SAP's Kagermann upbeat about business

BOSTON (11/17/2003) - Henning Kagermann, the chairman and CEO of SAP AG, the market leader for ERP applications, took the leadership mantle from his predecessor and company co-founder Hasso Plattner earlier this year. At an open session of AMR Research Inc.'s fall executive conference in Boston on Monday, Kagermann fielded questions on a number of topics, including the proposed Oracle Corp./PeopleSoft Inc. deal, pricing, open-source and outsourcing.

Excerpts of his comments follow:

On outsourcing: We believe the answer to what the customer wants is not outsourcing. It's more out-tasking. It has to be done on flexible platforms that allow outsourcing and in-sourcing strategies as the companies change. The best (practice) is to remain in control of mission-critical scenarios and allow clients to do smart sourcing. In the future, what we have to provide for you is transparency, whether you're installing software or procuring a service. My key question is, If I meet a client, what is his strategy in three to five years? Interestingly, not many clients can articulate this. If you outsource, you should have a contract and infrastructure to in-source again if necessary.

On the current market: The new trend in IT is back to growth. We will ship more innovations and encourage clients to invest in innovations. It's too early to talk about a turnaround, but we also believe 2004 will be better (than recent years). We see many clients starting to invest again, but in a different way. We're not expecting the average deal size to go up. We want to come back to double-digit growth. That means getting more market share. Now, SAP has 19 percent share, and there are some industries and geographies where we should be stronger, such as financial services and the public sector.

On pricing: It's fair to say we have a mixed model. The industry is not prepared to change the price model completely. At SAP, we have upfront commitments ... if the client wants to engage in development. We have phased contracts where the client is committed over a number of years.

On the small and midsize business market and niche providers: Is there competition with Microsoft? Yes there is, no doubt. We prepare ourselves as best as possible, and we have a good track record here. On the other side, it's a highly fragmented market, and there a only a few large-capability vendors. There are always segments. You'll find niche players; we will have a lot of those in the future. (But) there may not be many complete suite providers like in the car industry, (which provides buyers a complete car). To make the next step from the niche (market) to be a broad supplier, no one has achieved this. Look at the best-of-breed players -- Siebel, Ariba, i2 -- they've stayed where they are.

Large vendors like IBM are following the strategy of having lots of components and suppliers and they are the integrator. We're doing it. The only open question we have to solve is the maintainability (of the software).

On Oracle's bid for PeopleSoft, and acquisitions in general: It was not a surprise for us. In the meantime, it distracted Oracle and PeopleSoft for a long time from real issues. That's also good for us. I have more concern for the clients of those companies. That's the issue. I have no concern for SAP.

I would not exclude acquisitions. I was never a friend of doing acquisitions for growth. ... If you are looking at different verticals, there are potential for acquisition.

On open-source and Linux: If you look at Linux, it's still small; 8 percent to 10 percent (of our customers are using it). But it's faster growing than anything else. Most of our clients adopting Linux had between 500 and 2,000 users. One client has 30,000 users, but they are not using it on the database. They started replacing the application servers first, and it's a good move: to bring in a lot of cheaper application servers and still feel that the database, which is the heart (of the business), is secure. If, over time, if Linux proves as reliable as Unix, they'll probably replace that as well.

On radio-frequency identification (RFID) tag technology and Sarbanes-Oxley Act compliance: It's still a hot topic. We'll ship by the end of the year a packaged solution with an event manager with an RFID infrastructure and a visibility portal and an adapter to our suite.

It's the same (with Sarbanes-Oxley). We have a packaged solution. The key (advantage to Sarbanes-Oxley compliance in software) is that if you want to look down and make sure nothing (erroneous) has happened, at least from a system point of view ... you have a complete audit trail (in the software). If people want to have fraud, there is fraud. But the system is 100 percent secure.

On SAP adopting a role model: It's difficult to find one role model. In the meantime, I feel SAP is a bit unique. By far we're the market leader, so why would we look for a role model? For design, we'd go to Italy. ... In terms of quality, I admire the Japanese. I'd be more than happy if we could give the same quality they give to cars and other things. In Germany, I like the engineering. In the U.S., they are much better at turning innovations into a sellable product. This area we have to do better in.

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