet dozens of interviews -- with industry executives, analysts, customers and former and
current SAP employees -- suggest that New Dimensions has been a problem child. In
addition to the conference demo, one New Dimensions component, called LiveCache,
was so unreliable that developers dubbed it LiveCrash. Another product, now behind
schedule, got caught up in SAP'S dispersed development team and was kicked around
labs in California, India and Russia before landing back in SAP's sprawling
headquarters in Walldorf, Germany.
Of the four main products envisioned for the New Dimensions series, one is on the
market and fully operational, one is six months behind schedule, and two reached the
market on time but are failing to satisfy long-standing customers. "It is not sophisticated
enough and there are several problems they don't solve," says Susanna Berendes, who
is evaluating a New Dimensions product for her company, steel maker Thyssen-Krupp
AG. She says the company is "leaning toward more specialized solutions."
While SAP may yet work through these problems, the development headaches that have
afflicted New Dimensions highlight a common business dilemma: How can a company
that has blossomed on the success of one product change direction when the market for
that product stagnates? SAP rose from obscurity to become the world's No. 4 software
company by building programs that became essential for big companies. But fashions
change rapidly in the fast-paced software industry, where staying on top is notoriously
difficult.
From the outset, the development of New Dimensions was held back by executives
blinded by SAP's past success, former and current SAP officials say. Even after rivals
were racing ahead with similar strategies, some SAP developers resisted creating New
Dimensions. "There are developers who have been there for years and are struggling to
make the shift," says Peter Dunning, a former SAP vice president who now works for
Oracle Corp., a competitor.
Hasso Plattner, SAP's co-chairman and a co-founder, concedes the company has been
late to market with some products, in part because of development glitches. But he says
the company will prevail over its competitors. "History shows that being the first to market
is not most important," he says in an interview. "You have to be significantly better."
So confident is Mr. Plattner, one of Europe's most flamboyant executives, that he has bet
a golfing buddy $1,000 (963 euros) that no one else will build a better-looking system.
That's while grappling with a "mind-change in SAP that is bigger than ever before," he
says.
SAP certainly has the resources to catch up. Founded in 1972 by five refugees from
International Business Machines Corp., its software, R/3, is already established as the
technology backbone for many of the world's largest multinationals. One of the hottest
corporate fads of the mid-1990s, this "enterprise resource planning" software helped
SAP generate 1998 revenue of 8.47 billion marks (e4.3 billion) and a 30% share of the
global market for ERP software.
Some observers, like Ric Andersen, who leads the SAP consulting team at
Pricewaterhouse Coopers LLP, are bullish on the prospects for New Dimensions
because SAP "knows how to develop and can spend more money than anybody," he
says. SAP's development budget of $700 million a year is bigger than the annual sales
of many a competitor.
A lot is riding on New Dimensions at a time when the growth of R/3 sales has sputtered
to a halt. License revenue -- a measure of the amount of software bought by customers --
slipped slightly in the fourth quarter of 1998 and fell 8% in the first quarter this year,
analysts estimate. SAP's stock, which closed Monday at 346.50 euros in Frankfurt
trading, is down 49% from its 52-week high as a result.
The sluggish sales stem partly from the Year 2000 scare. Prospective clients of SAP --
as well as competitors such as Oracle and PeopleSoft Inc. -- say they don't want to tinker
with their carefully prepared computer systems until after the Y2K deadline has passed.
More worryingly, the market shows signs of shifting away from SAP's specialty. Many
companies say they aren't thinking anymore about automating their internal operations
and are focusing instead on how they can use the Internet to link with people outside the
company, something R/3 -- widely seen as corporate plumbing -- wasn't designed to do.
"R/3 is made for clerks, but we aren't talking about clerks anymore," says John Lee, a
former SAP vice president who now works at Oracle.
The New Dimensions story began in 1994, when SAP executives say they realized a
new strategy was needed to counter a growing threat from nimbler rivals. But no more
serious thought was given to the matter until 1996, when during a three-month-long
debate, the company decided to create a series of stand-alone software packages,
rather than adding components to R/3.
Kicking off a project of daunting scope, SAP devised the New Dimensions range of
products, including software for salesmen on the road; software that runs logistics and
distribution; and software that allows companies to buy products from each other online.
In addition, the company said it would make variations for 19 different industry sectors.
To pull this off, SAP turned the project over to some if its most senior executives,
including Peter Zencke, a 49-year-old executive board member with a mathematics
Ph.D. in "parameter identification." A driving force behind the development of R/3, Mr.
Zencke is an SAP diehard. Although some of his colleagues spend half the year in
Silicon Valley, he is building a house near the company's headquarters about an hour
from Frankfurt. He often takes employees' work home to finish himself.
True to SAP's origins as a manufacturer for mainframe computers, Mr. Zencke was
uncomfortable browsing the Internet as recently as two years ago, says Thomas Curran,
Mr. Zencke's former assistant, an American who became frustrated with SAP's
hidebound German ways and left to run a small software maker in the U.S. He also says
his ex-boss can be too loyal to the company, often creating bottlenecks through his
desire to be involved in all aspects of the development process.
"Once you have that dogmatic, religious attitude about how to develop software, it
becomes impossible to jump out of the shadow," says Mr. Curran.
Mr. Zencke concedes that he took greater control of the development team, but says it
was "a situation we had to manage," given that the team mushroomed 68% to 5,000
people in 1998 alone. On his Internet skills, Mr. Zencke says he does feel comfortable
Net surfing and notes that he wrote papers on how businesses can utilize the Internet in
1996 and 1997.
At the outset, Mr. Zencke wasn't even convinced of the company's new departure. As
recently as 1996 -- around the same time that SAP settled on the new strategy -- he
questioned whether there was a real demand for such products.
At a meeting to discuss a sales alliance with i2 Technologies Inc., Mr. Zencke dismissed
that company's niche offering: "Customers don't want your products; you are doing
business on the fringes," he said, according to a person at the meeting. I2 makes
software that runs companies' logistics, which is now a key product in the New
Dimensions lineup.
Mr. Zencke denies having said that. He says the two companies' relationship broke
down because of a disagreement over the price of i2's product.
As the market for R/3 continued to boom throughout 1997, product managers lower
down the food chain were also cool toward the new projects. Ask Kersten Ellerbrock, an
11-year SAP veteran who has left the company but now works for a firm that collaborates
with SAP. Mr. Ellerbrock says his attempts to introduce software based on modern
Japanese manufacturing techniques, although supported by executive board members,
didn't get enough momentum in part because of an internal debate over the company's
vision. His product plans were technologically similar to parts of New Dimensions.
Although Mr. Ellerbrock says SAP now has competitive products and a great
development crew, he says "change sometimes needs a little more time than we think.
We could have started two years earlier."
"It takes some time to get an organization moving in the right direction," responds Mr.
Zencke. "In our environment it is essential there is a culture to allow these kinds of fights."
By 1998, when SAP officially launched New Dimensions at its San Francisco
conference, niche software players such as i2, Ariba Inc., and Siebel Systems Inc. were
already selling competing products while SAP's developers were still struggling to finish
their own. Cadbury-Schweppes PLC drinks unit Mott's signed up as a trial user of a New
Dimensions software product that helps the company interact with its suppliers. Mott's
found the product wouldn't allow it to order online and performed sluggishly, according to
people familiar with the implementation.
The Mott's project was very ambitious, says Mr. Zencke, which is why it encountered
problems. He says they were solved in a short period of time. Mott's chief information
officer, Jeff Morgan, says the hiccups were "nothing that wouldn't be expected in a pilot"
program.
SAP's past success was sustained by a relaxed development style, where important
decisions were often taken in coffee corners dotted up and down the spacious halls of
headquarters. Then, with 5,000 developers split into numerous small teams, some
people found themselves duplicating work being done by colleagues. As crucial
deadlines loomed, developers could be found working late at night, ordering pizza and
beer to eat at their desks.
The double-teaming was often deliberate: Products developed in SAP labs in Palo Alto,
California, were sometimes taken back to Walldorf and rewritten in the company's
proprietary software language, ABAP.
"I called {the development structure} a cancer, and it is very difficult to control," says
Guenther Moeckesch, who worked in Walldorf for six years before starting his own
company, a small SAP competitor, in Cambridge, Massachusetts. "The way the
company developed was out of step with such a massive enterprise."
Mr. Zencke says SAP has restructured its development organization because the New
Dimensions strategy cuts across different parts of the company's activities. If developers
are working on the same bit of code, that isn't necessarily a problem. "Sometime
duplication is healthy as we all have different ideas," he says.
By late 1998, the emphasis on New Dimensions was even beginning to affect the
maintenance of R/3 by diverting attention away from it. In an internal e-mail to employees
last autumn, the executive board said it would create a "Hot Package" to correct errors
that had crept into the latest release of R/3. "We are convinced that this extra effort will
be worthwhile for everyone involved, and the amount of problems received will be
reduced considerably," the e-mail said. An SAP spokeswoman says the company often
releases fixes in batches for customers and the fix was, on the contrary, an indication of
how fast the development team was working.
Customers, meanwhile, weren't waiting for SAP to resolve its internal battles. Flagship
accounts such as Nike Inc., Siemens AG and drug-maker Bristol Myers Squibb Co. grew
tired of unfulfilled promises and went with the competition rather than waiting for New
Dimensions.
Joe Postiglione, director of global sourcing for Bristol Myers, said he met SAP
executives last year and told them there were 60 things missing in the software that
would allow his company to make commercial transactions over the Internet. "I couldn't
get into a substantive conversation and decided it was fruitless," he says. "Now they are
scampering wildly to be a real presence but they are still 12 months behind." Bristol
Myers went with Ariba instead.
"We feel very comfortable we are going to win major accounts back," responds Mr.
Zencke, specifically citing Bristol Myers, Nike and Siemens. He says SAP has already
made inroads into competitor's customers, but declines to be specific. ("Why would I
change?" asks Mr. Postiglione. "I have to catch up and get ahead for the next thing.")
By this time, it was early 1999. SAP had grown so hungry for more expertise that it even
came close to abandoning its long-standing prohibition against acquiring large
companies, and entered talks with Rockville, Maryland-based software company
Manugistics Group Inc., then valued at around $350 million. SAP wanted Manugistics'
consulting expertise in the area of New Dimensions-type software, something SAP
lacked. Mr. Plattner says he backed away "because the overall package wasn't attractive
enough."
The New Dimensions effort received a boost when SAP announced its first quarter
results in January: Over 10% of its 1.08 billion euros in sales came from New
Dimensions. Analysts, however, noted that most of that revenue came from only one New
Dimensions product, a tool to analyze information housed in databases, which has been
on the market for some time and isn't the hottest market SAP has targeted. For the full
year, the company expects 5% of sales to come from New Dimensions.
The one much-delayed product yet to be released -- software for traveling salesmen -- is
suffering from "performance issues," Mr. Plattner says.
The result has been a steady stream of executives leaving the company, in particular
from its U.S. operations. Within the last year, the chief executive and president of SAP
Americas -- Paul Wahl and Jeremy Coote, respectively -- have left, both ultimately ending
up at Siebel Systems, a competitor. Employees have left, too, in part because SAP is
prohibited by German law from offering a competitive stock option program, but a bigger
reason is frustration with the company's overall direction and progress.
Scott Smith, a New Dimensions salesman who left SAP, felt the buzz had moved on. "All
technology has a lifecycle and the technology which supports the core product is
approaching 20 years old," says the former product manager, now an executive vice
president at SAP rival Oracle. "SAP had the answer in 1993. It doesn't have it today." |
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