In just three years, SAP America (the abbreviation stands for Systems, Applications, Programs in Data

Processing, and is pronounced S-A-P) had gone from relative obscurity to being the phenomenon of the
corporate computing world. By the mid-1990s, it was well on its way to becoming a billion-dollar
company, and the derivative business powered by its engine was estimated at over $9 billion (see
Exhibit 1). Such growth had placed great strain on the organization's regionally decentralized structure.

In April 1996, Jeremy Coote, the newly appointed president, called a meeting of senior executives to
decide how to reorganize for the future. One of the resulting changes was that consulting activities
became a separate line of business. Coote had subsequently charged Eileen Basho, consulting’s new vice
president, with two major tasks: developing a professional services strategy that would allow the
company to move from global to mid-tier markets, and significantly reducing the time and costs of
implementation.

SAP AG, the parent of SAP America, was the world’s fifth largest software firm and the leading producer
of real-time, integrated applications software for client-server computing. Its R/3 product had quickly
come to dominate the enterprise information systems (EIS) segment of the clientserver market. R/3
software functioned as the central nervous system of a company, allowing an entire global enterprise to
communicate and exchange data instantaneously and seamlessly throughout (see Exhibit 2 for a more
complete description of the product).

SAP AG was founded in Walldorf, Germany in 1972 by four young software engineers whose vision of an
integrated software package had been turned down by their employer, IBM. Seven years later, they
launched their first major EIS product, R/2, which was designed for mainframe computers. In 1989, they
took their company public. Five years later, SAP's market capitalization was $15 billion, and over 75% of
the common stock was still owned by the founding families.

Three of the founders had remained active in the daily running of the company, and continued to sit on
the Executive Board. They were described as highly accessible, financially conservative, and as having
kept the company “outrageously flat." They ran SAP AG on the basis of informal working relationships
honed over long periods of time, consistently invested 20%-25% of gross revenues in R&D, capitalized
nothing, carried no debt, and did not book revenues until products were delivered. Almost 25% of the
company's 7,000 employees were in R&D, and half were in professional services, which at SAP consisted
of consulting and training.

The German (or AG) Executive Board was tightly linked to the product development organization and
was involved in a variety of strategic decisions concerning the product, such as the functionality to be
incorporated in new releases. Besides the founders, board members included the two top executives
from the R&D organization, and Paul Wahl, who joined the company in 1991 as vice-president for
worldwide marketing but had spent most of his career in technology organizations.

Strategic Focus

In late 1991, prior to the R/3 launch, the AG board had spent at least two months discussing whether
SAP should remain a product company, focused on selling software packages, or whether it should
broaden to focus on solutions. Wahl, who had just joined the company, described the alternatives and
some of the board’s thinking:
A product has a defined functionality, and you hope to sell a lot of copies. So as a product company, you
earn your revenues from license fees. A solutions company, on the other hand, gets a lot more of its
revenues from services, and provides a more complete package that includes implementation as well as
a wide range of other services.

But we knew that if R/3 were very successful and we were a solutions company, we would have to hire
thousands of consultants. The board said, no, we are a product company. What we want is market
penetration of our product. We want R/3 to become the business infrastructure, the de facto industry
standard. So what we need to do is to sell as much software as we can, as fast as we can.

To do that, we needed strong alliances with partners. There was some concern that this choice could
put us in a firefighting mode, where we had to fix our partners’ mistakes. Saying that we were a product
company also hurt the feelings of our own consulting people. But the choice focused us, and put even
more pressure on R&D to develop a superior product.

The board then had to decide how much of the services market generated by R/3 it would pursue itself,
and how much of the business it would leave to partners. SAP, it decided, would seek only 20%-30% of
the R/3 implementation business. In the United States, it would initially pursue even less. R/3 was
introduced in Europe on July 1, 1992, and three months later in America, where sales took off quickly
and then skyrocketed in 1994.

Coming to America

SAP AG began to expand internationally in the late 1980s, and chose foreign subsidiaries as its vehicle. It
established SAP America in 1988 as part of the Americas group, which also included Canada, Mexico,
Latin America, and Australia. When the American subsidiary experienced management problems in mid-
1992, top members of the German board parachuted in. After the dust settled, Klaus Besier became
president, Wahl joined the American board and Hasso Plattner, SAP’s co-founder and de facto chief
technologist, became chairman of the Americas organization, a position he continued to hold four years
later. Besier soon added the title of chief operating officer; he became CEO early in 1994. Besier was
described by a senior executive as a "dynamic leader, a marketeer par excellence, very directed and
driven. He speaks well and has a strong physical presence. With Klaus, there is no pretense. What
matters is getting the job done. His penchant is to build; the company has to be headed in a direction."

Charting a Course

To address the needs of the American market, Besier moved away from the German model in several
respects, including the sales organization, target customer base, organizational structure.

Commissioned Sales Force SAP America had learned from R/2 that its product needed to be sold more
heavily in America than in Europe, and that a strong sales force was required to compete effectively.
Alex Ott, vice-president of global partnering, recalled: “We had no customer base, no market share, a
handful of people, and a new product which ran on a new technology. We concluded that we must be
quick on our feet, and have more feet on the street than anyone else.” SAP America’s managers decided
that they needed a commission plan for R/3. Besier moved aggressively, putting the entire sales force
(rather than just a pilot group, as had been agreed by the board) on commission. He also recruited more
and more of the sales force from the ranks of professional salespeople, rather than engineers.
Target Customers Besier’s aggressive, entrepreneurial sales force believed that it could close deals with
very large companies. Their first multimillion dollar sale, to Chevron, proved to be a watershed for SAP.
The deal closed in December 1992; it punctured the belief that multinationals were married to their
mainframes. R/3 more than met Chevron’s tests for scaleability, volume, and speed; in fact, it
outperformed SAP’s major competitor by 300%-800%. The product's architecture was validated,
opening a floodgate to other large accounts. SAP America then set its sights on global companies with
revenues of at least $2.5 billion. Eric Rubino, general counsel, recalled:

The product was validated as being so superior to competitors' that we thought it really could become
the de facto standard—if we could get it out there fast enough. We believed that we had a window of
opportunity when no one could compete with us, but a window of only about two years.

Regional Organization To move product as quickly as possible, SAP America established in January 1993
autonomous regional offices in San Francisco, Chicago, Atlanta, and Philadelphia. SAP headquarters
remained in Philadelphia, but the corporate office, which continued to handle events, public relations,
and advertising, was separated organizationally from the Northeast Region. Each region became a
separate P&L with its own presales, sales, consulting, and training services, all reporting to a regional
vice president (RVP). Wahl explained:

Initially, we thought about common resources for the regions. Then we decided that for each region to
win strategic deals, we needed to give them all of the autonomy and tools they needed to close the sale,
as well as the services required to support the client.

The regions had significant flexibility in dealmaking. If they were negotiating licenses, for example, and
the customer thought the fee was too high, they could offer free training, or even free consulting to
close the sale.

In 1995, each of the four regions was further divided into three districts, led by a district director. Like
regional vice-presidents, district directors were general managers who ran relatively complete
businesses. Key aspects of the role was described by Robert (Bob) Salvucci, district manager for
Philadelphia, and later, Coote's successor as RVP for the Northeast: “It’s a fun job if don’t like a lot of
structure and you like to handle a lot of things happening at once. You need high energy, a thick skin,
and the ability to make rapid-fire decisions on the fly.” Districts did not have a separate P&L, however;
for accounting and compensation purposes, they were considered part of the region. The compensation
system was highly leveraged; that is, for regional, district, and other managers, it had a low base salary
relative to market, but there was no cap on the upside potential. The variable portion of the
compensation system was tied primarily to making individual, district, or regional software sales
numbers. Because SAP stock was traded only in Europe, there were no stock options.

The first Americas strategy meeting was held in Bermuda in the summer of 1993, and became
something of a landmark event. Market acceptance of R/3 was now assured, and enthusiasm for the
product was so great that explosive growth was anticipated. The group set a one-billion dollar revenue
target for SAP America, to be reached by 1997. To achieve such massive growth, the executives
concluded that they had to do three things: create an industry strategy to penetrate markets and build
the installed base, rethink and vastly expand their partnership strategy, and dramatically ramp up their
service and support capabilities.

An Industry Strategy: ICOEs The executives developed a vertical industry strategy, to be delivered
through industry centers of expertise, or ICOEs. ICOEs were to serve as a bridge between R/3 customers
and the product development organization in Walldorf. Each would work closely with users in a
particular industry, defining and prioritizing their requirements, and then communicating them to
developers to influence their design decisions and deployment of resources. This approach fit well with
SAP's product philosophy. The base R/3 product was not expected to provide a 100% solution; it would
meet only 80% of customers' needs, and ICOEs would provide the final 20% through customized
software solutions and industry specific consulting services. At their meeting in Bermuda, the executives
chose to establish ICOEs in six manufacturing sectors, including oil and gas, process industries, and high
technology. By 1995, these markets accounted for 80% of SAP America’s licensing revenues.
Organizationally, the ICOEs were small, highly autonomous units, consisting of two to six presales and
consulting experts, that nominally reported to a regional vice president. But they were in fact highly
independent, and were led by directors who were extremely entrepreneurial and had been recruited
because of their industryspecific knowledge. Each of the six ICOE directors interpreted his role uniquely,
giving different weight to one of three areas of activity: presales support, charting market direction, and
liaison with product development. The High Tech ICOE, for example, concentrated on supporting
customers and the SAP field sales force during the presales process, while the Process Industry ICOE
built a formal, broadbased process to help customers define their requirements more clearly. These
requirements were then prioritized for different user groups. User groups were highly organized within
the SAP community; they had considerable power, and served as a critical source of information and
feedback. Most ICOE directors spent considerable time in Germany building strong ties with influential
developers and SAP AG board members. As one of them put it: “SAP works like the Senate. Lobbying and
influence are essential for getting your industry's needs met in the next release of the product.” Prior to
the 1996 reorganization, the six ICOE directors had never met as a group; typically, they operated
independently of one another and had little contact. Partnering To realize the company's ambitious
growth goals, the range of partners and their level of investment in SAP would have to shift to
unprecedented levels. Ott was given the task of leveraging external resources in the sales and
implementation of SAP, while also managing the business side of partner relationships. He worked to
develop partnering relationships in four categories: alliance, platform, technology, and complementary
partners (see Exhibit 3). Allen Brault, director of the U. S. Partner Program, described the resulting
network as an "ecosystem": 5 Everyone is intertwined, with each firm tied into everyone else’s success.
If any component fails, it ripples throughout the entire system. Ultimately, the failure can be traced back
to SAP, because it means we have not worked closely enough with that partner. Gaining Cooperation
SAP America chose to leverage alliance partner resources and expertise by leaving 80%-90% of the
consulting implementation business on the table. It would focus on selling the product and assisting with
the initial installation; all other aspects of implementation or application were the province of partners.
To pursue this business, partners had to make substantial investments in their own SAP practices
(Exhibit 4). After three years, the results were obvious; as Ott put it: “R/3 has been a gold mine for
leading consulting firms.” Brault explained why SAP had been so successful in getting these firms to
invest in their SAP practices: Our approach is a complementary one, in that we have opened up a vast
new business for our partners. We say, “We have a great product, and if you are willing to make the
investment, we are not going to compete with you for the same consulting business.” Traditionally,
these firms have been reluctant to fund a practice around an outside vendor’s product, because the
vendors have often moved into consulting, making it difficult for them to compete effectively. These
relationships were further strengthened by changing business needs. In the early 1990s, the concepts
and language of reengineering and business process redesign (BPR) became increasingly popular. Ott
noted: "Consultants were talking about reengineering and BPR, but they did not yet have a tool to make
their concepts fly." R/3 was just such a tool, for it could immediately embed redesigned processes in an
integrated information system. R/3 could even lead the redesign process, as Coote observed: R/3 is
packaged software, but it is so broad that it forces different parts of an organization to work together.
Just to install the software and set the tables, every part of the company has to agree on some basic
points: What is a customer? When do we do credit checks? What are the capacity limits of each of our
factories? In addition, R/3 included at least 800 best practices, which made it possible to shorten the
BPR process and lower the risks associated with installing custom software and integration. Instead of
coming up with new process designs only to find that they could not be programmed into computer
systems, designers could use R/3's process templates, which were preconfigured, and then modify them
using automated modeling tools. Ott explained: The market will no longer pay for paper designs that
can’t be programmed. Our system is both very flexible and standardized: you can configure it according
to customer needs, without modifying the underlying software or interfaces. For this reason, the big
consulting firms have adopted R/3 into their BPR methodologies, and the process reengineers now
design their “to be” scenarios with R/3 in mind. Competency Centers The openness of R/3 and its
reliance on client-server architecture meant that customers had to make platform and technology
decisions that they had not faced with R/2. SAP had to help them assess their options, while remaining
neutral about their choices. This required an intimate familiarity with the ever-changing capabilities and
constraints of platform and technology partners, and an understanding of their ability to support R/3,
which was itself constantly evolving. To address these needs, SAP America established Competency
Centers with each of its platform and technology partners. The Centers provided a range of pre-sales
information to customers, and were a focal point for the flow of knowledge between SAP and its
partners. They were usually located at SAP headquarters in Philadelphia, and occasionally on partners'
premises. In each Center, the partner provided a dedicated team of technical and applications
consultants who were highly knowledgeable about their own product as well as R/3. The team worked
with customers on such matters as the sizing and configuration of the computer system they would
need, and the required connectivity to other corporate systems. The Competency Centers had the
systems in place to perform tests and benchmarking for R/3; these tests served as the basis for SAP’s
certification of hardware and technology partners. Certification was conducted by a group of 50
technologists based in Walldorf, under the direction of Wahl. Managing the Relationship
Complementarity between R/3 and partners' business focus was but one part of SAP's approach to
alliance relationships. Ott described its key characteristics: there could be no financial ties between SAP
America and its partners; the relationship had to be mutually beneficial; and it could not be exclusive.
The company had also established “rules of engagement" for partnering activities. Three of the most
important were equal treatment at the same level, making the highest level partnering status (called
“logo partner”) an earned one, and the establishment of clear criteria for promoting alliance partners to
that status. Every year, SAP America assembled its global alliance partners and shared with them its
business plan and anticipated consulting needs. Forecasts were extremely accurate because SAP
dominated the market, knew its pipeline, and was relatively certain of the deals that would close. It was
then up to each of the partners to decide how much more they wanted to invest in training and how
much additional resources, including the number of additional R/3 consultants, they would hire that
year. Ott explained his approach: The cornerstone of the relationship is open, trustworthy
conversations. I put our numbers on the table, and I never overstate our expectations. We have always
hit our numbers; in fact, we've always exceeded them. In addition, I will not sign up new alliance
partners to meet rising demand if the old ones can do it; I always give them rights of first refusal. Of
course, our logo partners cannot plan together because that would be collusion. But by the size and
nature of the large consulting firms, you have a pretty good idea of what they are likely to be willing to
invest. I don’t want to legally nail down these resources, however, because the relationship should be
based on trust. Ott’s organization included a single global partner manager for each of the global
alliance partners, as well as partner managers who were responsible for two or more smaller alliance
relationships. The rules of engagement minimized conflict of interest by having each partner manager
responsible for a single partner in a category. To ensure the best solution for customers, Ott insisted
that his managers not be measured on the SAP-related revenue generated by partners. They were,
however, responsible for managing all bilateral relationship issues of strategy, communication,
education, and advocacy. Under their direction, a master legal agreement was signed with each partner.
It outlined SAP’s obligation to train its partners, give them a copy of R/3 software, and assign partner
managers. Partners were obligated to make “reasonable commercial efforts” to acquire and maintain a
comprehensive knowledge of SAP and its products; live up to certain standards, such as keeping
customer satisfaction above a threshold level; and dedicate a partner manager of their own to SAP.
Alliance partners had to have a software implementation methodology that was appropriate for R/3 .
They were also required to attach a business plan to the legal agreement, outlining their expected
commitments of resources for SAP consulting, broken down by markets and geography. Partnership
agreements could be terminated on a number of accounts; the most important was customer
dissatisfaction. Based on an annual customer survey undertaken by an independent source, partners
were rated on a 1-10 scale. Those whose weighted average scores exceeded a certain level achieved an
award of excellence for the year; those that fell consistently below were warned of the need to
improve. SAP ratcheted up the standard annually, and was willing to use it to remove poor performers.
In past years, two partners had been removed for this reason. Professional Services Professional services
were those activities provided to customers for a fee; support activities, by contrast, had no fee
attached. Consulting was the core of professional services, while training spanned both categories. It
provided a source of revenue, but had historically been run on a breakeven basis. Consulting While a
few SAP consultants worked directly for a particular ICOE, most reported to the region that hired them.
Their solid reporting line was either to the district director or to the services director in the region.
Because of the company's explosive growth, the hiring rate for consultants had been exceedingly steep
(see Exhibit 5). Considerable learning took place on the job, since only 10 weeks of training was
provided. Although exact numbers were hard to come by, SAP believed that for every one of its own
consultants, there were 8-10 in the outside SAP community. Basho, who had been district director in the
New York metropolitan area before Besier named her vice president of consulting (with dotted line
control), in January 1996, compared SAP's and partners' consultants: There is nothing that we do that
our partners don’t. But you could best describe our consultants as deep and theirs as broad. Our
consultants bring in-depth product knowledge, and are always a little further ahead than partners on
the product's capabilities and requirements. SAP’s consultants did two main kinds of work: basis
consulting and applications consulting. Basis consultants put R/3 and its support system in place and
ensured that the software was functioning correctly in a network. They knew what hardware
configurations were needed to support the volume of transactions, how to convert the data from legacy
systems to R/3's clientserver approach, and how to load the software. Basis consultants were extremely
valuable, and their skills had to be well leveraged. For every basis consultant, there were at least three
applications consultants. Their primary responsibility was to work with the customer to identify their
requirements, and then customize the software configuration to match those requirements. Because
growth was so rapid, SAP America needed experienced managers immediately; it therefore hired its
consulting managers from outside. As William (Bill) Schwartz observed when he was hired as director of
human resources in February 1996: “The expectation was that you were being brought in because you
already knew the right thing to do, and you were expected just to do it.” There was no career path for
managers or consultants, and each region evolved its own definitions of managerial roles. Because of
the long learning curve, it took nearly two years for SAP to begin getting a payback from its consultants.
Unfortunately, with demand so high for anyone who knew anything about R/3, consultants began
leaving in significant numbers by 1995. Some left to join a customer or a partner organization; more
frequently, they left to set up their own R/3 consulting practices. Training During 1992-93, SAP
developed scores of modules on product functionality. The Northeast region sequenced a number of
these modules into a basic 10-week package that was used to train SAP’s own consultants; the approach
was quickly adopted by other regions. A five-week version of the course was then developed for
partners, and customized versions were presented to customers' project implementation teams. SAP
declined to pursue the end-user training business for profit, even though by 1996 it was estimated to be
a $600 million market To create a large-scale operation that could provide the quantity of external
resources of the desired quality level, SAP America founded a Partner Academy in June 1994. Multiple
locations were soon established in various parts of the country. purview, and he ran it on a breakeven
basis. Ott explained: “If our partners are going to invest so heavily in staffing up for R/3, I do not want to
charge them on top of that.” The cost of attending the Academy was set at $1000 per seat, but the fee
was not always collected. By mid-1996, 5,000 outside consultants had gone through at least one cycle of
training at one of the Academy locations. Those who passed were certified as skilled for that release of
the software. Support and Infrastructure One manager likened the 1993-95 period to “riding a rocket.”
During this period, very little attention was given to building infrastructure, except in the area of
licensing and contracts. Licensing and Contracts When Eric Rubino was hired as general counsel in 1991,
he found no systems or procedures in place to support the sales process. He recalled: “I would get a
license in and wouldn’t even know where it came from.” To create order, Rubino generated
standardized license agreements and a clear cut proposal process; he also copyrighted the product. He
observed: “Contract management is a tangible thing. For example, you must have a consistent message
across regions. You must have consistent discounting policies, and be consistent in your concessions to
customers.” Rubino developed tools for training new contract administrators, noting that, “If you are
going to decentralize, you must put tools in place to empower contract administrators—who are not
lawyers—to make business and legal decisions for the corporation, and train them to understand
corporate positions.” Tools included standard pricing manuals that spelled out discounts and
concessions, and a contract manual that spelled out, paragraph by paragraph, what the license
agreement meant in lay terms. The manual described very clearly what terms could be modified, the
exact terms that could be used or added, and what language and wording could not be deleted. Before
new administrators were sent out to the regions, they worked side by side with senior administrators for
a month. Rubino also held a great many joint staff meetings on a regional basis, ensuring that regional
contract administrators were aligned and consistent in their policies. Administration Between 1993 and
1995, there was little formal planning or budgeting. One result was great latitude in the interpretations
of the few administrative systems that did exist. Meetings were rare, and offices were frequently empty
because staff were in the field meeting with customers. In response, the regions got rid of the
computers sitting on unused desks and gave every employee a laptop. Salvucci described the field
environment: You were closing every deal you could, hiring people, opening offices, and building
support. There were never enough resources to go around, so you were constantly finding and juggling
resources, and being careful about the promises you made. Until Bill Schwartz came on board, all HR
was outsourced, so there was no infrastructure you could turn to for new employees—or for new
customers or resolving a problem. You were personally responsible for things like finding office space for
new hires, getting them laptops, plugging into systems, and ensuring new people were trained. Human
Resources Prior to Schwartz’ arrival, SAP America’s major HR concern was recruitment. The company
knew what it had to offer people to bring them in, but had little idea how its compensation system
compared to others, let alone the percentile in which its base salaries should be. Salary grades and job
titles existed on paper, but adherence to guidelines varied across regions. Schwartz found that even
many senior managers did not take a traditional business perspective, nor give much thought to how
their activities might impact people outside their regions. He observed: A director will want to promote
some consultants, and will justify it in terms of employee retention. They don’t think about a cost
justification, or revenues versus costs. I will push back: “You are adding costs, but are you making
money? Is there a strategy about whom you want to retain and whom you don’t? Have you talked to
other business directors about this? Have you considered the impact of your requests on my office? For
instance, if I approve your requests, what precedent will it set for other regions?" Building Infrastructure
By the spring of 1996, SAP America began paying far more attention to issues of organization, systems,
and infrastructure. Schwartz had a one-word explanation for the change: “Kevin.” Kevin McKay had
joined the company in mid-1995 as CFO for the Americas, with a charter to build the internal side of the
company and the goal of playing a major role in shaping strategic direction. Software, McKay
emphasized, was a reference business, in which the need to build infrastructure was linked to the phase
of the business. "Early on," he observed, “we needed some good toeholds, some key customer
references. Our first big push was to establish our name and to position ourselves. That’s the hull of the
ship parting the waves.” But he pointed out: Once you take ownership of a product, you must have a
huge infrastructure to support it effectively. Behind the hull there has to be fuel and propulsion that is
headed in the right direction. So we needed a hotline that follows the sun on a 7/24 [7 days a week, 24
hours a day] basis, consulting resources to size and implement the product, a whole group of partners to
help position R/3 within the customer organization, and relationships with hardware partners to
establish performance criteria on their platforms. We had to develop a curriculum to train people, and
build our own consulting organization to make sure the implementation was done right. That was stage
one. Now we are entering a different stage of maturity, where we have a huge responsibility to our
installed base. Worldwide, we have 5,000 customers who are investing millions yearly in our product for
their mission-critical activities. At this point we have to build the additional infrastructure to support our
customer base. To that end, McKay’s first-year agenda in human resources included several initiatives:
the creation of accurate, properly titled job descriptions, a market survey of salaries and benefits to
serve as the basis for a total compensation strategy, and the development of a communications plan
covering benefits and pay. Schwartz described the communications plan as "our effort to tell employees
what they risk losing if they leave. We have very good benefits and profit sharing, but we just gave them
to people. They weren’t communicated, so they just became taken-for-granted entitlements. We need
to tell people much more effectively what they’ve got here.” Schwartz had also begun working on a
long-term incentive plan, which included three-year vesting and a performanceunit plan pegged to SAP
America’s performance as a whole, and was actively recruiting someone to help direct career pathing,
succession planning, and management development. Sales and Implementation Process Presales and
Sales The decision to purchase R/3 was often part of a strategic choice to run one's entire company
differently. As a result, the sales cycle was a long one, especially for global clients. It often took a year or
more to build relationships to the point where an opportunity arose that could be used to gain access
for the 12-18 month presales and sales process. Account executives had to be able to identify and
position these opportunities, while building consensus across divisions, countries, and multiple levels of
the organization. In many cases, customers had never before made an enterprisewide decision. Paul
Melchiore, a global account executive, described the process: You hang out at the company for long
stretches of time. You live there, building relationships, understanding the organization’s complexity, its
politics, its readiness for change, and putting a strategy together for your unique selling .. .proposition.
Sometimes you do a small project; if it goes well, you develop allies, gain some exposure, and can then
begin selling the vision of what SAP can do across the board. You may meet 200-300 people during the
selling process, all of whom are potential influencers. It may take a year or more to get the credibility to
sell your vision at the top executive level. And when you get to that level, you may only get the
opportunity to present for an hour, once. Because the potential savings and strategic benefit from
implementing R/3 were so large, a formal justification process was seldom required. Instead, global
companies requested demonstrations, tests, and benchmarking to prove that SAP would work in their
environment. This often required the involvement of SAP's partners. Salvucci described the role of the
district director in the process: You need to be present at the beginning of the sales cycle to position the
product and develop executive contacts that you will need later. You also have to find resources for a
presales team, a sales team, and a consulting team to manage the sales cycle for the software. Because
there is a sales cycle for the consulting partner, hardware, and database, you must spend a lot of time
with them as well, putting together strategies. Implementation Although no two installations were alike,
outside partners like Andersen and Price Waterhouse usually took the lead role in R/3 project
management and implementation. Because they integrated SAP product knowledge with their own
implementation methodologies, each handled the process a little differently. The partner's consultants
and customer's team members were dedicated full-time to the project, working together day in and day
out. SAP’s basis and applications consultants, by contrast, usually served on multiple projects at the
same time. They therefore attended meetings intermittently, assisting in the implementation process
and providing expert advice and coaching about the product to both customers and partners. Each
region's consultants used their own implementation methodology. Some customers did not want to rely
on outside partners, or required special skills; these installations SAP handled itself. Organizational
Challenges In a Shifting Market Despite its success, SAP America was facing a number of challenges and
problems. By 1995, there were internal and external pressures, resulting from the company's explosive
growth, stronger competition, and new strategic demands. Internal Issues The regions had different
approaches to billing, overtime, and training, and were not operating as a single company. Utilization of
consultants, for example, could be 80-90% in one region, and half of that in another. There were similar
discrepancies in utilization rates in training centers. Nor was learning was being transferred throughout
the organization. Coote summarized the consequences: We have not been leveraging our size, and have
not been able to match our talent with the problem at hand. People are working separately on the same
problem, so instead of fixing something once, we fix it four times. Moreover, market perception was
that SAP implementation was costly and lengthy. This perception was fueled by a number of damaging
articles in the press that cited six-month projects taking four times longer than predicted, with an
attendant rise in costs. The reality was more complex. As a backbone for all business processes, R/3
made possible projects of a scale that had not previously existed. When implementation was linked to
the massive redesign of business processes, project scope escalated dramatically. As a result, it was
difficult to disentangle the costs and time for implementing R/3 from the costs of effecting the major
cultural and organizational changes associated with reengineering. Strategic Shifts and Opportunities By
1995, competitors' products had developed sufficient functionality to be considered viable alternatives
to R/3 . SAP’s largest competitor, Oracle, had an excellent database to which it had added an EIS
application. As one manager observed: “What they want to sell is their database, so they use their
application as a loss leader to gain control of the account. They are getting very aggressive and will do
whatever it takes.” Other firms had taken a modular approach, developing, for example, a strong HR
module to gain entry, which could then be leveraged to sell other products over time. Baan had
emulated SAP in some respects, but in order to land the Boeing account, was reputed to have revised its
base product considerably—a path SAP had refused to take to win any order. By 1996, SAP America had
approximately 500 customers and 700 installations in North America; about half were Fortune 500
companies. As McKay pointed out, one challenge was to harvest these accounts more completely:
“We’ve sold modules and software to the top tier, but we haven’t fully mined these accounts. We have
the hunters out bagging the big global accounts, but now we have to bring in the farmer who works
them over time.” Coote identified another challenge: "We must dramatically increase the customer base
so that we become the de facto standard.” This meant continuing to close global deals, increasing sales
in services markets, and moving into the midtier market where customers thought about R/3 in a very
different ways. Bryan Plug, president of SAP Canada, elaborated: Because of the complexity of their
businesses, and their cultural belief that they are the best, big companies feel that they must invent
their own business practices. So they want an implementation method that explores all the nuances and
niches of R/3, and allows them to extract all the flexibility and functionality they can. They assemble the
best software, the best process experts, and the best implementers, and are willing to make the
necessary investments to stay on the leading edge. Mid-tier companies, on the other hand, are more
pragmatic. They don’t presume they can do it best. They are willing to find out what others have done,
and see how closely it fits their situation. They are willing to adapt, and are looking for a guided tour
through the software. All they want is a solution that will work for them. The increased importance of
the middle market had implications for the sales and implementation process as well. Salvucci
explained: You have to be able to pick up a phone, get to the top people, and get in the door. You are
trying to close the order from the moment you arrive. You have to minimize the sales cycle, get a
decision, and, if it isn’t happening, move on. Reorganization On February 1, 1996, Besier resigned from
SAP America to head an Internet startup. In the wake of his departure, a three-person Office of the
President was formed. Wahl was named CEO, but .. . still spent about half of his time in Germany. Coote,
who had joined SAP in 1988, become CFO of SAP America in 1990, and was at the time RVP of the
largest region, the Northeast, was named president, and took responsibility for the line organization.
McKay continued as CFO and was named, in addition, chief operating officer for the Americas, adding
training, internal systems, hotline, and other support to his responsibilities. Both McKay and Coote
reported to Wahl. A New Structure On Saturday, April 13, 1996, Coote called a meeting of senior
managers to discuss the best way to realign the company for the next wave of growth. His two primary
objectives were for SAP America to act more as one company, and to better leverage its size and skills.
Coote’s original proposal for the new organization was vertical industry segments, an idea that had been
strongly favored by Besier. Some expectancy had built around this outcome, with the ICOE directors
anticipating that they would become vice presidents. In presenting the proposal, Coote separated out
the existing manufacturing ICOEs and also, for the first time, financial services, health care, and
government. He explained: “I wanted to give everyone the same view of where we make money today
and in the future. Today 75%-80% of our revenues come from manufacturing companies. But our future
growth is in services.” Lines of Business After a modest amount of discussion, the group concluded that
although SAP America should continue to work toward a vertical organization, it was not yet ready to
make the leap. It simply did not have the people to fill many of the vertical roles, and managers were
not clear about the criteria to be used to form segments. For example, how many and which industry
slices should they have? On what basis would such segments be formed? To which markets did they
really want to dedicate resources? There was concern as well that SAP might again splinter into a dozen
or so pieces, driving up overhead. The group therefore agreed rather quickly that for the next 18-20
months, they would organize around three major lines of business: sales, consulting, and training. In the
weeks following the meeting, a more detailed organizational plan was developed, coupled with a new
compensation plan. For directors and above, a portion of variable pay was now based on the
performance of their line of business, and a portion was based on SAP America's performance overall.
Sales Sales was further sub-divided into its own three lines of business by size of account; a fourth line,
emerging markets, which involved the three new services markets, was added as well (see Exhibit 6).
Peter Dunning, formerly RVP for the Southern region and newly named executive vicepresident,
described the increased focus the reorganization gave him and his account executives in Global Sales: As
RVP, I had 250 people; 80% of them were in consulting and support. The job was very maintenance
intensive. Now I can focus on getting licensing revenues from large accounts. We’ve gotten rid of the
distractions—like geographic barriers and different sized accounts—for people who are good at global
deals. In anticipation of the next reorganization, Dunning set as one of his priorities the building of a
virtual organization within Global Sales organized around industry expertise. More and more of his sales
people would become specialists in particular industries. ICOEs The thorniest issue in the reorganization
was what to do with the ICOEs. Coote outlined the situation: The ICOE directors were doing an excellent
job, but they had each gone in separate directions. I wanted them to be more like program directors in a
defense company or brand managers in a consumer products company who work across organizational
boundaries. In reality, they were creating separate organizations within the company, and were
beholden to no one. As a result, they were getting detached from the line. What we needed was to
internalize their message into the mainstream of the organization. After a great deal of discussion, the
six manufacturing ICOEs became part of Jane Biddle’s industry marketing group, reporting directly to
Coote. Coote and Wahl had hired Biddle a few weeks earlier, anticipating that she would play a
leadership role with the ICOEs. Biddle had 25 years experience in software development, systems
implementation, and marketing, knew all the ICOE directors, and had been to Waldorf many times
because SAP had for years been the largest client of her strategic marketing firm. Biddle had two broad
objectives: bringing consistency and standardization to ICOE practices, including a single face to
customers and the field; and developing an integrated approach to marketing within the company by
spreading ICOE knowledge throughout SAP. One of her vehicles was a formalized business planning
process, which required the ICOE directors to develop plans and present slides in a common format. Her
next step in planning was to help them turn their strategic plans into operational plans and budgets. To
bring the ICOE's industry knowledge into the line organization, Biddle's first step was to develop
“solutions guides.” Each was a primer on an industry, and crafted the information to what a salesperson
would want when talking with a potential customer. These guides were to be the basis for focused sales
training, the first of its kind at SAP. The Challenges in Professional Services The reorganization gave
Basho the 850-member consulting organization on a solid-line basis, rather than the dotted-line
reporting she had had since January. She set as her top objective “to change both the myth and reality
that SAP implementation is costly and complex.” Coote had charged her as well with the goal of
developing an implementation strategy for moving downmarket to mid-tier companies.
Professionalization Even before the reorganization, Basho had taken steps to begin professionalizing the
consulting organization. One of her first initiatives was to personally review each region. She first
assembled a seven-page outline of the issues she intended to cover during her visit, and sent it out
several weeks in advance. She recalled: “The regions were shocked. First, because they got to see
something in writing, and second, because I sent them the request ahead of time.” Another first was the
attention Basho devoted to productivity and consistency across regions. She requested information on
consultants' billable hours and then established targets for the end of 1996. In addition, she assigned a
cross-regional group to develop a single implementation methodology for mid-tier companies, and
created another group to define an integrated set of consulting roles. Their work provided the input for
Basho's recasting of the professional services organization and the development of multiple career
paths. Career Paths and Roles Basho subdivided her consulting force into four groups: technical services,
field consultants, principal consultants, and global support managers. Her technical services people were
grouped by functional expertise; they included SAP’s 200 basis consultants and experts who worked
with emerging technologies. The field consulting group mirrored the national accounts salesforce, and
had a four-step career path: applications consultant, lead consultant, consultant manager, and services
director. Basho aligned each of her field directors with an ICOE director, and made them accountable for
bringing ICOE knowledge into the professional services organization. A new role, called principal
consultant, was created for experienced consultants who aspired to excellence in consulting rather than
positions in management. The role had considerable cachet; the .. . first cadre of principal consultants
immediately renamed themselves “platinum consultants” and created their own logo. Basho explained
the importance of this option: “These were the people who were leaving SAP to establish independent
practices. Within a couple of weeks of announcing the concept, a number of them had already
contacted us and told us they want to come back." Basho also split out the role of global support
manager (GSM) and positioned GSMs at the front end of the sales process in a role equivalent to partner
in a Big Six firm. There were 30 to 40 GSMs in total. Each was dedicated to a single account, mirroring
the approach in sales. GSMs developed the overall implementation program for a new R/3 installation
and coordinated SAP resources throughout the process. Expectations and Behavior Basho and Schwartz
worked together to clarify roles, procedures, and lines of authority in the new organization. In May,
Basho convened a two-day meeting with her directors and managers, where she and Schwartz shared
the stage. He recalled: We were all in the room together, and Eileen said: "When you want to promote
someone, I want to see it first, and I want a justification. Bill is the last stop in the process, so don’t go
around me. He will support me and simply send it back." And I stood there nodding my head, "Yes."
Schwartz then explained how the consulting organization would work with his field HR people; this time,
Basho nodded in affirmation. Following the meeting, several people observed that they had learned
more about what was expected of them in the preceding two days than they had in the previous two
years. Customer Alternatives and Involvement The key objectives of moving into the middle market
(called "national accounts" at SAP America) and controlling implementation time and costs were both
addressed by a new approach. Basho explained: In national accounts, we are going to go in and help
customers size the project during the pre-sales period. Using an estimating tool, we can draw a baseline
for time, costs, and resources. Then we are going to explore alternative project approaches, and
increase the choices a customer has on implementation. If they choose to work with one of our global
alliance partners, we will position the partner. If they choose Accelerated SAP [SAP’s new rapid
implementation methodology for national accounts], we can recommend a group of smaller partners
who are certified implementers. Initially, I will have to subcontract these small partners in under me.
Even though they have good people, they don’t yet have a reputation for successful implementation.
Coote felt so strongly about getting a rapid implementation methodology in place that he had
accelerated its timetable. Reorganizing by lines of business had made it easier, he thought, to adopt a
strategy for the middle market that differed from past approaches. Salvucci, who now had national
account sales responsibility, concurred: One of our strategies for selling in the middle market will be to
engage our consulting organization early in the sales cycle, and put a stake in the ground for customers:
if you want to use our methodology to install SAP, this is what you can expect in time and money. If our
partners won’t step up and meet these targets, we will do it ourselves. That does not mean we are going
to go out and do all the consulting. We are not. What we are doing is putting a stake in the ground to
increase our control over the process. In the global market, Basho also intended to bring down
implementation time and costs. She explained: I am also increasing our involvement with global
accounts. From the beginning, global support managers are now strategically placed to deal directly with
the customer’s executive sponsor, and to educate the customer about how to use our partners more
effectively. The GSM sets the implementation strategy, gets the right people onto the projects, and
keeps the program from going off track. Basho was keenly aware that this new approach would impact
partner relationships, although she did not envision major changes in strategy. She observed: “Our
partner strategy was and is sound. The problem is that we gave up too much control." Coote agreed,
noting that SAP America's approach to global accounts was one of continuing evolution. He observed:
We have to be more involved than in the past, and that means we have to refine the partnering model.
In addition, our product has continued to evolve, and we have more tools available for automating some
of the configuration work. Partners have to understand their changing role in the mix, and that the
relationship will continue to change. ..adiExhibit 1 Annual Revenues (in millions)* 91 92 93 94 95 As of
9/30/96 (9 months) SAP-Global (DM) 707 831 1102 1831 2696 2372 Americas** (DM) 81 98 232 636
1010 921 Americas ($) 49 63 146 394 711 614 Exchange rate as of December 31 1.664 1.562 1.654 1.616
1.421 1.5 Americas % of Total Market 12% 12% 21% 35% 37% 39% *In both Germany and America, the
composition of revenues was roughly the same, and had been quite stable: 70% licensing of software
and maintenance 20% implementation services by SAP's consultants 10% training of partners and
project teams **Americas includes: Canada, U.S., Mexico, Latin America, and Australia. U.S. operations
account for 80-90% of Americas operations. Source: SAP America Exhibit 2 R/3 R/3 was a standard
software package that helped companies reorganize around processes rather than functions. It
employed a three-tier architecture whose robustness, scaleability, and flexibility allowed it to meet the
diverse demands of global and smaller customers, as well as the needs of a broad range of industries.
R/3's master file and client-server design made possible seamless and synchronous integration of data
sharing across an enterprise, even through new releases of the product. This capability led SAP
America's president Jeremy Coote to observe: "What you are buying from SAP is the breadth and scope
of seamless integration, rather than a product." By 1996, the cumulative investment in R/3 exceeded
DM 3 billion, and had been fully expensed. The scope of R/3's reach was massive; it cut across the entire
enterprise, linking over 80% of all activities. The global nature of the product was reflected in its ability
to automatically calculate exchange rates, and to operate in multiple languages. Revenues from R/3
came from licensing users at a particular site, and from annual maintenance fees which were a
percentage of the original fee. Licensing fees depended on the number of users and their category of
use; some users only read transactions, some carried out a limited set of transactions, while others used
the full capacity of the system. Fees were higher for the more intensive categories of use. R/3 was very
open architecturally. This meant that a customer was not locked into an existing database, type of
hardware, or any specific portion of their solution forever. R/3 could run on any of the major hardware
platforms, operating systems or relational databases. The product consisted of a large suite of
applications modules in four broad areas—finance and control, materials management and production
planning, sales and distribution, human resources—and the software took a process perspective on all
of these activities. For example, on a quote-to-cash process, it delivered a quote on a product to a
customer, priced it out, checked availability, procured materials, stages them, shipped the product, and
collected the money. The horizontal, process orientation of R/3 was designed into the software through
configuration tables. A table was an arrangement of default settings through which data ran
automatically. A major process could involve a few hundred tables, and changing one table had ripple
effects on scores of others. Although R/3 was designed as a standard package, the software could be
customized by changing the settings in the tables. Based on its preferences and operating requirements,
a company decided on the settings for each table. In this way, it tailored the software to its needs, but
without changing any code. Recently, the laborious process of changing every table by hand had been
superseded by two major developments: SAP had encoded over 1,000 best practices into the software;
and SAP had developed new modeling tools that automated the table-setting process. Best practices
were scaleable business processes that had been drawn from 25 years of close collaboration between
customers and developers. They were actually precise configurations of table settings that encoded the
practices of industry leaders, served as templates that other companies could use as a starting point for
their own organizations. New modeling tools such as Business Engineer also made it much easier to align
standard templates with a customer's own processes. Business Engineer allowed customers to
automatically reconfigure scores of tables to accommodate their changes to SAP processes. The tool
allowed the application consultant to lift the template into the modeling tool, make it look like the
customer's, and drive those parameters back into R/3. SAP had also developed a rapid implementation
methodology called Accelerated SAP that drew from the best practices of field consultants, who
collaborated to design the new methodology. It was specially tailored for mid-sized companies, who
were unwilling to invest in extended implementation. .. Copying or posting is an infringement of
copyright. . 397-057 -18- Exhibit 3 Types of Partners Type Characteristics SAP Certifies That: Value to SAP
Value to Partner Examples ALLIANCE Professional service firms that provide services and resources in
sales and implementation of SAP products. Individuals in the firm have sufficient R/3- knowledge
Leverage client relationships Leverage industry expertise Allow SAP to sell high volume of R/3 fast Allow
R/3 to become de facto industry standard Huge, lucrative SAP practice area Price Waterhouse Andersen
Consulting ICS/Deloitte CSC Index DDS, Inc. PLATFORM Provide hardware on which R/3 runs R/3 runs on
the platform Ensure that SAP's technology is in sync with current and future platform technology
Provide multiple platform choices to customer Leverage large marketing budgets of platform companies
Ensure that its current and future technology will support R/3 SAP is a market leader which drives their
commodity product, part of channel strategy Exploit SAP in their advertising IBM* HP* Digital Apple
AT&T Sun Microsystems Pyramid Telemarketing TECHNOLOGY Provide operating systems and databases
through which R/3 runs R/3 runs on operating system or under database Provide multiple choices to
customer Ensure current and future compatibility R/3 is core business application which must be able to
support Oracle Microsoft Intel COMPLEMENTARY Wide range of applications and software tools that run
on top of or with R/3 Interoperability of R/3 and third party software SAP does not provide 100% of
software solution Leverage specialized software expertise of third parties Use interoperability as
marketing tool Use SAP as channel to sell product *Some partners, such as IBM or HP, have multiple
partnering relationships with SAP—as providers of professional services, platforms, operating systems or
middleware, and software product. Source: SAP America Exhibit 4 Alliance Partner Investment in SAP
Practice: Number of SAP-Certified Consultants, circa Early 1996 Worldwide U.S. Price Waterhouse 1800
1100 (500 to be added in '96) Andersen Consulting 2700 (100/month to be added in '96) N/A
ICS/Deloitte & Touche 1400 (600 to be added in '96) 900 CSC 1000 200 SAP America 750 180 NA: not
available Source: Aberdeen Group Exhibit 5 SAP America Headcount Year End Sales Consulting Other
Total 1988 -- 9 2 11 1989 5 22 12 39 1990 16 50 23 89 1991 30 114 43 187 1992 50 155 79 284 1993 118
220 73 411 1994 211 523 138 872 1995 230 679 361 1270 10/31/96 296 846 479 1621 Source: SAP
America .. Copying or posting is an infringement of copyright. . 397-057 -20- CEO SAP Americas P. Wahl
COO/CFO SAP Americas K. McKay Vice President/ General Counsel E. Rubino Vice President Marketing
TBD* Vice President Global Partnerships A. Ott CIO Finance Director HR W. Schwartz Hotliine Training
Product Reqs. Planning Tax Manager R/2 Managing Director Australia President SAP America J. Coote
President SAP Canada Growth Markets B. Plug Executive VP Latin America P. Dunning Executive VP
Global Accounts P. Dunning VP National Accounts-East R. Salvucci VP National Accounts-West M. Tolbert
VP Professional Services E. Basho VP Emerging Markets J. Soenksen Director Industry Marketing J. Biddle
VP Global Accounts P. Melchiorre VP Global Accounts VP Global Accounts 4 Districts Presales 6 ICOEs
Managers: Programs Events Field Services 4 Districts Presales VP Field Services West VP Field Services
East Director Global Support Director Technical Services Director Nat’ l Partner Relations Director
Principal Consulting 4 Districts 4 Districts GSMs Basis Consultants Other Exhibit 6 SAP Organization Chart
- May 1996 *TBD = To be determined Source: SAP America