AUGUST 3: The sober facade of the New York Stock Exchange has been transformed for a day. In between its columns, banners depicting life-size palm trees lean in the slight breeze. Two blocks of Wall Street overflow with sand. The Motown sounds of Little Anthony & the Imperials attract a crowd. At 8 a.m., a beach party begins in the heart of Manhattan.
It wouldn't seem out of place for a California company--say, an Internet software developer--to stage such a blowout. But the fete marked the NYSE listing of buttoned-down German enterprise software maker SAP (which stands for, the curious will be pleased to discover, "systems analysis and program" development).
Hasso Plattner, CEO and cofounder of SAP, is accustomed to putting on an American face to do business in the United States, the largest international market for software. Sales in North and South America--
most of which come from the United States--grew 62.3 percent in 1997 to $1.5 billion, 43.1 percent of the company's overall revenues of $3.4 billion. In total, 80.9 percent of SAP's revenues came from outside Germany.
GERMANY'S MICROSOFTSAP has succeeded in the United States like no other European software company has. Of the top ten software developers in the world, only SAP is not based in the States. (The German company is No. 4, behind Microsoft, Oracle, and Computer Associates; IBM is generally excluded by analysts because the vast majority of its software revenues are tied to its hardware sales.) In fact, analysts compare SAP's leadership in the growing enterprise resource planning (ERP) software market to Microsoft's competitive juggernaut. SAP's ERP market leadership has given it control over pricing and margins, and the company's $600 million annual R&D budget, the ERP sector's highest, keeps SAP's products ahead of the competition's. Like Microsoft, SAP has placed its rivals in a no-win situation by forcing them to compete on both price and innovation--in a global market that the consultancy AMR Research projects will increase 37 percent annually through 2002.
That such success could breed arrogance is notsurprising. If asked, Mr. Plattner will bark that "SAP customers have no year 2000 problems." And he recently dropped his pants to show his displeasure with Oracle CEO Larry Ellison's crew in a yacht race.
But SAP does have its humble side, says Mr. Plattner. The company has not always been an international superstar. Founded in 1972 by four former IBM engineers, SAP spent ten years selling mainframe software exclusively to the German-language market until two major customers, U.S.-based John Deere and U.K.-based Imperial Chemical Industries,strong-armed SAP into making English and French versions of its software. In 1984 the company formally decided to go global and opened its first foreign subsidiary, in Switzerland;SAP America was established four years later in Philadelphia.
Despite an initial public offering on the Frankfurt Stock Exchange in 1988, SAP continued to play only a supporting role in the emerging enterprise software market until 1992. That year Mr. Plattner and company introduced R/3, a powerful client/server system that has won the business of a large number of Fortune 500 companies, including Coca-Cola, Chevron, and General Motors. By 1993 SAP had become the seventh-largest software company in the world and was included in the DAX index of 30 blue-chip German companies. With its August listing, SAP joined the NYSE with a market cap of roughly $72 billion, which made it the 32nd-largest company trading on the exchange.
SAP's international success is the exception, not the rule, for European companies. For reasons that include limited risk capital, a lack of entrepreneurial role models, and the widespread emigration of European technical talent to the States, only a handful-- like the Netherlands' Baan and Germany's Software AG--have succeeded in the global tech market, and none has done as well as SAP. Most European startups are discouraged by the enormous costs of staffing a U.S. division and marketing an unknown foreign brand in the highly competitive U.S. technology market. So how did SAP do it?
ONE COUNTRY AT A TIMESAP began its international expansion effort in earnest in the mid-'80s by establishing small subsidiaries around Europe. These sales offices were initially also research projects. By using Europe as a set of multicultural test laboratories for its global efforts, SAP learned how to adapt to unfamiliar styles of business, customers with different priorities, and language difficulties. Profits from these early foreign subsidiaries were used to fuel further international efforts. Mr. Plattner explains the reasoning behind the company's incremental global strategy: "Technology companies that wish to expand internationally have to think like missionaries and first establish small advance groups to learn the language, business climate, and culture," he declares. "You cannot just arrive and preach about your product. You have to give each subsidiary the freedom to establish a local identity."
In 1988 SAP made the United States the centerpiece of its international strategy. That year the company also earmarked more than 10 percent of its total yearly sales and 22 percent of its staff for R&D, establishing overseaslaboratories in France, India, and the States that would concentrate on creating new products for local markets.
"The reason that entrepreneurs in Europe fail is that they don't have the ambition to make it worldwide," says Mr. Plattner. "People still think that if they do well in their own country, that's enough." He adds that although SAP did fabulously in Germany alone--reporting a 50 percent before-tax profit margin in the late'70s--Mr. Plattner and the rest of the SAP board weren't satisfied.
Such statements have led many to characterize Mr. Plattner as having an unusually American demeanor for a German CEO--a polite way of saying that he is outspoken, overtly competitive, and prone to emotional outbursts. "To be successful in America, you have to act more like an American. You have to mimic them," he says in self-defense. (Many executives of international companies would disagree; see "Culture Club.") Mr. Plattner now spends half of each year in Palo Alto, working on product development.
SAP's globalsuccess from its headquarters in Germany is all the more remarkable given the track record of its home country's tech companies. Many of SAP's peers, when they're able, leave Germany to incorporate in the States, where they can be near potential partners, investors, and customers. (For a look at one German company's decision to do so, see "The Promised Land.")
THE GERMANS ARE LEAVINGWhile acknowledging that the German taxation system has played a large role in his country's entrepreneurial emigration, Mr. Plattner thinks the exodus is misguided. He says that the heterogeneous European environment, where there are even more languages than currencies, is the perfect training ground for international expansion, and he cautions European startups against leaving the Continent too soon.
When European startups leave, they take skilled local technical staff with them, most of whom will not return home. "We have reverted to the climate of the '60s, when talent moved from Europe to the U.S.," says Mr. Plattner. SAP has made some effort to help Germany retain its technology professionals. The company is developing a German venture capital arm, and it recently sponsored four professorships in entrepreneurial business at German universities.
But those efforts come second to SAP's recruitment agenda in its largest market. "We must have Americans to succeed in America. It is our No. 1 hiring priority," says SAP America's CEO, Paul Wahl. The company has long-standing relationships with 29 U.S. universities, and its listing on the NYSE was largely motivated by the need to provide stock options that would entice and help retain American employees. SAP did not issue new shares but merely listed the shares that were previously traded through American depositary receipts, vouchers that represent shares being traded abroad and that cannot be purchased through stock options.
In addition to stock options, SAP turned to Wall Street for worldwide visibility and better relations with American investors and financial analysts, says Mr. Plattner. But that exposure comes at a price. Previously Wall Street paid attention only to SAP's quarterly earnings statements. The NYSE listing means that SAP will now get up-to-the-minute coverage and be subjected to the increasing scrutiny of analysts. "Before, Wall Street gave greater coverage to some of SAP's competitors on U.S. exchanges," says George Gilbert of Credit Suisse First Boston. "Now that SAP has the second-largest market cap for a software company, behind only Microsoft, everyone in the financial community on this side of the ocean is forced to pay attention."
CONTINENTAL DIVIDE Another key to SAP's success is that it has not embraced every characteristic of U.S. software companies. Mr. Plattner criticizes his U.S. competitors for not taking application development seriously enough, citing an August article in Forbes that reports that Mr. Plattner's rival Mr. Ellison finds the application side of Oracle's business too simple to be worth his time. "That kind of arrogance shows that Mr. Ellison does not understand that applications reflect real business functions and require very hard work," he says. By contrast, Mr. Plattner prides himself on getting his hands dirty: he calls customers and works directly on corporate implementations.
Although adapting its products to each of its target countries is important, SAP has been careful not to forget what has made it successful in the first place. Harry Tse, director of enterprise application research and consulting at the Yankee Group, warns that SAP's growing U.S. business and swelling U.S. staff (more than 20 percent of its employees are now based in the States) might "corrupt" the company's products. He asserts that SAP's existing culture is advantageous in the ERP market because it is based on German expertise in operational research, a philosophy that emphasizes business procedures over pure automation. By contrast, he says, American ERP vendors tend to view software merely as a way to computerize business functions, not to modify and then unite disparate business processes in order to solve larger problems.
And unlike U.S.-based software giants, SAP is fairly conservative about acquiring competitors. "We're not going to go for a big bite just to beef up revenues," says Mr. Plattner. "I have not seen a single software merger that has been an overwhelming success, and I already have my hands full managing the few strategic acquisitions we've made." (In April SAP invested $10 million in the French component software developer Ilog, and in June it purchased 51 percent of Ofek-tech Software Industries, an Israeli developer of software for management of warehousing and distribution centers.)
THE WEIGHT OF THE WORLDLYFor SAP, being a multinational is a mixed blessing. Despite his nonchalantpersona, Mr. Plattner admits to worrying constantly about the company's future. He feels the burden of SAP's high market capitalization and frets about the overinflation of the entire market. "We celebrate every success as something that happened yesterday," he says. "In the SAP boardroom there is a lot of paranoia. This is partly how we motivate ourselves."
Lately it seems there's little need for such anxiety. SAP traded 1.4 million shares its first day on the NYSE. Credit Suisse First Boston estimates that SAP's 1998 revenues will be up a staggering 49 percent from the previous year's and that 1999's revenues will be 39 percent more than that.Paranoia aside, Mr. Plattner seems to have the world spinning in SAP's direction.
SAPHEADQUARTERS: Walldorf, GermanyPHONE: 49/6227-7-47474URL: www.sap.comINTERNATIONAL OFFICES: 50 countries in Europe, North and South America, Asia, Africa, AustraliaOWNERSHIP: Public (NYSE, Frankfurt: SAP)FOUNDED: 1972EMPLOYEES: 16,900PRODUCT: Suite of client/server enterprise applicationsYEAR INTERNATIONAL SALES BEGAN: 1984INTERNATIONAL MARKETS: Europe, North and South America, Asia, Africa, AustraliaINTERNATIONAL PARTNERS: Microsoft, Hewlett-Packard, IBM, Intel, Oracle, InformixCOMPETITORS: Oracle, PeopleSoft, Baan, J.D. EdwardsREVENUES FY97: $3.4 billionINTERNATIONAL % OF 1997 SALES: 81%