The Hindu Business Line : ‘There are no times like this’

German efficiency was at its best at Bangalore last fortnight, evident from the start of the press conference at sharp 2 p.m. as announced earlier. Without ado, Peter Zencke, member of the board at SAP, got through his speech and then patiently answered queries.

Later, meeting with K Bharat Kumar of eWorld, Zencke was candid, indicating that these were new times, times that “no one in this room would have faced earlier.” Read on for excerpts from the conversation.

SAP’s core software grew only 7 per cent without revenues from newly acquired Business Objects. Is there mayhem in the marketplace? Small and medium-sized companies are facing trouble with credit. What is happening?

Frankly, we should not say we know exactly what is happening. All of our forecasts in enterprises — middle-sized and large — close to the end of Q3 (quarter ended September), were brilliant. Normally, this would have been a record quarter. Then the financial problem started in the US, and at least at that time there, there was an immediate reaction from larger enterprises, that this was something big. Their reaction was ‘We don’t know what the impact might be, we haven’t seen this before.”

This has hurt us in the third quarter. One key question is how much it would affect the real economy. No one knows. Across the US, Europe and even Asia, more importantly, measures are being taken so that it won’t affect the real economy. Since no one knows (what is going to happen), we are in the ‘be prepared’ mode.

It’s a financial crisis, so you have to keep an eye on liquidity. You might need the cash for something else. So people are prudent and are watching. It would not be wise to say that we know what is going to happen.

If clients are prudent and are saying this, what portions of your business get affected? Licences, obviously, but consulting and services?

There is this waterfall… first you see the effect in licences, you don’t see that immediately in projects. Something very hard must have happened if projects are stopped because there is no immediate benefit (in stopping projects).

The big consulting companies have seen no impact in Q3. If licences really go down, after some delay, future consulting projects and infrastructure service providers would be affected as well. Some of the India-based providers have projected growth numbers. So, it’s a mixed situation. What is an opportunity for some would be reason to panic for others.

But, it would be dramatic if smaller customers don’t get the money to invest any more. Then this affects the whole supply chain. Smaller suppliers have to go to OEMs to get cash in advance and then it would be an overall crisis.

We have to get that under control. If there is no money in the system, then the economy doesn’t work.

What does it mean to all the segments that you have — MySAP, All in one, Business One? In the months to come, how would the investments you would make in these change?

No change. The biggest risk is if the smaller guys don’t get money to invest. Then they would not spend at all. And, they cannot survive without that. They will have to react faster.

Has that begun?

We have only seen it partially.

So is there worse to come? (pause)...So you say that there is a problem but no solution in sight. After all with financing, there is only so much that SAP can help…

We help with financing for clients. We also have financial models such that upfront investment is solved.

But that does not apply to a significant portion of your business. So enterprise customers who are probably better prepared would be a better target market for you…

We are not changing target markets so far. We keep busy. We don’t want to be negative. There is a lot of perception. But you have to live with uncertainty.

What does it mean to the vendor eco-system? The likes of Satyam and TCS are your partners...

So far they don’t see it yet. There are big projects running and no one would stop them. They will go on. Clients have also done the system consolidation — that’s the best part. In the last three-five years, many have done that. Some of them are still busy with that. Some others, ABB Asia for instance, recently finalised plans to go live in Asia. So these clients are in good shape.

So, from services vendors’ point of view, some large deals would re-emerge?

I would say that there is some hope that these, large consolidation deals, are not going down. Today’s TechEd (SAP’s annual tech do), is a big commitment from partners to SAP and they won’t show that if there is no good business.

One is business consolidation. The other is real-time information. Many people feel that getting real-time information about business is key. If it changes in an unanticipated way, then monitoring business becomes very important. With Business Objects, we have an excellent proposition at this point in time, especially in liquidity management. You really need that these days, if you don’t have it yet.

With Licence sales going down, would your vendors see the lag effect in implementation deals in, say, three-six months?

Yes, there is an historical pattern there. But it is too early to give a warning signal.

So in times like this, how do you work with your service providers?

The problem is, there are no times like this. If this were a normal recession then I would say that in most cases, customers took benefit out of SAP, they invested in a sort of (anticipated) way, so we feel safe. The only thing is, there has not been something like this so far.

It would be misleading to be optimistic.

In three-six months from now, if you want to sense recovery, what signs would you look for? For the PC market, it is easy to look at Taiwan and get some cues.

The first is to look on the software side. How (licence) orders come on…

How much of the growth from Business Objects would offset the reduction in growth for SAP’s core offerings?

There is topline as well bottomline growth. On the topline, Business Objects is growing better while SAP has been doing better on the margins front.

Ideally, we should increase the margins of Business Objects while we work on the topline together. That is ideal. But if Business Objects’ margins are not so good, then it’s only helping us half way. At the end, you could mix up the two, that’s important.

With Business Objects, it’s not akin to adding solutions one by one. We have exciting offers based on our memory-based analytics and Business Objects’ offerings. There is really something in real time analytics where we have sub-second or one-second response times with algorithms running on memory with an easy User Interface on top of that. It’s not restricted to the SAP customer base but is an offer that could run across industry for everybody. It’s a brilliant piece of technology which gives immediate insight, especially for retailers.

They can view their last year’s business, in all segments, in all countries, in all shops and then you arrive at an idea of what might be in correspondence. Eg, if consumer demand is going down, then you can identify which product categories are affected and which are not. This is brilliant — insight and visibility for the retailers, especially in today’s world of lesser liquidity and slumping consumer purchases.

Is it easier to sell the tools that Business Objects brings to the table, which take lesser time to show returns on Investment?

I would say that everything that has a faster return is the right answer in today’s environment.

For SAP, Q2 saw banking and retail blazing a trail. How has Q3 been for the verticals?

Banking is obvious (it’s a slide). Retailers are concerned since consumption is going down. Some retailers say they are doing well. It depends. So is it with consumer product companies. It’s not rocket speed growth but growth, nevertheless.

You recently raised the cost of maintenance to 17 per cent, going up to 22 per cent by 2012. Surprising, especially in difficult times now?

We had prepared clients for that before the financial crisis started. We did not consider pulling back either, after the bad news hit.

Historically, our maintenance charges have been lower than competitors’ and our clients know that. Actually, we have not just increased charges for clients. We have increased the services portfolio. For SAP, this has become a business process platform. We have extended the periods of maintenance from one, five through seven years now, these are investments from SAP to help customers. Enhancement packages were introduced a year ago, and customer reaction and experience with the enhancement packages has been good.

So, the message is; no longer big release changes. But, we deliver the innovation into the installed base without disturbing the business process and customers switch on what they need for the business. In the past, there was a maintenance period, recovery was from maintenance or with yesterday’s release, then they would need to upgrade — that meant high total cost of ownership (TCO).

We have helped offload some costs for customers. We have become more flexible. We have broadened our portfolio that is covered by the extended package.

So if we reduce the cost for customers, it outperforms this raise in maintenance fees.

You have a Euro 200 million cost-cutting programme in place now. Is the 1 percentage point cut in R&D spending part of this or is it distinct?

We have not said that we would cut R&D. But we would do something straightforward in all lines of business — we won’t add headcount, so won’t hire. There is normal attrition, so there is some saving.

In R&D, there was a period of three-four years of massive additional investment in rolling out.

So now we have to take advantage of that investment. So the ratio between selling products and what is part of R&D would have to go down, compared to four-five years ago. So investments in R&D would go back to normal levels.

Brazil, India and China have done well for you while Russia hasn’t. Any signs you see that things may not be hunky dory in the first three countries?

No signs yet. We are monitoring it carefully. The risk is the spread of the financial problem into the real economy globally. Do we know how the economy in US will affect manufacturing in China? No. There’s a huge business in China that depends on the US auto sector.

For long, you were not directly servicing customers in West Asia and then started doing so recently with an acquisition? Prospects?

West Asia has big money now. Probably they would go into different businesses as well. It’s a good opportunity, they would know, to invest not only in the financial sector, but in other industries as well.

If things are so bad even for a big company such as yours, what outside help do you get, from the likes of economists, to guide you through this?

One big help is our huge customer base. We are very close to our customers and we don’t have to ask analysts so much. Sometimes analysts ask us. That is a good thing — to be close to customers and to know what would change, say, if deal sizes would shrink.

For instance, we have seen that in our history as well, to recognise shrinking deal sizes, and look at volume-based growth.

Even in this quarter, we have developed specific offers to develop packaged solutions that could be quickly deployed.

Pre-configured solutions reduce cost as well.

We are recognising some industry scenarios or value-add scenarios where these compositions could hook into these services. So that’s another area where we have done preconfigured solutions. We will probably have to scale that much more than we have in the past.

Thumb rule figures for R&D as a percentage of revenue?

14 per cent to total revenues, last year.

You have reduced accelerated investments in R&D but we see more investments in sales productivity. Tele and Web presence in Barcelona, for instance? Is it a sign of the times, to give you better returns?

There is always the question of productivity. Investment into sales productivity is the right thing to do in these times. Even if you are reducing flights that employees take, and there are tonnes of flights in SAP, they are replaced by tele-presence meetings.

End of Q2, you had indicated that partners plans to add 30,000 people worldwide for implementation may be inadequate and that 50,000 should be the number. Is there a number you have now? What is the business volume that would drive manpower growth now?

We don’t have an answer to that now, but we have identified that there could be a shortage in consulting. We have invested in education programmes, e-learning, to help our partners catch up with the latest technologies.

Creating business process experts is an initiative we started two years ago. People need to be not only experts in specific areas but also deliver extra value by understanding customer pain points. The idea is to dig deeper and find solutions on the process level. We have so far educated half a million people as business process experts. That is a big success.

What does your cost-cutting initiative mean to the Indian development centre?

We are not sending anyone home. We have reduced third party costs. We are cutting down such resources.

If your centre has about 4,000 people, would third party contractors number one-fourth or one-third?

Less. So, lesser travel and no more additional hires is the focus.

Salary Increments?

(Smiles). There is nothing to debate today! We will talk about it next year.

On acquisitions, are there still gaps you would like to fill now, since valuations are low?

Even if I were looking I would not talk about it.

In acquisitions, does India figure in your radar, any interesting opportunities?

There is really an interesting base of technology and point solution offerings, which might be attractive for SAP. Jadu, a recent acquisition, which fits well into the environment, is supported by a good engine. So it’s not technology alone, but should fit into our overall portfolio.

You stopped accelerated investments in Business By Design (BbD).

That was done before the financial crisis. BbD is actually a good thing. Our offer is not that much comparable with other offers on-demand. Others would offer modules. But ours is the full-blown system.

On functionality, there is high demand. It’s not that SMEs are not demanding. Some said that they like this but would want more. So we have invested in functionality. We will not scale up that business in volume before the TCO goes down. Our own cost to service that solution is not low enough for us. So we cannot go (heavily) into a business that gives us low margin, in these days.

Before the slowdown happened, you had said that you won’t meet the $1-billion target by 2010 but 12-18 months more than that. So what signs did you see?

As I said, even higher demand for functionality — so it’s another iteration on development. This is different from what others are doing, such as HP.

Have you considered the franchisee model or any other?

We like to take help like that but if we have not proven yet that the way to run that business as profitable …. Once it is profitable we will have partners. But to prove that this is a good business is something we have to deliver to the market.

So what is the thinking on this front?

Heavy investments into life cycle management so that cost per additional customer for on-demand is going down.

Given that and given the times now, competitors such as NetSuite could get a foot in the door — ageing legacy or even ERP solutions as well?

My perspective is that it is not easy at all for NetSuite to cope with the functionality that SAP customers have, even in large enterprises. We have learnt that over the past, in business.

So what is your view on Software as a Service (SaaS) if even you are still trying to figure it out?

One is the business model. I believe that not everyone will go for on-demand. It could depend on location. Connectivity is an issue, location-wise… stability of Net connectivity. It’s a real problem. It’s not really location-independent. Some things still need to be solved in the marketplace. China, for example, is not ready today. There is some question mark over India as well, whether this model could be adopted. Once it works, it could be extremely attractive for customers.

A peek into the future. Recently you tied up with RIM for SAP solutions on the BlackBerry.

It’s a business decision, not an architecture decision. It would apply to other areas as well. User experience in the BlackBerry is specific to RIM, for Nokia it would be different, as it would be yet again for a Microsoft user. On mobility, we have to deliver on the expectations of users of all these devices.

We would like to adapt device-specific technology and make it co-operate with SAP technology rather than put one SAP technology across devices. So there will be other tie-ups for this, as well.

What is your view on cloud computing? It has not picked up quickly enough, despite being talked about.

It is an element of SaaS. Two main ideas here, sharing infrastructure and virtualisation. I believe in cloud. It’s a key element to get TCO down.

If you have not yet figured out profitability in SaaS, would the same apply to Cloud computing as well?

Cloud computing is one of the ways to achieve profitability. If you decouple maintenance effort from the customer, so you maintain infrastructure and share maintenance, that’s actually the way it can become profitable.

There must be evolutionary hardware development before that can happen…

Yes but we are not waiting for such developments. Technology for this is already available.

Anything else?

You see uncertainty all around. But in Bangalore there is a lot of action and optimism that these hard days are an opportunity for business as well. Turning this situation into opportunity is a challenge but a good way to go.

bharatk@thehindu.co.in

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