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May 14, 2007

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Pantologist

SAP's Plan to Globalize
Hits Cultural Barriers
Software Giant's Shift
Irks German Engineers;
U.S. Star Quits Effort
By PHRED DVORAK and LEILA ABBOUD
May 11, 2007; Page A1

Five years ago, Germany's largest software company decided it had to become less German.

To get more global, SAP AG hired thousands of programmers in countries such as the U.S. and India. It assigned them to key projects that almost all had been handled from its home base in the small town of Walldorf, Germany. It adopted English for corporate meetings, even in headquarters. SAP recruited hundreds of foreign managers, and non-Germans made up half the company's top ranks by last year, up from one-third in 2000. The newcomers sought to inject a faster pace and open SAP's insular culture to more outside influences.

The resulting tensions show how the challenge of globalization goes far beyond navigating different languages and time zones. In Walldorf, longtime employees feared the company was changing too much, too fast. Veteran software developers protested the loss of autonomy and "Americanization" of the company. "We used to be kings here," says Rainer Hüber, a developer who's spent his entire 25-year career at SAP in Walldorf.

But in Silicon Valley, home to many of the newcomers as well as SAP's biggest rivals, employees worried the company wasn't changing enough. In March, Palo Alto, Calif.-based Shai Agassi, SAP's head of product development and most visible agent of change, resigned, frustrated with the internal conflicts. "I became not only an agitator, but a lightning rod for a lot of things," Mr. Agassi says.

SAP executives tried to assuage both groups -- promising German veterans that they would still have jobs while reassuring the newcomers of the commitment to change. In globalizing, "you have to tackle the shift of power," says SAP Chief Executive Henning Kagermann. "You cannot avoid it."

SAP's shift was more dramatic than most, as the company tried to remake itself to cope with the changes the Internet was forcing on its business. Few companies try to globalize from top to bottom. Many companies build extensive sales, service and manufacturing operations abroad, but most keep top posts and important areas like corporate strategy and product development close to headquarters. Microsoft Corp., for instance, continues to set software strategy from Redmond, Wash., even as it hires thousands of programmers in India.

SAP, by contrast, split up its pivotal product-development effort into eight centers around the globe, directed from California by Mr. Agassi. The company hoped to smooth some of the bumps with cultural sensitivity classes for employees and beer outings for new executives in Walldorf.

Its challenge was all the greater because in much of Europe unemployment rates are higher than in the U.S. and there is even more anxiety about losing jobs to emerging economies. So-called "national champions" often have been protected from competition and German companies have only slowly joined the globalization trend.

It's not clear that SAP's internal revolution is helping its financial results. Software sales grew less than the company and analysts expected in 2006, as big customers slowed purchases and rivals stepped up competition. SAP shares have fallen about 16% in the past year on Germany's Deutsche Börse and 19% on the New York Stock Exchange, while archrival Oracle Corp.'s have climbed about 32% on the Nasdaq. Revenue has grown, however, to €9.4 billion last year, or about $12.5 billion, from €7.3 billion (then about $8.1 billion) in 2001.

Founded in 1972 by five German IBM engineers, SAP grew into the world's largest maker of software used by companies to run back-office systems such as accounting and procurement. SAP expanded its sales force globally in the 1980s and 1990s, but nearly all of its software was written in Walldorf, 50 miles south of Frankfurt.

Developers there took a year or more to hone programs, hashing out problems with colleagues at coffee bars that dotted the office hallways. The programs they wrote were complex and expensive, often requiring teams of experts months to install. They didn't work well with software from other vendors, since SAP assumed it would be a one-stop software shop for customers.

That comfortable model was rocked in the late 1990s as businesses increasingly connected with each other and customers via the Internet, often transacting business with people who didn't use SAP software. Instead of buying complicated, expensive suites of software once every five years, companies often turned to Web-based software sold by monthly subscription -- by SAP's rivals and upstart Internet firms.

Mr. Kagermann, a former physics professor known for his careful, studious approach to management, was skeptical of the Internet business model. He and his co-CEO at the time, Hasso Plattner, moved cautiously. They experimented with online programs, created subsidiaries specializing in Internet business, and bought smaller companies. One 2001 acquisition brought in an Israeli-based company headed by the brash Mr. Agassi, who had founded four companies by age 24.

Mr. Plattner, one of SAP's founders, was known as a technological visionary with a fiery temperament. He once mooned the crew of Oracle founder Lawrence Ellison's yacht during a race. He took to Mr. Agassi, who argued back after Mr. Plattner blasted his software during their first meeting.

Mr. Plattner challenged Mr. Agassi with difficult management assignments, placing him in charge of other Web-focused units and hundreds of SAP staffers. Mr. Agassi recalls pitching Mr. Plattner scores of ideas, each one rejected. Mr. Plattner declined to comment for the article.

Toward the end of 2001, one of Mr. Agassi's ideas caught Mr. Plattner's attention. "It was the first time he didn't say it was stupid; he actually put his glasses on," laughs Mr. Agassi. Under Mr. Plattner's direction, the idea became SAP NetWeaver, designed from the outset to work with the Internet and software from other vendors. It also could be updated more quickly than traditional SAP programs.

Meanwhile, Messrs. Plattner and Kagermann had concluded that their cautious approach to the Internet had hurt SAP in the U.S. The software business was moving away from SAP's complex applications to smaller, more flexible programs and they needed more innovation. Competition was heating up, too. In 2003, Oracle began a three-year, $20 billion acquisition spree that swallowed more than 20 software makers, including PeopleSoft Inc. and Siebel Systems Inc. In 2003, SAP revenue fell for the first time in the company's history.

Mr. Kagermann decided SAP couldn't respond quickly enough if it controlled everything from Walldorf. "The lesson learned for us was that being the fast follower is not enough," he says. "We have to be in many places and to get signals earlier."

Messrs. Plattner and Kagermann loosened Walldorf's grip, bringing newcomers like Mr. Agassi further into management. In 2002, they promoted Mr. Agassi to the seven-member executive board, and merged the Internet subsidiaries he'd headed into SAP. The next year, they broke up SAP's product-development teams, a move Mr. Kagermann calls the company's "first big cultural shift." They made Mr. Agassi head of technology development and officially put him in charge of NetWeaver, which was released in November 2003.

SAP hired thousands of programmers in India and China. By 2005, it had eight global software labs, with different areas of expertise. The number of software engineers in German labs doubled -- but the proportion working elsewhere increased from a quarter of the total to 40% by 2006. Projects were carved up and sent to units around the world. Palo Alto handled the products' look and feel; India specialized in analytical tools; Walldorf managed hard-core coding.

The moves caused uneasiness in Walldorf. Mr. Hüber, the veteran German developer, says he missed piloting projects from start to finish. Developers of traditional SAP programs, meanwhile, clashed with Mr. Agassi on how to tweak their software to accommodate NetWeaver. "They said, 'You don't tell us what to do -- we tell you what to build,' " recalls Mr. Agassi.

Mr. Agassi complained to Mr. Plattner and asked not to work on projects involving SAP's traditional software. Instead, Mr. Plattner promoted Mr. Agassi in 2005 to oversee the older programs as well. Mr. Agassi describes the shift as "punishment" and "a challenge." The move effectively put a non-German in charge of SAP product strategy for the first time. It also gave Mr. Agassi responsibility for most of SAP's 14,000 developers; 60% of them were still in Walldorf, where he had never been based.

Mr. Agassi hired hundreds of Silicon Valley techies from rivals, many into senior positions. He oversaw a 100-day plan to reorganize how products were developed -- then pushed to carry it out in 50 days. He asked deputies to identify German managers who could threaten change. They came up with a list of 24 people to win over.

Mr. Agassi devised a number of projects, some of which led to real products, to show the engineers the new faster pace. In one project dubbed "Hercules," Mr. Agassi gave a group of 10 developers 12 weeks to create 100 programs to analyze data, such as defects in car parts. At SAP's normal pace, one such application would take several months.

The developers tried to talk Mr. Agassi into lowering the goal to 30. He refused. They ultimately met the target by creating a clever program that created other programs. Under Mr. Agassi's direction, SAP created 26 new products last year -- versus one or two in previous years.

Some veterans worried that the pace would damage quality. "The fear is that you can't sustain the momentum over time," says Eberhard Schick, a Walldorf developer who took part in Hercules. It's not "good, old German engineering." Programmers griped that Walldorf had lost control over product strategy. "The power went to Palo Alto," says Mr. Schick.

The concerns crystallized at breakfasts in Walldorf in early 2005 set up to introduce Mr. Agassi to the rank and file. Developers grilled him about why he was hiring so many Americans and whether he planned to abandon SAP's proprietary computer language in favor of languages more widely used in Internet applications.

In August 2005, a German employee complained to a local newspaper that Mr. Agassi's "boys come in at very high levels, without even being seen by the staff here." Five months later, Germany's national Handelsblatt newspaper published an article headlined "SAP and Globalization -- March of the Americans." One German manager was quoted saying, "It's clear Agassi would like to get as many functions as possible to the U.S." Mr. Agassi says his mission was "to bring the best talent we could find anywhere into SAP, regardless of location."

In April 2006, SAP executives hosted a town-hall meeting in Walldorf on the "Americanization of SAP," where workers aired concerns over the increasing use of English and the hiring of engineers overseas. A few months later, a handful of SAP workers, including Mr. Schick, won enough support to start a workers' council, roughly equivalent to a labor union.

Their fears were fanned by SAP's moves to transfer some jobs out of Germany. Much software maintenance -- updating and fixing older systems -- is now done in India; some human-resource work went to Prague. "The job of the workers' council is to help the German staff manage the consequences of this globalization" by helping workers find other jobs at SAP, says Mr. Schick.

Mr. Kagermann was unyielding. "There cannot be even a minute where you debate" globalization, he says. But executives reassured engineers that SAP wasn't cutting employment in Germany, and reassigned those whose jobs were transferred. Executive-board member and personnel director Klaus Heinrich says Walldorf's engineering staff has been growing and no workers have been laid off.

Mr. Heinrich advised the new foreign executives how to get along with German engineers -- work hard, and impress them with content. SAP sponsored cultural-sensitivity classes that taught, for example, that Indian developers like frequent attention while Germans prefer to be left alone. Another tip: Americans might say "excellent" when a German would say "good."

Meanwhile, Mr. Agassi's developers were cranking out more programs, but some of the new offerings didn't sell well and prompted grumbling inside SAP. "It's nice to create a prototype," Mr. Schick says of one new product. "But I question whether the program is really being used by customers."

Mr. Agassi complained that the new programs didn't get enough marketing and service support, people familiar with Mr. Agassi's thinking say. He clashed with other executives -- particularly sales chief Leo Apotheker -- over the complaint and SAP's long-term strategy, insiders say. "When you produce 26 new products in one year, the [company's] gearboxes start to crack," Mr. Agassi said in an interview in late 2006.

Mr. Plattner had told Mr. Agassi that he had a shot at being CEO someday. But when SAP in February extended Mr. Kagermann's contract until 2009, Mr. Agassi calculated it would be several more years before he would get the chance. The "passion-to-cost equation" was no longer high enough, he says, and he decided to leave.

These days, Messrs. Kagermann and Plattner are working hard to convince SAP's Palo Alto developers that the company won't return to its Walldorf-centric days. "What we're doing to globalize R&D is the right thing and we will continue," Mr. Kagermann said in a conference call with reporters on the day Mr. Agassi's departure was announced. He added, "It's not easy to manage."

Dimitar Vesselinov

Inside SAP Labs Bulgaria https://video.google.com/videoplay?docid=42683659531829972

Dr. Petri I. Salonen

Great that you commented on this, as I am a subscriber to WSJ service and wondering how SAP would feel about it. However, I hope people understand that globalization is here to stay and even Germany has to adjust to those changes, whether they want it or not. That is my humble opinion as a Finn living in the States.

Subbaraman Iyer

Shai, I have a great respect for you as a tech visionary and as an entreprenuer and was actually looking for a comment from your side explaining your position.

Based on just empirical evidence, it does seem that German organizations find it difficult to assimilate and integrate people from other cultures.

I have given my comments on this issue on my blog.

Subbaraman Iyer

Shai, I have a great respect for you as a tech visionary and as an entreprenuer and was actually looking for a comment from your side explaining your position.

Based on just empirical evidence, it does seem that German organizations find it difficult to assimilate and integrate people from other cultures.

I have given my comments on this issue on my blog at: https://subbaiyer.wordpress.com

Rolf

SAP will Americanize, India-ize, China-ize until it is a global company, just like all other companies will. The question is only which companies will be the early movers in figuring out how to make this work well, and thereby gain a competitive advantage. One aspect is clear, the converging force of the company culture needs to be stronger then the diverging force of the respective country cultures.

Seems like we are still very much in the experimentation phase (also see Chrysler). In this light its interesting to look at Lenovo as it merged its Chinese operations with that of the IBM PC division. Its management team is a mix of American and Chinese executives. Perhaps an extension of what IBM’s founder, Thomas Watson, said it in the thirties: ‘world peace through world trade’..

vinnie mirchandani

Shai, you should be proud at the role you played in making SAP more global. Globalization is also an issue front and square at IBM, and the Indian offshore vendors, and every major tech company as I wrote below. I am proud our industry is so color blind, and laugh at folks like Lou Dobbs on my blog. But it is naive for SAP or Indian or Israeli or other company workers to think you can get majority of revenues from the US market, and not have proportionate US representation in your global work force. The benefits of globalization have to flow both ways.

https://dealarchitect.typepad.com/deal_architect/2007/05/global_company_.html

PS: as a blogger, I believe in free access to my blog, but the WSJ is a paid subscription and I know you respect that as you mentioned in your main content. If I were you I would either delete the comment above which copied and pasted the whole article, or request the WSJ to publish it on their free section. They have on occassion. Regards

Steve Mann

Shai... I thought the article was dead on and extremely well researched. I passed selected quotes around my teams to shed light on the tensions they deal with on a day to day basis. I saw a lot of light bulbs going off. The globalization efforts must continue if the company is to thrive. Plain and simple.

Hope you are well.

John

Shai, thanks for the clarification as the article itself tends to shed a different light, albeit obliquely, than the one you have provided. Having followed this industry as an analyst and more recently working for the largest French software company, I have observed the incredibly rapid and dramatic impact of globalization in this industry. Would even argue that it is more pronounced in our industry as the product, being digital, can be instantaneously developed, shared and even deployed regardless of location. The trouble is that this has occurred at such a rapid pace that we, as a community have not had the time (or will?) to put into place the social policies and guidelines that provide for this transition. Thus, is it no wonder that there would be grumblings from the workforce?

Padmanabha Rao

Shai,
I hope some day you will blog your real reasons for leaving SAP. NetWeaver was a 1Gen bridge for SAP to become global in (in its workforce and product strategising). Oracle and other competitors notwithstanding, SAP (with its IBMish thought, and German stands) has the global gene within it, so adaptation is a matter of time than anything else. You are bang on when you say that in times of hardship the cultural lines become very strong. Is it possible that that Apr06 town-hall meeting got atleast the title wording right? It isn't true that the US is a model for globalisation, is it?

Wish you well.

Shai Agassi

Thanks for all your kind words everyone.

1) I will check with WSJ if they are ok with the comment, or are they willing to publish publicly. If the answer is no, I will drop the comment (I didn't pay attention to its posting).

2) I believe that there are dividing lines in every company, many differnt axis always collide on interest and it is the CEO's thankless job to try and balance them out. Did I mention it is a thankless job??? (how is that for an answer to Padman)

3) When you get to zero sum games (such as resources, attention, or even where a project is on the priority list) the emotions and division lines get ugly.

4) the internal divisions usuall matter less when the external pressures get stronger (such as lower share price or barbarians at the gates). SAP was doing pretty well during the last couple of years.

Padmanabha Rao

The SDN was certainly a powerful way for SAP to go and remain global. Surely you have the satisfaction of having started valuable processes at SAP?

I would argue a maniacal focus on making the SDN the corporate communication channel for a diverse global service company would (have) help/ed. Needless that would develop NetWeaver too as the choice Application for SAP's clients.

Regards.

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