Late in January, just hours after SAP (SAP) reported its fourth-consecutive quarterly drop in sales, executive board member Bill McDermott said that he'd heard the customers' complaints about price increases imposed during a recession and that the world's largest supplier of business software was responding. "I'm not deaf," McDermott said in an interview. He also pointed to signs of a stronger 2010: After two years of belt-tightening, customers were starting to buy software. "CEOs need to grow their businesses again," he said.
McDermott's remarks may now serve as a prescription for SAP itself, which on Feb. 7 named him co-chief executive, along with executive board member Jim Hagemann Snabe. Longtime executive Léo Apotheker, who was named CEO less than nine months ago, resigned his post after a flow of brutal financial results, customer complaints about higher prices, and the elimination of 3,000 workers, the largest in the German company's history.
In order to fix SAP, former North American sales boss McDermott and Snabe, head of product development, need to stock its pipeline with products that companies are more interested in buying, calm restive customers, and counter competition from Oracle (ORCL), which has outmaneuvered SAP through canny acquisitions. High on the co-CEOs' priority list will be shifting SAP's focus from cost-cutting to innovation. SAP must develop versions of its complicated software that can be delivered over the Internet and run on new classes of mobile computing devices.
"There had been an erosion in trust" with customers, says Paul Hamerman, an analyst at Forrester Research (FORR). SAP alienated them by raising prices for technical support while aggressively selling data-analysis software it acquired when it bought Business Objects in 2007, Hamerman says. The sales tactics came as information technology departments were trying to cut back. SAP was "trying to extract as much money as they could from customers," Hamerman says. "If you try to do that too aggressively, you pay a price. SAP paid the price in customer loyalty."
McDermott and Snabe will need to wage a multifront battle. Software license sales fell 28% last year as companies pared spending on computer systems during the recession. Customers balked at price hikes and forced SAP in January to back off an even-more-expensive plan to raise support fees. And SAP is perceived as lagging in inventive products. "They haven't been able to keep pace with the innovation that's gone on in the industry," says Brendan Barnicle, an analyst at Pacific Crest Securities who rates SAP shares "sector perform."
Moreover, the job cuts and organizational restructuring that Apotheker enacted sank morale among SAP's remaining 47,000 workers. An employee survey fielded last year indicated unrest in the ranks, SAP said. During a conference call with analysts on Feb. 8, SAP supervisory board chairman and co-founder Hasso Plattner said management needs to make SAP "a happy company again."
SAP American Depositary Receipts fell 2.67, or 5.8%, to close at 43.29 on Feb. 8. The shares have underperformed the market in the past year, gaining 13.2%, vs. a nearly 22% increase in the Standard & Poor's 500-stock index and a 29% gain in Oracle's stock price.
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