SAP's great succession debate heats up

Water-cooler sessions at SAP are expected to become more intense in the next month as the world's largest business applications vendor debates the future of its chief executive officer.

With his contract set to expire at the end of the year, there has been much debate over whether CEO Henning Kagermann would seek another term. But a partial solution will be floated next month, when the supervisory board for the software behemoth meets on February 15.

At the meeting, Hasso Plattner, SAP's co-founder and the chairman of its 16-member supervisory board, will propose that Kagermann's contract be extended through the end of 2008, SAP spokesman Steve Bauer said Tuesday.

Wall Street, industry players and, of course, thousands of SAP employees are keenly interested in the outcome of this decision-making process, given that it affects the leadership of a company with $3.6 billion in annual sales. SAP has an extensive reach into the corporate world with its applications to aid companies in crunching figures and managing sales and customer relations and human resources.

SAP's supervisory board, comprised of eight elected directors from outside the company and eight nonexecutive employees, is likely to approve the one-year contract given Kagermann's past performance and a tight race in selecting a potential replacement.

Kagermann, whose tenure at SAP has spanned a quarter of a century, will turn 60 in July. Once its executives turn 60, SAP issues one-year contracts rather than the usual multiple-year contract, which can span up to five years.

But whether Kagermann wants to stay around once his contract expires after 2008 remains a question.

For now, however, the proposal to extend Kagermann's contract for a year would give SAP's relative newcomer and fast-rising star, Shai Agassi, a chance to gain some ground against the company's longtime sales and marketing executive, Leo Apotheker, who has emerged as a front-runner for the CEO spot over the past six months.

Big incentive
"I think Henning will go for another term," said one source with influence over the CEO selection process. "There is the 2010 incentive that was announced, and Leo and Shai are not there yet" in terms of taking over the CEO post.

SAP announced in May an incentive program that would dole out a total of $390 million (300 million euros) to SAP's executive team, senior managers and key contributors, if the company's stock doubles over a five-year period ending in late 2010. The executive committee, including Kagermann, would receive one-third of the booty if the milestone is hit.

Apotheker, the 53-year-old president of customer solutions and operations, has gained more support among the supervisory board members over the past six months as a potential successor to Henning, said sources with influence over the CEO selection process. Before that, the sources said, a large percentage of the board members remained undecided between the two.

Agassi, the 38-year-old president of the product and technology group, has had several big ideas, but the success of those projects has yet to be seen, sources say.

"The main reason I don't see Shai as No. 1 is he hasn't provided a success story within development," said a source with influence over the CEO selection process. "On smaller development projects, he changes his mind and goes the other way. That forces people to throw away the things they were working on."

Agassi sees things differently.

He noted in an interview late last fall, for example, that in 2003 SAP began overhauling it product line to run on a service-oriented architecture (SOA) that is designed to ease the use and deployment of the software. The road map for the SOA project is set to be completed this year, he said, and the company has delivered on every milestone of that road map.

When asked how long it may take before the industry can say with confidence that his ideas are working out, Agassi responded: "I think, first, it's not about Shai. Shai is meaningless. In the overall scheme of things, this is not about an individual; it's about our 12,000-(engineer) organization. They're all-important and they're all contributing," Agassi said, noting the company has three product cycles: five-year core changes; 18-month cycles; and half cycles of 9 months.

"You don't see results usually until you get a cycle inside SAP and a cycle outside in the market and the reason is, it takes us time to build a product that has a meaningful impact, fundamental impact and it takes our customers a cycle to adopt," he said.

Length of tenure
Other challenges in naming Agassi as CEO is his relatively short tenure with the company and his sphere of oversight over SAP's operations, which is substantially less than Apotheker's, say sources with influence over the CEO selection process.

Agassi, who oversees about 9,000 people, joined SAP in 2001 following the acquisition of his company, TopTier. But during his short tenure, Agassi has quickly risen up the company's ranks. He was promoted to SAP's executive board in 2002 and, in the following year, he took over the software development for the whole company from co-founder Plattner.

"People are more familiar with Leo, who has done more on the operational side of the business," said Brendan Barnicle, an analyst with Pacific Crest Securities. "Shai is R&D and came in through the acquisition."

But Apotheker, who joined SAP in 1988 and oversees approximately 19,000 people, lacks a strong technology background and, at the end of the day, SAP is a technology company, contends one source familiar with the CEO selection process.

Another source also noted that Agassi and Plattner share a closeness that comes from a deep knowledge of technology.

Both Apotheker and Agassi declined to elaborate on whether Kagermann would renew his contract, or whom his potential successor should be if Kagermann steps down.

"I am fully committed to our strategy and the vision and leadership of SAP under Henning Kagermann," Apotheker said through a representative late last year. "I am passionate about delivering value to customers around the globe by playing a leadership role in driving our sales, consulting, marketing and (small and midsize enterprise) initiatives."

Agassi, in an interview late last fall, also expressed a desire to have Kagermann remain at the helm of SAP.

"What I hope to have happen is that Henning extends his contract because I think the current team is a fantastic team," Agassi said. "I think Henning's position today is critical for SAP. I think Leo brings in unparallel experience in managing the relationship in the machinery that makes the field function, and I think I'm lucky to be in that team...I think if you compare us to the rest of the industry, we bring in a much more balanced team on all axes: products, true field expertise, the global reach that this group has got, the maturity and the young age. I think it's all coming together very nicely."

One SAP user group, however, is not concerned with any potential change in leadership at the applications giant.

"As a user group, we don't comment on internal operations at SAP. We have developed a strong relationship with Henning, Shai and Leo and...at the end of the day, no matter who is the head of SAP, the relationships we established there are good," said Rod Masney, president of the Americas' SAP Users' Group.