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Intelligent Systems

Volume V, Number 1, February, 2000

A quarterly newsletter for clients and friends of Chenault Systems

High Impact Consulting means Flexible Systems

By Tom Chenault

In our past newsletters we have tried to emphasize the importance of building flexible systems and staying away from single solution systems from just one single vendor. The concept of enterprise resource planning (ERP) is fine as long as it is done on an incremental basis with the users and consultants working together. However, time and time again we have seen organizations settling for the one big solution with no regard to technology changes or interaction between consultant, vendors and customers. This is inconsistent with our concept of High Impact Consulting. The one solution panacea can be a Pandora’s box.

The following is an article from the Marketplace section of the January 18, 2000 issue of the "Wall Street Journal" which explains this subject in greater detail. Somehow, SAP, the large software vendor, missed the Internet revolution, which is hard to do. They will catch up, but one wonders what will be missed next.


The following article appeared in The Wall Street Journal issue of January 18, 2000.

How a Software Titan Missed the Internet Revolution

By Neal E. Boudette
Staff Reporter of the Wall Street Journal

WALLDORF, Germany – SAP AG used to be held up as proof that software companies don’t have to be American to be superstars. Then the Internet arrived and utterly changed the market.

SAP was late to recognize the e-commerce boom, even as the Internet was transforming every aspect of business: software for coordinating companies internal operations. Slow to reward valued employees with stock options; it has seen nearly all of its top U.S. executives jump ship.

SAP’s German leadership brushed off signs that the Web was changing all the rules.

The result: a big slowdown at an industry legend where sales in the ‘90’s often grew 50% a year. Even after an upturn in the fourth quarter and a boost from the dollar’s strength against the euro, preliminary results show that sales for the full year will rise only about 18% to about 1.5 billion euros. Net profit was down 24% for the first three-quarters. Full-year profit will probably rise, but only thanks to a $200 million gain on investments in the fourth quarter.

"We were caught between Germany and Silicon Valley," admits Hasso Plattner, co-chief executive and one of the company’s founders. "We have to reconcile ourselves to the situation. We have to change because of this new economy."

SAP is the world’s largest supplier of the complex software that lets companies weave together basic internal operations like purchasing, accounting and manufacturing. Hundreds of multi-national companies have used SAP’s flagship program, R/3, to underpin their restructuring efforts.

But now companies want to use the Web to create links to customers and suppliers. R/3 wasn’t built for that. Systems by rivals like Ariba Inc., Siebel Systems Inc. and i2 Technologies Inc. are.

Much of SAP’s problem, say current and former employees, stems from the dominance of its headquarters. Ensconced in Waldorf, a sleepy village an hour south of Frankfurt and nine time zones from the Internet revolution’ front lines, the headquarters team brushed off warnings that e-commerce was changing the rules.

Internet projects that did get going elsewhere were pulled back to Waldorf, rewritten and delayed. One key product, B2B Procurement, was supposed to enable customers to buy supplies over the Web. Development began in California with input from Chevron Corp., but Waldorf insisted on using older, clunkier software ill suited for the Internet. The first version flopped.

SAP has revamped B2B Procurement, but Ariba has moved ahead, too. In June, Chevron evaluated the two companies’ products and found 100 areas where Ariba performed better. "What SAP showed us was not a viable product," said Jerry Jacobson, Chevron’s e-procurement project manager.

SAP acknowledges the product has some shortcomings. "We have a lot of basic functionality, but …we need some enhancements," says SAP America chief Kevin McKay. A new version is due in March.

For another important product – CRM, which helps companies track all interaction with customers – SAP engineered a bulky program for laptop computers. It’s getting trounced by a sleeker product from Siebel Systems that runs on the Internet. Mr. Plattner concedes SAP made the wrong call on CRM: "We made a decision two years ago and there has been a massive paradigm shift to the Internet."

SAP has many trappings of a California firm – casual dress, first names, 24-hour cafeteria, a development lab in Palo Alto. But under the hood it is a German-engineered machine. Its stars are Waldorf’s 5,200 programmers. According to SAP creed, their engineering ability is the reason its software sells. In Waldorf, salesmen are called "Klingelnputzer" – doorbell polishers.

Some of the last year’s slowdown came from customer’s reluctance to buy new software while bracing for the millennium bug. But corporations also are rethinking the return on spending millions of dollars on the kind of software that SAP makes, widely viewed as corporate plumbing.

It didn’t help last year when Hershey Foods Inc. and Whirlpool Corp. had delivery problems after turning on systems built around R/3 and SAP officials commented that customers themselves are often to blame in these situations. Hershey says its customer system is "improving" but notes that December deliveries were slower than expected. Whirlpool said its problems have been addressed and that it "enjoys a good working relationship" with SAP.

When SAP’s top brass gathered in late January 1999 at Mr. Plattner’s vacation home on Syit, a North Sea Island, it was clear that something serious was wrong. Rival Oracle Corp. had begun repositioning itself for e-commerce, boasting in TV ads that is technology runs the Web’s hottest sites. Mr. Plattner snapped that SAP had to respond, according to people who were there. In the ensuing discussion, top management finally conceded SAP needed a new Internet-centered strategy.

Shortly afterwards, Mr. Plattner asked two young programmers – Peter Graf and Andres Muther – to help reinvent SAP. Their idea, collectively called, was to bundle SAP’s software with new programs that reach out to business partners via the Internet. In theory, could allow a purchasing manager to check his inventory, a supplier’s stocks, auction prices on the Web and FedEx’s delivery schedule – with just a few mouse clicks in one, seamless system.

In September, SAP showed customers 15 applications, but they had been pulled together quickly for the occasion. Many components were and still are unfinished. For example, can only work with other SAP programs. Links to rival systems – critical to customers who buy software from various suppliers – are a long way off, people familiar with the product say.

For some big customers, wasn’t coming together fast enough. In October, General Motors Corp. chose software from Commerce One Inc. for a massive online marketplace. "We need to move at e-speed," says Alan Turfe, direction of GM’s trading-exchange initiative.

SAP also resisted a stock option plan, putting itself out of synch with U.S. employees. Tantalized by job offers, Paul Melchioree, the SAP’s head of global accounts, and a colleague, Eileen Basho, approached Mr. Plattner in March 1998. "There was to be an equity play at SAP or the whole American management team is going to leave. Help us stay at SAP." Mr. Melchiorre recalls saying.

Mr. Plattner, whose SAP stake is worth about $4.4 billion, refused. Back then, he says, stock options would have upset SAP’s culture. "We have a different philosophy in Germany. I wasn’t going to sacrifice the company for a few American managers," he explained.

Two months later, Mr. Melchiorre went to Ariba and rich options: He sold some in October for more than $20 million. Leaning against his white Acura sportscar, license plate ARBA (the Ariba stock symbol) he says, "Thank God Hasso said no."

By November 1999, SAP America had lost more than 200 top managers, including its chief executive and president. The parent company’s global accounts chief and U.K. general manager also jumped ship. Siebel took 27 SAP employees. SAP sued, alleging "predatory hiring." Siebel said the suit has "no merit."

That finally ended Waldorf’s recalcitrance. When the SAP management board reconsidered the stock-option idea in the fall of 1999, there was "zero resistance," says Kevin McKay, SAP America’s current chief executive. The plan still requires shareholder approval, which is not assured. Shareholders vote today.

Despite its late arrival to the Internet party, SAP can catch up. Some 12,000 companies around the world use SAP R/3 and most haven’t jumped into e-commerce just yet. In December, SAP announced deals with Hewlett-Packard Co. and major German chemical companies that want SAP to create an online marketplace for them.

Loosening Waldorf’s grip on development, the company farmed out development of some pieces of to a small German company, Impress Software Inc. Impress moved its headquarters from the German city of Hanover to Boston in 1998 to be closer to Internet developments and the U.S. market.

Taking a page from Oracle’s marketing book, SAP has pumped up’s profile. "American companies do marketing differently. The PR statement comes first then the product," Mr. Plattner says. "We have to compete on this, too."


Reprinted with permission of The Wall Street Journal copyright 2000 Dow Jones and Company, Inc. All rights reserved.

Quotes Worth Noting

"If you want to understand the Internet, rent, buy or borrow a teenager." – Eric Schmidt, CEO Novell

"Without education we are in a horrible and deadly danger of taking educated people seriously." -- Gilbert Keith Chesterton

"Sometimes things take longer than they do." – Bill Goodykoontz


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