SAP’s Bill McDermott: The Future of Enterprise Software

As president and CEO of SAP Americas, Bill McDermott is responsible for managing the German software developer’s strategic initiatives in the U.S., Canada, Latin America, and most recently in Japan, China and India. SAP Americas, headquartered in Newtown Square, Pa., provides collaborative business solutions to companies in 25 different industries. In a recent interview, Wharton management professor Saikat Chaudhuri asked McDermott for his views on where enterprise software is headed and how the company has leveraged worldwide resources to deliver its services globally. The two also discussed SAP Americas’ relationship with Microsoft and threats the company faces from arch rival Oracle. An edited transcript of the conversation follows.

Chaudhuri: Bill, it is a pleasure to have you here for a conversation about enterprise software, trends, competition and the like.

McDermott: Thank you.

Chaudhuri: What are your thoughts on enterprise software — where is it headed, where are the trends, where are you positioned in all that?

McDermott: The customer today wants a trusted innovator and they are standardizing their business processes on proven platforms — platforms that are well integrated and global. Any customer, whether small, mid-size or large, is thinking beyond their geographic boundaries, beyond their current markets. They have to innovate. They have to grow. So, the market is in favor of big, proven brands and it is not going to be nearly as friendly to small, riskier plays.

Chaudhuri: I think that makes a lot of sense. I see a push towards business intelligence, for example. Why is that?

McDermott: There is a major gap between strategy and execution. If you talk to most CEOs today — and I do all the time — they have great strategies. You can look right behind their desk, on the credenza — three-ring-bound strategy documents galore, and they are great. The issue that they all have, though, is: How do you execute that strategy? So, the real art form is taking strategy to execution and then renewing that loop on a continuous basis. Business intelligence actually allows you to do that — how do you get the data, the information and the knowledge in the hands of the executive to make well-informed, real-time decisions.

Chaudhuri: So, if the era of Internet or Web 1.0 was really about amassing lots and lots of information and getting access to it, maybe the 2.0 world will be about using that effectively?… It won’t be as difficult to sift through data [because] it comes to you in the form that you need it — is that the kind of vision that you foresee?

McDermott: Exactly. As an example, when SAP acquired Business Objects, we obviously did not do so to acquire revenue or market share; we were already the market leader. We did so because it offered a platform-agnostic technology that could extract data and aggregate data from any platform or any source. That is because the C-level decision maker has to be in real time, and they need to have the knowledge at their fingertips, including mobile, so they can make those calls and advance their company.

Chaudhuri: Now, IBM also bought Cognos [around] that time. How is that relationship going — because you work closely with IBM, right?

McDermott: Yes. IBM is a great partner, a very strategic friend to SAP, and it is only natural that at times we will have “coopetition,” if you will, in these relationships and that is fine. IBM provides a great service to their clients, and there will be times when [something] is the right decision for IBM clients and we fully accept that. But never mistake the importance of IBM to SAP and I think, SAP to IBM.

Chaudhuri: Speaking of “coopetition,” Microsoft is another company that you have an alliance with. And I raise that not just in terms of a relationship, but you spoke of platforms. There was a time when people were saying, “Wouldn’t it be nice to have an integrated platform, back-office and front-end applications.” Is that just a dream?

McDermott: Well, Microsoft would be another example of a very important partner. And yes, it is true, in certain segments of the market we do compete, but we see the importance of connecting the desktop in the case of Microsoft to the enterprise applications of SAP to create an experience for the customer that is truly world-class and far more productive.

That is why we co-innovated and developed a product that we call “Duet,” which essentially links the desktop and the enterprise applications of SAP. For example, many knowledge workers get up in the morning, they click on to their email and they will be making decisions — such as providing someone a raise or giving them some time off  – right in their email system. Wouldn’t it be nice if that was automatically updated in the enterprise HR system of SAP? And we now obviously do that with our product called Duet. So Microsoft, again, is a very strategic partner and friend to SAP.

Chaudhuri: So, you see that as another direction in which all this could head, right?

McDermott: Yes, but you know what the common theme is: If it is in the best interest of the customer, you should do it. And there will be times where these relationships will have strain on them because of certain competitive scenarios, but you have to get past that because we are big brands, we are market leaders and the customer deserves the best from all of us.

Chaudhuri: So, where is Google in all this? Everybody seems to think about Google no matter what industry they are in these days. But, in particular, it might be relevant from the point of view that a lot of applications are going to the web; it is becoming an alternative platform. How do you see this? As an opportunity, a threat, a bit of both?

McDermott: I think it is more of an opportunity. Google has done a great job of providing information to the casual user and the information worker and clearly the cloud computing concept is something that is here to stay. And therefore, Google has created great search, great cloud computing and, I think, it has forced everybody to think more productively about that user experience and how you can get that information into the users’ hands in highly productive, low-cost ways. So, credit to Google.

Chaudhuri: Do you think that Google is limited to the “casual user,” as you phrase it, or will that have enterprise implications as well?

McDermott: Well, I think, there are going to be collaborative relationships between Google and search and some of the enterprise leaders like SAP overtime, and that is the way it should be. Again, that will give the customer more.

Chaudhuri: Social networking is another hot area. Facebook and the like are talked about a lot. We think of it more in the consumer sense, but actually from a human resource point of view, a people management point of view, allocation to projects, understanding capabilities, strengths, skills, weaknesses and what people are thinking — that is also a fantastic application for enterprises, right?

McDermott: Yes, it is. In fact, right here in Philadelphia, there are small companies that are innovating today to provide Facebook-like services to big corporations, and more and more they are trying to extract from the enterprise market pull to their sites because they think they can help businesses with things like advertising, affinity networking and marketing, etc. So that, too, is a trend that is here to stay.

Chaudhuri: And since you mentioned Philadelphia, what is the role of SAP America right now? I mean, it has been evolving over time. Palo Alto has also built up a strong base, and that’s been fluctuating over time as well, but that is an important center. At the same time, you are expanding in Europe, you are expanding in China, India and other markets as well, and you are setting up centers for R&D, application development all over the world, how does this all fit together?

McDermott: That is a good question. Development in Philadelphia, as an example, is real. It is also real in Montreal and it is also real in Europe and India and parts of China and Eastern Europe, so what you are seeing now is global development at SAP. But SAP America in the context of Newtown Square (PA), in particular, is a hugely important site to us, as we have created thousands of jobs across the U.S. in these last six years. We became the undisputed market leader.

And we also believe strongly in giving back to the community. If you have watched what we have done in Philadelphia, whether it is on the education side with organizations such as KIPP [Knowledge is Power Program] and some of the innercity schools and building playgrounds with KaBOOM and homes with Jon Bon Jovi, we have really tried to be part of the community and we really believe in that.

Recently, I was with Jack Welch and we had a conversation on the concept of giving back. It is something that you can do when you are winning because you have something discretionary to give back. So, we are careful to explain that our people love to do it and we love to help them do it. But, keep winning — that is the key to doing it.

Chaudhuri: That enables you to do it.

McDermott: Exactly.

Chaudhuri: And from a business point of view, having these multiple centers around the world is obviously very useful to develop in real time, 24×7. How does this work seamlessly? I mean, you have held different positions in different parts of the world: How do you see this?

McDermott: It is a 24×7 world. If you think about the customer, which is the essence of everything I am, that is the DNA. The customer operates in a global economy and is operating their business on a 24×7 basis. So, whether it is active global support, watching over their success 24×7 in every corner of the world, or it’s sales, service, consulting and all the customer-facing activities, you have to be constantly on. What I love about being global is constantly being on in every single time zone and constantly being in real time and what is really going on in the world. So, it is thrilling.

Chaudhuri: Early morning calls, late night calls, and the like.

McDermott: Yes. It is thrilling. Well, you start out in the morning with Europe and of course you end the day with Asia.

Chaudhuri: That’s a fun life, I can see that.

McDermott: And that is how they start their day.

[Laughter]

Chaudhuri: Do you also see, amidst this model, areas of specialization developing? Do certain centers in certain parts of the world, for instance, focus on an area perhaps by virtue of the skills that they have, or even the immediate requirements or needs? Or are these all generic centers that are emerging in SAP’s case, or even more generally?

McDermott: I think it’s a balance. There may be a specific area of expertise or a functionality that you’re focusing on, and you might decide a certain part of the world has the knowledge workers that immediately could resource that and get it done. So, in that context, you might choose something geographically.

But, more or less, horizontal service around the world is the concept that we look at. And if you look at the jobs that we’ve created in development, for example, over these last several years, the jobs in Europe have actually stayed pretty steady or pretty flat and they’ve expanded dramatically in parts of Eastern Europe, but in particular in India and China.

Chaudhuri: I ask that in part because IBM, Microsoft, Cisco — peers to you in terms of the stature in their various segments — they are setting up centers around the world as well. And it seems to me that they’re trying to focus their energies from the beginning on particular needs, so they’re saying that, okay, initially we’ll do development, which is for the local markets, and then we’ll expand that. Perhaps there are certain efficiencies or cost requirements that they can meet, but they’re not only intending the output to be limited to, say, a technology to that local market or something that can be used, but just new areas of innovation they wouldn’t otherwise be typically thinking about in a San Jose, or a Redmond….

Is this how you think about this as well, or is it different? Do you really mean you want all types of skills [to be] represented at each center?

McDermott: No, we think about it similar to some of the big names that you just mentioned. For example, if you’re innovating in a certain area and you have to staff something up quite quickly, you want to source new pools of talent, and clearly that’s an opportunity to do that.

You may also look for pools of talent to better support existing customers — in some cases even back-office functions — in a more economical and productive way. Clearly, when it comes to thought leadership, when it comes to the economics of serving an existing customer base, there’s real innovation going on in places like India today.

Chaudhuri: You have an interesting dual role, because you are, of course, head here of the U.S. operations. At the same time, you are on the overall executive board as well, so you do have to keep the perspective of how the operations around the world function in concert with what you have set up here. So, I think that gives you perspective at both the local level as well as the global level.

McDermott: It’s true, but we’ve always thought globally. Even five, six years ago, we were outsourcing a lot of work and a lot of knowledge work, important work, some of it that we brought back to the United States from faraway places like India and even China. So, it’s always been in our thinking to be global.

We’ve also done this in places like Brazil, where we set up certain customer support centers and localization centers. One of the really important things that you need to do well in large enterprise software is make sure you’re localizing the product and the application to the customer who ultimately is going to use it. A lot of folks don’t realize this, but in places far from the United States, most of the largest competitors are local competitors, they’re not big, well-known brands in the U.S. So, having that savvy around what’s really going on in local markets is key to us.

Chaudhuri: And I think [also] the nature of the firm. Here, you’re probably used to the largest customers. [If] you go to a lot of emerging markets, you have a lot of the small and medium-size enterprises who can’t always hire too many consultants to be able to implement these solutions. So they need an approach that will also work for them — give them the effectiveness they need, while at the same time being cost-efficient as well.

McDermott: You’re absolutely right, and some of the best business practices that we have now for small and mid-size customers actually came from our Asia Pacific operation, because the notion of prepackaged, industry-specific, ready-to-run applications with a fast time-to-value fuse actually came from emerging markets. And then we brought those ideas and syndicated them in places like the U.S. where you could better serve the small and mid-sized customer over here.

So, innovation is fascinating, because it comes from every part of the world. The big idea is [that] the best ideas exist somewhere in the world at all times. The art form is aggregating them and scaling them across the world at all times.

Chaudhuri: That’s a wonderful way of putting it, because earlier there was more of a model where there’s some sort of headquarters or center, and everything else is distributed and adapted locally, rather than ideas coming from local places because there are certain needs or pressures that are being faced, and then they are aggregated and scaled in some way and adapted to also be used in other markets.

McDermott: I agree totally, and also the talent. If you have great talent in a best business practice, for example with large enterprise, that works beautifully in the U.S. It will work in Japan. It will work in India. It will work in China.

So, don’t hesitate to cross-pollinate those business leaders and move them. Let them get cross-border experiences. Let them adapt to new cultures and new languages and new ways of doing things; they become fantastic executives. Then, when they come back to the United States, for example, or Europe, they bring rich experience. And when you see a person who’s done that, if they left in the year 2005 and they came back in the year 2008, you can hardly recognize them. They’re so polished. They’re so much more complete. They think so much bigger and so much more globally.

So, we’ve gotten pretty good at moving people to new locations and letting them innovate and grow.

Chaudhuri: That’s a key mechanism. Since we’re on the topic of strategy, let me ask you about SAP’s growth strategy.

McDermott: Sure.

Chaudhuri: There are some interesting models in your industry. You have, on the one hand, Oracle, which has been aggressively pursuing the acquisition-based path. You, on the other hand, have been more conservative and have filled gaps, but mainly pursued an organic growth strategy. A few years ago, it was even more interesting, because people said, “Oh, all these Oracle acquisitions — building an integrated platform out of a Siebel and Peoplesoft and JD Edwards and so forth is going to be a very, very challenging task.” But they also seem to be making some good progress, from what one hears; it hasn’t quite been the disaster that some people had predicted. Where do you view this going, and how do you view your strategy in that context?

McDermott: Well, the number-one competitive advantage for SAP over a company like Oracle is integration. We design the application from the ground up to be integrated across business processes end to end, and we do that in 26 distinctly different industries.

So, for example, if you are in the consumer products business and you want to implement a process, you know that SAP designed [the application] with engineering in mind from end to end, and it’s ready to run out of the box.

Companies like Oracle have to interface things and deal with very complex implementations because none of that has been engineered by design, and there may be different pieces of different acquisitions all in the same solution, and customers really have to navigate through that. It’s very costly to do that for the customer. It’s very risky to do that for the customer, and I think that’s why Oracle continues to lose market share as it relates to SAP.

Chaudhuri: It’s difficult to create that universal platform which will bring all these pieces together. I mean, not everything is so modular that you can just plug in these pieces and move forward.

You seem fairly confident about the strategy of SAP going forward. Where are you headed next?

McDermott: Oracle, as an example, has acquired all their growth. Unfortunately for the customer, none of that has been integrated on a common platform.

SAP has acquired all of its growth through an organic growth strategy. Where are we going? We’re going to continue to do what we’ve been doing organically for 35 years as the market leader, two times larger than the number two.

But, we’ll also do that now for small and mid-sized customers, because there’s a lot of growth there. We’ll do that for business users, as evidenced by the business intelligence move and our acquisition of Business Objects, because it really helps the C-level decision makers close that strategy-to-execution loop we talked about earlier.

So, think of us as a company that’s going to lead in small, mid, and large companies as their platform, their standard platform of choice, in 26 industries. Think of us as expanding with small and mid-sized clients all around the world. And think of us as the company that appeals to that business user within an enterprise with new and innovative solutions such as Business Objects.

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