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Neurottstrasse 16
69190 Walldorf

Telephone: (+49) 6227/34-0
Fax: (+49) 6227/34-1282

Public Company
Incorporated: 1976
Employees: 6,857
Sales: 2.70 billion DM (1995)
Stock Exchanges: Berlin Bremen Düsseldorf Frankfurt Hamburg Hanover Munich Stuttgart Geneva
SICs: 7372 Prepackaged Software; 7373 Computer Integrated Systems Design; 7389 Miscellaneous Business Services

Company Perspectives:

"Whether opening up new markets or servicing existing ones, SAP is committed to its tested strategy: concentrating on its core business--developing and selling standard enterprise applications software--and partnering with hardware vendors, software suppliers, technology providers, value-added resellers, and consulting firms.

Company History:

SAP AG is the fifth largest independent software producer worldwide and the largest producer of standard enterprise-wide business applications for the roughly $9 billion global client-server software market. The company's principal business activities are the development and marketing of an integrated line of prepackaged computer software for over 1,000 predefined business processes, from financial accounting, human resources, and plant maintenance to quality assurance, materials management, sales and distribution, and business workflow. Its two major products, the R/2 and R/3 suite of business software applications, are used by over 4,000 companies in the oil and gas, banking, insurance, utilities, telecommunications, pharmaceuticals, consumer products, automotive, retail, health care, chemicals, and high tech and electronics industries. Through its 28 international subsidiaries, led by its U.S. subsidiary SAP America, SAP AG markets its software and consulting, training, and support services in more than 50 countries.

1970s Founding

SAP AG was founded in 1972 by five German engineers with IBM in Mannheim, Germany; interestingly four of the founders--Hasso Plattner, Dietmar Hopp, Klaus Tschira, and Hans Werner Hector--were still with SAP in early 1996. When an IBM client asked IBM to provide enterprise-wide software to run on its mainframe, the five began writing the program only to be told the assignment was being transferred to another unit. Rather than abandon the project altogether, they left IBM and founded SAP in Walldorf, near Heidelberg. While the company originally took its name from the abbreviation for Systemanalyse und Programmenentwicklung (systems analysis and program development), SAP eventually came to stand for Systeme, Anwendungen, und Produkte in Datenverarbeitung (systems, applications, and products in data processing).

Without the benefit of loans from banks, venture capitalists, or the German government, SAP began fashioning its software business gradually through the cash flow generated by an ever-growing stable of customers. Working at night on borrowed computers to land their first contracts, Plattner and colleagues built SAP's client list with German firms in its region, beginning with a German subsidiary of the global chemical company ICI and later adding such major German multinationals as Siemens and BMW.

Operating in a corporate computing climate in which business programs were designed to provide only specific, isolated solutions with no relevance to a company's other applications--let alone any outside company's needs--the idea of a fully integrated software product that could be tailored to any company's business proved a hard sell at first. However, because SAP produced software, a non-labor-intensive product, it was able to avoid the labor agreements and high costs that dog many German manufacturing startups. In 1976 SAP declared itself a GmbH (Gesellschaft mit beschränkter Haftung) corporation, or limited company, and by 1978 it was selling its financial accounting software to 40 corporate customers.

R/2 in the Late 1970s

In 1978 SAP began developing, and the following year released, R/2 (R for "real-time"), a mainframe-based, standard business software suite in which integratable modules for accounting, sales and distribution, and production enabled customers to consolidate their financial and operational data into a single database and eliminate costly paperwork and data entry. Because the modules were self-standing, businesses could select only those they needed, which could then be further customized to their unique requirements. The promise of real-time integration of mission-critical corporate data, viewable through the spreadsheet-like windows of specialized software, offered the potential for uniform data flow, streamlined business operations, and centralized decision-making.

Relying on word of mouth filtering through the overseas branches of its German customers, SAP soon began selling its software outside Europe. With corporate giants like Dow Chemical and Bayer already running R/2, SAP could rely on the fear of obsolescence of its customers' rivals to sell its software to the major competitors in each industry. Among the large corporations who began to adopt R/2 were Dupont, General Mills, Goodyear Tire and Rubber, Heinz, and Shell Oil, as well as 80 of the 100 largest companies in Germany, such as Hoechst, Daimler Benz, and BASF. By 1991 R/2 had gone through four releases or versions and had established itself as the standard for integrated corporate business software in Europe. By 1994, SAP could claim more than 1,400 R/2 installations worldwide.

R/3 Development in the 1980s

As R/2's potential began to peak in the mid-1980s, Plattner and company's former employer, IBM, announced a new "system applications architecture" (SAA) technology in which all IBM operating systems and platforms would be fully harmonized such that code written for one product would work with any other. Seeing the ramifications of such integratability for its own products, in 1987 SAP began developing R/3 for use in the decentralized, non-mainframe computing environment known as client-server. In client-server arrangements, data is processed not by a single costly mainframe but by many cheaper networked "server" computers, which display their data on flexibly arrangeable PCs called "clients." While R/2 focused on providing data processing solutions for static, individual functions of business operations, such as inventory tracking or shipping, R/3 was designed to allow a business to view its entire business operation as a single integrated process in which data entered into any single application in the system would simultaneously be registered in every other. In theory, a company's entire data network would now be a cohesive, interpretable whole that would enable management to more efficiently allocate resources, develop products, manage inventory, forecast trends, streamline manufacturing processes, and automate routine operations.

R/3 itself consisted of IBM's OS/2 operating system as its "front end" or user interface, IBM's DB2 program as its database component, and SAP's own proprietary application component, which was based on AT&T's Unix operating system because it offered the greatest functionality with other vendors' systems. Thus was created the three-tiered architecture--interface or desktop + database + application--on which all later versions of R/3 would be based.

By 1987 SAP had grown to 450 employees and boasted sales of DM150 million. And although no less than 27 percent of this was plowed back into research, in 1988 SAP GmbH formally converted itself to a publicly traded Aktiengesellschaft (AG) to raise even more capital for research and development. SAP had established its first operations outside Germany in the mid-1980s, but it was not until the creation of a Swiss-based subsidiary, SAP International, in the late 1980s that it began the expansion that would make it a truly international player in the global client-server software market. In 1988, it established SAP America in Philadelphia, staffing it initially with transplanted German managers. SAP executives soon realized, however, that an American team was more likely to be able to maneuver through the idiosyncrasies of the U.S. software market and soon began hiring U.S. professionals. One not unimportant result was the abandonment of traditional German business practices in favor of a more American approach: lifting limits, for example, on how much salesmen could earn in commissions and submitting budgets in which fully one-third of all annual resources were devoted to product marketing. Fueled by the release of R/3 in 1992, SAP America began to grow into SAP AG's most profitable subsidiary, expanding from two U.S. offices to twenty between 1992 and 1995 alone.

Introduction of R/3 in the 1990s

After five years in development, R/3 had been launched with the expectation that it would complement R/2's multinational-oriented niche by extending SAP's reach into the mid-sized, less mainframe-dominated business software market. Unexpectedly, however, R/3's release coincided with a growing trend toward corporate downsizing, and even SAP's largest customers began eyeing R/3 as a less labor-intensive replacement for R/2. As a result, in the space of one year (1992-93), the percentage of SAP America's total revenue generated by R/3 catapulted from five to 80 percent, and R/2's status as SAP's flagship product dwindled from 95 percent of revenues to only 20 percent. R/3 was suddenly hot, and virtually overnight SAP had translated its reputation as Germany's wunderfirma to the global stage.

On the strength of R/3's rocketing sales, by the mid-1990s SAP had traveled from the relative anonymity of 1992 to the business applications vendor of choice for nine of the ten largest U.S. corporations, one-third of the Fortune 500, seven of the ten largest Business Week Global 1000, and 80 percent of the Fortune 100 companies in software, computers, peripherals, and semiconductors. Total sales revenues had nearly tripled between 1991 and 1995 to DM 2.7 billion and had increased 66 percent between 1993 and 1994 alone. Such major corporations as Apple, Chevron, Colgate-Palmolive, Digital Equipment, and Polaroid were jumping on the R/3 bandwagon, and by September 1995 SAP could claim over 1,100 installations of R/3 for companies with $1 billion or more in sales (in addition to 700 R/2 installations) and more than 1,300 installations in smaller companies (with 800 R/2 installations). SAP's share price had in the meantime grown 1,000 percent since its introduction on the German stock exchange in 1988, and by 1996 it ranked as the highest valued company in Germany.

Foreign Markets in the 1990s

Two years into the R/3 boom, SAP's sales to German companies, once its sole market, had fallen to 37 percent; North American sales accounted for one-third of all revenues; and the Asia-Pacific market was expected to reach the same level by the year 2000. With two-thirds of all sales revenues now coming from its foreign subsidiaries, in 1996 SAP relocated most of its marketing operation to its Wayne, Pennsylvania, complex. Between 1992 and 1996, it opened subsidiaries in South Africa, Malaysia, Japan, the Czech Republic, Russia, mainland China, and Mexico among others, and was making R/3 available in 14 foreign languages including Russian, Mandarin Chinese, and Thai.

As SAP's global market share in client-server applications began to climb toward 30 percent, new versions of R/3 were released to enhance customizability, reduce installation time, and extend the number of business processes the product addressed. Version 3.0, released in 1995, offered modules in four basic business areas: financial, sales and distribution, manufacturing and logistics, and human resources. A complete R/3 system involved more than 75 modules, 7,000 tables controlling over 3,000 processes, as many as 17 million lines of code, and an installation time of seven to nine months. While individual modules were priced at about $100,000 each, the total installation tab for the average customer (excluding consultants' fees) amounted to $1 million. Complete installations, however, including software, hardware, and system integration, were known to climb as high as $30 million.

If the corporate world's sudden enthusiasm for the R/3 solution at times resembled a religious conversion, there was never a scarcity of heretical dissent. Some customers began to complain of the extreme complexity of R/3's structure, which forced users to search through several layers of menus before finding the application they wanted to run. Configuring the product to conform to the highly particular needs of corporate clients took months, and sometimes over a year, to complete, and the third-party consultants hired to guide clients through the installation ordeal often had little practical experience or abandoned customers for more lucrative projects midway through. Moreover, the rule of thumb that corporations should prepare to spend one dollar on consultants for every dollar spent on software became an object of nostalgia as consultant-to-software expense ratios for R/3 installations rose to four and even ten to one. As SAP began to enjoy the monolithic status of Microsoft and IBM it was also accused of arrogantly forcing its system on customers who could not use R/3 unless it was modified to conform to their unique business practices. Finally, some corporate information technology managers, taking the dictum "You don't get fired for buying SAP" too close to heart, were convincing their companies to invest in R/3 without examining whether they really needed so robustly featured a system or whether it could create, for them, the efficiencies that would justify its cost.

Competition and Other Challenges

SAP's two major competitors, Oracle Systems (United States) and Baan (the Netherlands), were meanwhile making inroads into SAP's market share. Although Oracle's database product was the program most often used as R/3's database component--making SAP the largest value-added reseller of Oracle products--in 1995 Oracle announced it would overtake SAP as the world's leading provider of industry-specific software within three years. Baan, though dwarfed by SAP in sales and customers, scored major coups in the mid-1990s when both Boeing and German giant Siemens Nixdorf rejected R/3 in favor of Baan's quick-installing business software package. SAP boardmember Henning Kagermann dismissed the setbacks, telling the Deutsche Presse Agentur, "If SAP wins a large order, it's accepted as natural. When we lose a potential customer, immediately it's a big headline." SAP management also dispelled the severity of the threat posed by Oracle, pointing out that it in head-to-head competition SAP still won the contract 80 percent of the time.

Two public relations disasters in the mid-1990s suggested not only the extent of the controversy that had begun to surround R/3 but also SAP's saavy in handling criticism. In March 1995 the German business magazine Wirtschaftswoche published an article accusing SAP of accepting commissions from hardware vendors for computers sold to SAP customers and quoting several users' disparaging remarks about the expense and installation time required by R/3. As share prices nose-dived, SAP lashed back. Its hardware partners unanimously denied any kickback arrangement with SAP, and SAP itself took out a court order on the magazine for inaccuracy and deliberate misquotation and ran four-page ads in major German print outlets in which the article's sources claimed they were misquoted and expressed satisfaction with R/3.

Then, in early 1996, U.S. computer industry analyst Forrester Research published a study in which it argued that SAP's R/3 was based on an obsolete architecture that could not keep pace with the open, nonproprietary architecture increasingly favored by the software industry. SAP, Forrester claimed, knew that R/3 would be obsolete by 1997 and secretly planned to foist a brand new "object-based" system called R/10 on its customers in 1999, masking its deployment through a series of add-ons to R/3. All SAP customers, Forrester advised, should minimize their dependency on R/3 and prepare "exit strategies" to avoid being trapped into an expensive installation of a new SAP product.

SAP reacted by prematurely releasing quarterly financial figures showing that R/3 sales had not in fact peaked and by vehemently denying that it was planning to abandon R/3. It further vowed to spend DM3 billion on R&D over the next five years and announced plans for new versions of R/3 that reflected its willingness to make the product, which was based on its own proprietary programming language, more open to integration with other vendors' products. SAP, moreover, signaled it was embracing the Internet-driven trend toward "object-oriented" software in which applications could be embedded with other vendors' mini-programs (called "objects" or "applets"). The strategy worked, and Forrester Research was soon announcing that SAP was "leading in the new Internet game."

The Future

In the mid-1990s industry observers agreed that SAP's continued dominance of the client-server business software market rested on its ability to stay ahead of the breathtaking pace of change in the global software market. In the mid-1990s, for example, SAP was directly affected by the rise of the "intranet," a microcosmic version of the Internet created by companies as in-house data networks, mirroring the structure and appearance of the World Wide Web but protected from the cybersurfing public by so-called firewalls. By seeming to offer the potential to perform many of the same business applications and data processing features of R/3, such intranets represented a plausible threat to SAP's market leadership. SAP responded by announcing new features that would turn R/3 into an Internet-capable tool. Using a browser connected to the Web, for example, two companies with R/3 installed in their systems could process orders in real time over the Internet, while consumers could order products electronically from a company's online catalog and be confident the order was registered immediately in the company's R/3 system.

SAP's ability to sustain its success also depended on its willingness to continue working, à la Microsoft, with its hundreds of strategic partner firms throughout the computer and services industries. SAP's Platform Partners program, for example, had enabled it to cooperate with computer manufacturers such as Compaq and IBM in tailoring SAP products to new hardware developments. And its partnership program with such Big Six accounting firms as Arthur Andersen and Price Waterhouse had spawned a lucrative new subindustry of R/3 consultants whose institutional independence from SAP enabled it to focus more of its resources on improving its product. Finally, SAP's participation with other software vendors in industry-wide initiatives (such as the Open Application Group) to determine standards for new technologies demonstrated its willingness to cooperate with potential competitors to ensure the continued functionality and influence of its products.

Significantly, in 1994 SAP formed an alliance with America's software giant Microsoft to make SAP software integratable with such Microsoft products as Windows NT, an operating system for networked computers, and SQL Server, a database product. In 1995, Microsoft returned the favor by selecting R/3 for its global finance and accounting data system. In early 1996, Microsoft founder and chairman Bill Gates paid a symbolic visit to SAP AG's German headquarters to talk up the two megacompanies' budding relationship. "We love SAP," he said. "SAP has had more impact on our general product direction than any other software company we have worked with.... [Microsoft and SAP] are the two best companies to be in."

By learning how to quash media and public relations flare-ups and better market its products, by continuing to modify R/3 to capitalize on new technologies like the Internet, and by encouraging third-party vendors to develop specialized add-on applications to extend the number of business areas in which R/3 could be used, SAP appeared to have positioned itself to remain a formidable presence in the global business software market.

Principal Subsidiaries: SAP America Inc., SAP (Schweiz) AG, SAP France S.A., SAP Canada, SAP (UK) Limited, SAP Japan Co. Ltd., SAP Italia S.p.A., SAP Asia Pte. Ltd. (Singapore), SAP Hong Kong, SAP (Beijing) Software System Co., Ltd., SAP Aktiengesellscaft (Moscow), SAP Nederland B.V., SAP Österreich GmbH (Austria), SAPSA (PTY) LTD. (South Africa), SAP Australia PTY LTD, SAP Mexico, S.A. DE C.V., SAP-M GmbH, STEEB-CAS Informationstechnik GmbH.

Further Reading:

Edmondson, Gail, "America's Latest Software Success Story Is German," Business Week, August 8, 1994, p. 46.
Fondiller, David S., "Client Serving," Forbes, July 4, 1994, p. 130.
"The Prudent Approach to R/3," The Forrester Report, April 1996.
Hamm, Steve, "All Abooarrrd!: SAP America and SAP AG Gain Momentum," PC Week, July 17, 1995, p. A1.
Lieber, Ronald, "Here Comes SAP," Fortune, October 2, 1995.
Nee, Eric, "Hasso Plattner and Klaus Besier: An Interview with Eric Nee," Upside, December 1995.
Ricciuti, Mike, and J. William Semich, "SAP's Client/Server Battle Plan," Datamation, March 15, 1993, pp. 26-32.
Saltz-Trautman, Peggy, "Creating an Industry," International Business, February 1996.
SAPInfo: The Magazine of the SAP Group, Walldorf, Germany: SAP AG.
"SAP Responds to Media Slaying," IBM System User International,
Steinmetz, Greg, "German Firm Grows, Silicon-Valley Style," Wall Street Journal, April 11, 1995, p. A16.
Zeitz, William A., "SAP R/3: Dream or Nightmare?" ComputerWorld, January 29, 1996.

Source: International Directory of Company Histories, Vol. 16. St. James Press, 1997.

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