Government Exhibit P3037 [Non-designated testimony redacted]
| 00007 | | | | | | | | 3 | RICHARD A. KNOWLES | | 4 | was called as a witness, and having been first duly | | 5 | sworn, testified as follows: | | 6 | EXAMINATION | | 7 | BY MR. ANDEER: | | 8 | Q. Good morning, Mr. Knowles. Could you | | 9 | please state your full name for the record? | | 10 | A. Richard Allen Knowles. | | 11 | Q. And your place of employment? | | 12 | A. SAP America. | | 13 | Q. And your business address, please? | | 14 | A. 3999 West Chester Pike, Newtown Square, | | 15 | Pennsylvania. | | | | | | | | | | | | | | | | | | | | | |
| 00009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 11 | Q. I'm going to be asking you a series of | | 12 | questions today about the enterprise software | | 13 | market in general as well as the Oracle proposed | | 14 | takeover of PeopleSoft. Both these topics are | | 15 | subject to litigation, as I'm sure you are well | | 16 | aware. | | 17 | Let me just lay out a couple of ground | | 18 | rules for you before we begin. I'm going to ask | | 19 | for both my benefit and for the benefit of the | | 20 | court reporter that you make all your answers | | 21 | verbal, so both of us need to refrain from as many | | 22 | hand gestures in responding to our questions as |
| 00010 | | 1 | possible. | | 2 | I would also ask that if I ask a question | | 3 | that you don't understand, please let me know and I | | 4 | will try to rephrase it. If you need a break at | | 5 | any time during this proceeding, just let me know | | 6 | and we will try to accommodate you. It's probably | | 7 | a good rule that we break about every hour. And | | 8 | one final thing. Is there any reason that you | | 9 | don't think you could answer my questions | | 10 | truthfully or fully today? | | 11 | A. No. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 00011 | | 1 | Q. Back on the record. I believe I asked | | 2 | you what are your current responsibilities as vice | | 3 | president of operations for SAP America. | | 4 | A. Okay. I oversee the North American | | 5 | operations on behalf of our CEO. In essence I | | 6 | operate as kind of like a chief of staff or a | | 7 | mini-chief operating officer for the corporation. | | 8 | This entails duties that represent sales, | | 9 | marketing, service, consulting. My role is | | 10 | horizontal in nature, crosses all lines of | | 11 | business. I execute on the strategies, the | | 12 | development of the strategies, for SAP America. I | | 13 | oversee the pipeline process and the way we go to | | 14 | market to sell in a given quarter, and I work the | | 15 | processes that include customers, customer | | 16 | satisfaction, and then a variety of special | | 17 | projects that the chief executive, Bill McDermott, | | 18 | would want me to oversee or execute on. | | 19 | Q. So you report directly to the CEO, and | | 20 | that is Bill McDermott? | | 21 | A. Yes. | | | |
| 00020 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 10 | Q. You had mentioned that SAP America is the | | 11 | sales and distribution arm here in the United | | 12 | States for SAP AG; is that right? | | 13 | A. Yes. | | 14 | Q. What is it that SAP America is selling? | | 15 | A. Software that SAP AG has created. | | 16 | Q. Are there other services in addition to | | 17 | software that SAP America offers? | | 18 | A. Yes. We have four revenue lines of | | 19 | business. One would be software. Second would be | | 20 | maintenance and support services. The third would | | 21 | be education and training services, and the fourth | | 22 | is consulting services. |
| 00025 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 10 | Q. Are you familiar with the term, | | 11 | "Application software enterprise application | | 12 | software?" | | 13 | A. Yes. | | 14 | Q. Where would that fit on this stack? | | 15 | A. It actually sits on top of the stack. | | 16 | Q. And is this, is enterprise application | | 17 | software something that SAP sells? | | 18 | A. Yes. | | 19 | Q. So just looking at this stack, SAP offers | | 20 | enterprise application software; is that right? | | 21 | A. Yes. | | 22 | Q. Data management, people process/portals, |
| 00026 | | 1 | and integration platform. All those products? | | 2 | A. Yes. | | 3 | Q. Is there anything missing in this stack | | 4 | that we have identified? | | 5 | A. There's many modules and components | | 6 | inside the stack, too numerous for me to rattle off | | 7 | the top of my head, but I would like to clarify one | | 8 | thing. SAP is in the business of creating the best | | 9 | software in the world, and we refer to that | | 10 | software as enterprise application software. | | 11 | That's our core business. | | 12 | NetWeaver or the technology stack is the | | 13 | underpinning by which the software is delivered. | | 14 | So NetWeaver is not the primary solution that we | | 15 | devise. It actually helps us in the delivery of | | 16 | the enterprise application software. So all of the | | 17 | products or solutions that we call enterprise | | 18 | application software, they all sit on top of the | | 19 | technology stack. | | 20 | The technology stack is to us a | | 21 | differentiator and an enabler to bring our product | | 22 | to market, to help our client solve their business |
| 00027 | | 1 | issues or business problems. So the way you asked | | 2 | your question, we would reverse it and say what is | | 3 | most important is the software at the top of the | | 4 | stack, and then the stack becomes a differentiator. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 00031 | | | | | | | | | | | | | | | | | 6 | Q. What is the relationship between the R/3 | | 7 | enterprise and mySAP ERP? | | 8 | A. When we released and came out with mySAP | | 9 | ERP with the NetWeaver underpinning, that | | 10 | essentially is the next evolutionary step for an | | 11 | R/3 customer today. So if you are a brand new | | 12 | customer and you came to SAP and said I would like | | 13 | to buy R/3, you would essentially be buying mySAP | | 14 | ERP with NetWeaver underpinning. So it's next in | | 15 | the evolutionary cycle. If you think of time in | | 16 | history, you would go from R/2 to R/3 to just mySAP | | 17 | ERP, with the NetWeaver stack. That is the cycle. | | 18 | | | 19 | | | 20 | | | 21 | | | 22 | |
| 00033 | | | | | | | | | | | | | | 5 | Q. Maybe this is -- how many customers does | | 6 | SAP America have? | | 7 | A. When you say "customers," you mean | | 8 | individual buying entities or do you mean | | 9 | installations? | | 10 | Q. Well, that is a helpful distinction. | | 11 | Perhaps first we should identify the number of | | 12 | buying entities. | | 13 | A. I don't know the exact number. Probably | | 14 | in the neighborhood of multiple thousands, like | | 15 | maybe close to 2,800 buying entities, 2,800 to | | 16 | 3,000. | | 17 | Q. Just to be clear, this is sort of a | | 18 | ballpark figure just between SAP America and buying | | 19 | entities; is that right? | | 20 | A. Correct. | | 21 | Q. The parent SAP AG, do you know how many | | 22 | buying entities have a relationship with SAP AG? |
| 00034 | | 1 | A. Yes, probably in the neighborhood of | | 2 | about 20,000 clients, which translates into roughly | | 3 | 67,000, 68,000 various installations. | | 4 | Q. And in terms of installations in the | | 5 | United States -- well, not in the United States, | | 6 | I'm sorry. In terms of SAP America's | | 7 | installations, what is that figure? | | 8 | A. 2,800 to 3,000 equates to somewhere in | | 9 | the neighborhood of probably 6,500 installations. | | 10 | Q. Now, you have made this distinction | | 11 | between buying entities and installations. What is | | 12 | the difference there? Why is the number of | | 13 | installations so much greater than the number of | | 14 | buying entities? | | 15 | A. You can have one client procure SAP | | 16 | software and actually install it say at four | | 17 | different locations, so that would be considered | | 18 | four different installations, versus just one | | 19 | consolidated instance. So if you have a | | 20 | multinational or conglomerate that has multiple | | 21 | divisions, we may have sold to various divisions of | | 22 | the conglomerate, but not maybe the parent company. |
| 00035 | | 1 | That's why. | | 2 | Q. Do you have a feel for how many, looking | | 3 | first at SAP America, this 2,800 to 3,000 number of | | 4 | buying entities, how many of those have mySAP ERP? | | 5 | A. Very few. | | 6 | Q. Less than 5 percent? | | 7 | A. I would say that's probably a good | | 8 | number. | | 9 | Q. What are the bulk of these buying | | 10 | entities using? Are they using one of the R/3 | | 11 | versions? | | 12 | A. Correct. | | 13 | Q. Is there an effort on the part of SAP | | 14 | America or SAP AG to convert these customers to | | 15 | mySAP ERP customers? | | 16 | A. Absolutely. | | 17 | Q. How is that done? How is the conversion | | 18 | or what is SAP America doing to encourage customers | | 19 | to make this switch? | | 20 | A. We have, in the normal course of | | 21 | business, our sales executives work with the client | | 22 | to understand what is their landscape that they |
| 00036 | | 1 | have today, what are their needs, what are their | | 2 | issues that they still may have within their | | 3 | enterprise, and if it makes sense for them to | | 4 | migrate or upgrade from say an R/3 installation to | | 5 | a mySAP ERP installation. | | 6 | Then if there is a business case, then | | 7 | there would be a business reason to proceed and | | 8 | actually attempt to work with the client to upgrade | | 9 | them. Because in the ERP configuration, they are | | 10 | going to get additional capabilities and | | 11 | functionalities that they may not have today in | | 12 | their current R/3 installation. Unfortunately, | | 13 | each case, each client gets a totally different set | | 14 | of circumstances. I wish there was a way to say we | | 15 | have a group of clients that all look the same, act | | 16 | the same, behave the same, but they do not. Each | | 17 | enterprise operates differently. | | 18 | Q. You mentioned that an R/3 customer | | 19 | converting to mySAP ERP or mySAP Business Suite | | 20 | will get added functionality; is that right? | | 21 | A. Correct. | | 22 | Q. Is there an added cost to converting from |
| 00037 | | 1 | the R/3 to the mySAP ERP? | | 2 | A. Absolutely. We don't do things -- we are | | 3 | in the business of making software and selling | | 4 | software. We don't give the software away for | | 5 | free. | | 6 | Q. So one, would one of the costs be an | | 7 | additional license cost? | | 8 | A. Yes. | | 9 | Q. Would there be a cost to implement the | | 10 | new version of the software? | | 11 | A. Yes. | | 12 | Q. Are there any other costs associated with | | 13 | an upgrade from R/3 to mySAP ERP? | | 14 | A. Well, you would also have maintenance | | 15 | costs and you can potentially have training costs. | | | | | | | | | | | | | | | | | | | | | |
| 00039 | | | | | 2 | | | 3 | | | 4 | | | 5 | | | 6 | | | 7 | | | 8 | Q. In your experience, are there customers | | 9 | that will evaluate their choice of SAP as an | | 10 | application software vendor when considering an | | 11 | upgrade, will they consider marketplace | | 12 | alternatives for enterprise application software? | | 13 | A. Absolutely. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 00040 | | | | | | | | | | | | | | | | | | | | | | | 8 | Q. I guess I'm focusing on perhaps products | | 9 | I have heard referred to as SAP All in One or SAP | | 10 | Business One. Are you familiar with those | | 11 | products? | | 12 | A. Yes. Those are products that we sell at | | 13 | the low end of the market through our channel, | | 14 | primarily. Those are considered the small to | | 15 | medium-sized business solutions. | | | | | | | | | | | | | | | | | | | | | |
| 00044 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 16 | Q. Why is there two separate sales forces, | | 17 | the large enterprise versus the mid-market? | | 18 | A. Since our last deposition, when we came | | 19 | into this year we changed our go-to-market process | | 20 | for covering the market. | | 21 | We made a concerted effort as part of our | | 22 | strategy this year to grow our mid-market channel |
| 00045 | | 1 | through the direct sales force, and that | | 2 | necessitated the need to actually hire and segment | | 3 | and distinguish a separate sales force just for the | | 4 | mid-market. We defined the mid-market as $200 | | 5 | million up to $1.5 billion in annualized revenues, | | 6 | and we have a dedicated sales team that goes after | | 7 | that market now in each region. | | 8 | Then the other team is large enterprise, | | 9 | which we define as $1.5 billion and higher, and we | | 10 | have dedicated a sales team to that. The strategy | | 11 | and the rationale behind that is with greater | | 12 | focus, we would have greater penetration and we | | 13 | could get closer to the customer and serve the | | 14 | customer in a tighter, more organized fashion. | | 15 | Q. So just quickly summarizing, you have one | | 16 | sales team, or within each region you may have | | 17 | several sales teams which are dedicated to going | | 18 | after accounts with between $200 million and $1.5 | | 19 | billion in revenues; is that right? | | 20 | A. Yes. | | 21 | Q. And then within each of those regions | | 22 | there's separate sales forces going after those |
| 00046 | | 1 | accounts with greater than $1.5 billion in | | 2 | revenues; is that right? | | 3 | A. Yes. | | 4 | Q. What -- is there a difference -- strike | | 5 | that. What brought about this change? Why did SAP | | 6 | decide to go with these two separate sales teams, | | 7 | so to speak, forces? | | 8 | A. It goes back to the heart of our | | 9 | strategy, and our strategy was how do we -- it was | | 10 | trying to answer how do we get closer to the client | | 11 | and how do we continue to grow and innovate our | | 12 | business. We identified that as an opportunity the | | 13 | mid-market, the $200 million to $1.5 billion market | | 14 | is still being underserved and underpenetrated, and | | 15 | based on the economy, the way the economy has been | | 16 | going, that if there was going to be any growth, | | 17 | the smaller companies typically lead in the growth, | | 18 | and they also are the first to spend. | | 19 | Therefore, as we begin to come out of the | | 20 | economic trough, we wanted to be well positioned to | | 21 | serve that market and essentially continue to grow | | 22 | our region, our SAP America. Historically from a |
| 00047 | | 1 | percentage of business, we also see it as a great | | 2 | opportunity as a catalyst to fuel our growth. | | 3 | Q. Just so I understand, in order to pursue | | 4 | these opportunities that you have identified, it | | 5 | was decided you needed two separate sales forces; | | 6 | is that right? | | 7 | A. Yes. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 00048 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 16 | Q. Is there a difference in selling to | | 17 | entities, the different entities? Is there a | | 18 | difference selling to a mid-market account, as you | | 19 | have defined it, versus selling to a large account, | | 20 | as you have defined it? | | 21 | A. It depends. And it would depend on a | | 22 | couple of factors. Is it different selling to a |
| 00049 | | 1 | $1.5 to $2 billion entity versus a $1.499 billion | | 2 | entity? Probably not. But selling to a $250 | | 3 | million entity versus a $1.5-plus billion entity | | 4 | yes, there's going to be some slight differences; | | 5 | one, the amount of revenues they have, the amount | | 6 | of different processes they might want to automate, | | 7 | the amount of capital that they expend in their | | 8 | capital budget. There's a variety of things like | | 9 | that that will be different. But generically to | | 10 | say they are the same, that would not be factual. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 00053 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 19 | Q. And so this system tracks the different | | 20 | opportunities that are currently being pursued by | | 21 | SAP America sales executives? | | 22 | A. Yes. |
| 00054 | | 1 | Q. What sort of information is tracked by | | 2 | this system? | | 3 | A. That's a very broad question. In | | 4 | general, it would be all of the activities related | | 5 | to the client, meaning what is the solution that | | 6 | the account executive anticipates the client | | 7 | needing, the potential revenues that we think that | | 8 | the sales cycle may generate. If there is a known | | 9 | competitor competing for the opportunity, when we | | 10 | anticipate it selling or closing. When do we | | 11 | anticipate a contract signing. Broad general | | 12 | things in those categories. | | 13 | Q. You mentioned one of the areas is a known | | 14 | competitor. Are account executives encouraged to | | 15 | learn what other alternatives a potential client | | 16 | might be considering? | | 17 | A. If they are a good account executive, | | 18 | absolutely. | | 19 | Q. How is that done? How is that sort of | | 20 | discovery done by the account executive? | | 21 | A. It's done based on what you just said. | | 22 | Discovery. It's working with the client, trying to |
| 00055 | | 1 | ascertain from the client side are you looking at | | 2 | other solutions, solution providers. Also | | 3 | intuitively they should also know, if they have | | 4 | been selling for a while, they should know. So if | | 5 | you are looking for X solution, generally available | | 6 | information says who offers X solution. We need to | | 7 | anticipate them being in the sales cycle. A | | 8 | variety of sources like that. | | 9 | Q. You mentioned intuition. What sort of | | 10 | factors -- again we are focusing on enterprise | | 11 | application software sales to these larger | | 12 | enterprises. What sort of factors would lead you | | 13 | or an account executive to conclude this is my | | 14 | competitor. What are the sorts of things they | | 15 | should be thinking about? | | 16 | A. Depends on the solution definition, if | | 17 | it's a broad solution encompassing multiple | | 18 | solution areas. Also the scale of the solution. | | 19 | For instance, if it's a multinational solution that | | 20 | is being sold in a variety of countries around the | | 21 | world hosting multiple locations, that is quickly | | 22 | going to tell the account executive then it's |
| 00056 | | 1 | probably not going to be a start-up company | | 2 | competing for that business, just because of the | | 3 | size and scope of the project. That would be like | | 4 | one factor. | | 5 | The other factor is the type of solution. | | 6 | For instance, if they say, well, I'm in the market | | 7 | to buy business intelligence software to do | | 8 | strategic enterprise management. We would never | | 9 | consider, our account executive would never | | 10 | consider PlumTree, who is a portal company, | | 11 | competing for that business. So it's just logic | | 12 | rules based on what is the problem they are trying | | 13 | to solve. | | | | | | | | | | | | | | | | | 19 | Q. Another factor may be the scale, and | | 20 | perhaps here it would be helpful. What do you mean | | 21 | by the scale? You mentioned globally, but are | | 22 | there other dimensions? |
| 00057 | | 1 | A. There's a variety of dimensions in any | | 2 | given sales cycle. I just used scale as one | | 3 | example. To elaborate on that, if you have a | | 4 | client that has operations in, say, five different | | 5 | countries, then that client, if they are going to | | 6 | use, say, a financials package, and maybe we are in | | 7 | the market to sell them a financials package as | | 8 | part of the solution, that means they will need to | | 9 | have multicurrency capability. | | 10 | Well, to do multicurrency, the solution | | 11 | set needs to provide multicurrency support, which | | 12 | we do, which some competitors may not, depending on | | 13 | which currency it is. So just by saying I need | | 14 | global instance, multiple currency support, and I | | 15 | need that supported, that is going to kind of limit | | 16 | the field of choice pretty rapidly, depending on | | 17 | which countries have to be supported. That is the | | 18 | type of logic rules. | | | | | | | | | | | | |
| 00063 | | | | | 2 | Q. Perhaps that's helpful. You mentioned | | 3 | that one of SAP's strengths is global pricing; is | | 4 | that right? | | 5 | A. Yes. | | 6 | Q. What would you list as some of the other | | 7 | strengths that SAP has? | | 8 | A. We offer the broadest set of available | | 9 | languages, largest set of multinational currencies. | | 10 | We offer the broadest solution set in the industry. | | 11 | We offer the largest innovation and research and | | 12 | development to build the best software in the | | 13 | world. We run some of the best business processes | | 14 | for some of the best companies in the world. And | | 15 | because of our customer base, we have throughout | | 16 | the last 30-plus years gained insight into best | | 17 | practices from all of these industries and all | | 18 | these customers that any new customer signing on | | 19 | with SAP, they get to leverage that knowledge base. | | 20 | And best practices of some of the other best run | | 21 | companies in the world. That is what we would | | 22 | consider at our high level key differentiators for |
| 00064 | | 1 | SAP. | | 2 | Q. Starting with the last, what is the | | 3 | importance of being able to leverage the knowledge | | 4 | base of your customer base? | | 5 | A. It's important from the perspective that | | 6 | when a client buys a solution, when they are trying | | 7 | to solve a problem, that they can rely on a company | | 8 | that has done it before, experienced maybe some | | 9 | hardships during the learning curve, and it has the | | 10 | set of experience that says this is the way we did | | 11 | it with XYZ company and this is the way we can | | 12 | solve it for you. | | 13 | The customer is not necessarily buying | | 14 | just software. They are buying a solution, and | | 15 | usually when they are making a decision, they want | | 16 | to make a decision based on what company is able to | | 17 | speak to expertise, and experience that says they | | 18 | can actually do it, and they have actually done it, | | 19 | and they have actually earned their, so to speak, | | 20 | their stripes and lessons learned. So when we go | | 21 | to engage with a client, they are buying that body | | 22 | of knowledge, and we believe that is a key |
| 00065 | | 1 | differentiator for SAP. | | | | | | | | | | | | | | | | | 7 | Q. You had mentioned a learning curve. | | 8 | Could you explain the learning curve as it pertains | | 9 | to enterprise application software. What is that | | 10 | learning curve? | | 11 | A. Learning curve, it depends on the area | | 12 | you would like to discuss. Learning curve has | | 13 | multiple meanings inside the software world. When | | 14 | I use the word "learning curve," the way I meant it | | 15 | or intended it was if you are talking about a | | 16 | company that has never automated any of its | | 17 | business processes, they are doing everything | | 18 | manual, for them to go from a manual process or a | | 19 | highly dependent, highly focused labor process to | | 20 | an automated process, that is going to require a | | 21 | major cultural change inside the core DNA of that | | 22 | company. |
| 00066 | | 1 | Software doesn't necessarily solve that. | | 2 | You actually have to have change in the people and | | 3 | their mindset along with automation. It's the | | 4 | marriage of those two that come together in an | | 5 | implementation such as SAP or any of the other | | 6 | solutions, for a client to say who is going to be | | 7 | best positioned to help me. Who has done that | | 8 | before. Who knows my business the best. Who | | 9 | understands, by the way, how other companies in my | | 10 | industry may be doing this, so who can help me the | | 11 | best. We believe that is SAP. | | 12 | So the learning curve is the client has | | 13 | got a learning curve that, to make that transition, | | 14 | they get to leverage that body of knowledge within | | 15 | SAP. Yes, on the product side it's one thing, but | | 16 | it's also on how have other companies implemented | | 17 | it. How are they leveraging it. Which pieces did | | 18 | they leverage first, second and third. That is | | 19 | what they get with SAP. That's the learning curve | | 20 | I spoke of. | | 21 | Q. And that is more from the customer's | | 22 | perspective, looking at how SAP can help it get to |
| 00067 | | 1 | where it wants to go? | | 2 | A. Absolutely. Everything we do is from the | | 3 | customer's perspective. | | 4 | Q. Looking at that, what are the industries | | 5 | in which SAP offers a deep experience, something a | | 6 | customer would value? | | 7 | A. We offer solutions in 23 broad | | 8 | industries. Our primary industries would be the | | 9 | manufacturing industries, discrete manufacturing | | 10 | process, and in those we break those down into such | | 11 | industries as chemicals, pharmaceuticals, aerospace | | 12 | and defense, high tech, consumer products, the | | 13 | services industries, financial services, banking, | | 14 | insurance, state and local government, federal, | | 15 | higher ed. Those are the broad categories, but we | | 16 | have solutions in 23. | | 17 | Q. Within those 23, are there industries in | | 18 | which SAP has deeper experience, as opposed to | | 19 | perhaps less experience in? | | 20 | A. Yes. | | 21 | Q. What are some of the deep industry | | 22 | knowledges? |
| 00068 | | 1 | A. Anything in the manufacturing realm, | | 2 | consumer products realm, are typically going to be | | 3 | the strong suit. Anything in the services side is | | 4 | going to be not as strong, such as the financial | | 5 | services side, some in the public sector side, such | | 6 | as health care, the public sector area. Those are | | 7 | probably the lower level. | | | | | | | | | | | | | | | | | | | | | | | | | | 16 | Q. Is there a learning curve on the part of | | 17 | SAP when it is entering, say, an industry in which | | 18 | it may not be as familiar with? | | 19 | A. Yes. | | 20 | Q. What is that learning curve? | | 21 | A. Again, that is a very broad question to | | 22 | be answered, but let me categorize the answer this |
| 00069 | | 1 | way. In the public sector, for instance with | | 2 | health care, there's a set of rules and governance | | 3 | around the health care area that is referred to as | | 4 | HIPPA. To know how HIPPA works and to be able to | | 5 | offer the solutions sets to solve the HIPPA | | 6 | requirements, that would require us to, one, make a | | 7 | substantial investment in learning HIPPA, | | 8 | understanding how finances and human capital and | | 9 | procurement, et cetera, all work within, inside the | | 10 | health care organizations. So it's one thing to | | 11 | learn it. | | 12 | Then the next set of body of knowledge | | 13 | from a learning curve is how do we actually | | 14 | automate it. How can we build in an automated way | | 15 | of solving the HIPPA reporting requirements which | | 16 | is going to be distinctly different than maybe the | | 17 | way a typical manufacture deals with things, | | 18 | because manufacturers doesn't have to deal with | | 19 | HIPPA. | | 20 | So each industry has its own unique set | | 21 | of regulations maybe or processes and we would have | | 22 | to make a huge capital investment to learn and then |
| 00070 | | 1 | transfer that knowledge actually into automation or | | 2 | into writing the code to solve that business | | 3 | process issue. | | 4 | So it has two effects on anybody trying | | 5 | to get into that business. Lawson has taken great | | 6 | steps, I think, and they have done a phenomenal job | | 7 | at learning about health care, working with health | | 8 | care clients, understanding the needs of health | | 9 | care clients and actually transferring that body of | | 10 | knowledge into their product. | | 11 | SAP, on the other hand, we have tended to | | 12 | focus on other areas and not as well as Lawson has | | 13 | in health care, for instance. So in that case we | | 14 | would say they are better able to solve that | | 15 | business need than we are. | | 16 | Q. You mentioned financial services as an | | 17 | area in which you have less expertise; is that | | 18 | right? | | 19 | A. I wouldn't say less expertise. I would | | 20 | say that is not our strong suit when you compare it | | 21 | to, say, high tech or one of the manufacturing | | 22 | industries. |
| 00071 | | 1 | Q. Do you find in looking at different | | 2 | industries there are different -- you mentioned | | 3 | Lawson in health care, but do you see different | | 4 | companies in terms in each of these different | | 5 | industries? | | 6 | A. Depends on the industry. There are | | 7 | different dynamics for each industry, and health | | 8 | care is just as extreme example, because Lawson | | 9 | happens to be phenomenal at health care, but, yes, | | 10 | there's different positions and players in each | | 11 | industry. | | 12 | Q. In terms of financial management | | 13 | software, are there differences, say, between what | | 14 | a discrete manufacturer may be using for financial | | 15 | management and what, say, a health care | | 16 | organization is using for financial management? | | 17 | A. At the high level, there's no difference. | | 18 | They both need to account for money. They both | | 19 | have treasury operations. They both have to pay | | 20 | people, employees and suppliers. So at the high | | 21 | level, no. But when you get into the industry | | 22 | differences between a health care organization |
| 00072 | | 1 | versus a manufacturing organization, then there | | 2 | becomes differences. | | 3 | In manufacturing, they are more worried | | 4 | about the accounting and cost management of their | | 5 | manufacturing process and cost accounting. Whereas | | 6 | in health care, they don't manufacture anything, | | 7 | they serve. They serve patients. So the | | 8 | accounting is more about patients and supplies and | | 9 | different components to serve a patient, whereas a | | 10 | manufacturer is worried about widgets and parts and | | 11 | inventories. So even though they kind of do the | | 12 | same thing and it all involves money, the actual | | 13 | how-to is distinctly different. | | 14 | Q. And those differences must be accounted | | 15 | within the software itself? | | 16 | A. Absolutely. | | 17 | Q. Let's look at human resources. Are there | | 18 | differences between, say, a discrete manufacturer, | | 19 | for example, one of the big three automotive | | 20 | companies, and a financial institution such as | | 21 | Citibank, in terms of HR applications? | | 22 | A. There's probably going to be slight |
| 00073 | | 1 | differences. Both have employees, both have | | 2 | vacation, both have accounting for payroll. At a | | 3 | high level generically they would be the same. | | 4 | However, in a financial services industry, from an | | 5 | HR standpoint they are probably going to measure | | 6 | their people and compensate their people quite a | | 7 | bit different than a discrete manufacturing person. | | 8 | Their compensation may be more hourly based, may be | | 9 | performance based on production, whereas financial | | 10 | services is going to be more tied to corporate | | 11 | goals or revenue streams. | | 12 | So the actual, again, at the high level, | | 13 | they may seem similar. You both have employees, | | 14 | but at the operational level, how it's implemented | | 15 | and what you do with the application is going to be | | 16 | distinctly different, industry to industry. So | | 17 | unfortunately the same answer as financials. | | 18 | Q. So there are differences again that must | | 19 | be accounted for within the software, depending on | | 20 | what industry you are working in? | | 21 | A. Absolutely. | | 22 | Q. In terms of the example we used, are |
| 00074 | | 1 | there, you have, say there is a unionized work | | 2 | force versus a more white collar work force. Is | | 3 | that something that is significant in terms of your | | 4 | HR enterprise application? | | 5 | A. The rules that would govern union labor | | 6 | versus non-unionized labor, sure. The management | | 7 | of those employees would be distinctly different. | | 8 | Again, we are speaking at a very high level. | | 9 | Down, the lower level you go into, the | | 10 | actual processes that each company runs is going to | | 11 | be distinctly different. I think the best | | 12 | statement is this. There are 23 different | | 13 | industries that we cover. Each industry is unique | | 14 | in its own way, and within each industry, each | | 15 | company has its own uniquenesses of how it wants to | | 16 | run its operations. So even though I know we are | | 17 | contrasting HR between a discrete manufacturer and | | 18 | a financial services industry, I want to make sure | | 19 | we understand that even in discrete manufacturing, | | 20 | the way each of the discrete manufacturers view | | 21 | themselves and the way they want to administer | | 22 | their HR policies is going to also be different. |
| 00075 | | 1 | So at the broad level industries are | | 2 | different, but even within the industries, | | 3 | companies are very different. And the software has | | 4 | to be able to be configured in such a way to solve | | 5 | what that company thinks is the more important | | 6 | elements to run its business, to try to create some | | 7 | element of competitive advantage from the other, | | 8 | their own competitors, within their given industry. | | 9 | Q. So looking -- maybe it's helpful to look | | 10 | at a particular industry, say high tech. There's a | | 11 | number of different desktop manufacturers. You | | 12 | have Dell, you have HP, for example. Would those | | 13 | two companies, would they be looking for unique | | 14 | functions in terms of their HR, their financial | | 15 | applications that say a potential vendor, software | | 16 | vendor such as SAP would have to account for? | | 17 | A. Yes. Each of those would be distinctly | | 18 | different, because the way they sell, market, | | 19 | distribute, make their products is distinctly | | 20 | different, so that is going to require different | | 21 | ways of accounting financially for their products. | | 22 | So, yes. |
| 00076 | | 1 | Q. So it sounds like neither of these | | 2 | companies could simply go to your neighborhood | | 3 | Office Depot and pull off, say, just an | | 4 | off-the-shelf software and plug it in to perform | | 5 | these functions. Is that right? | | 6 | A. Depends on what application you are | | 7 | saying. | | 8 | Q. Let's look at HR. Say we are looking at | | 9 | Dell. If Dell wants to automate its HR department, | | 10 | could it go to Office Depot and pull off a software | | 11 | package and just simply install it and run its HR | | 12 | department? | | 13 | A. At the highest level, sure. It sounds | | 14 | crazy, but yes. They could go buy a small | | 15 | off-the-shelf software solution for HR and do it. | | 16 | They would be crazy to do it, because their costs | | 17 | would be astronomically high to run it and probably | | 18 | take a lot of people to do it. It's just the same | | 19 | as we have firms that we run into today that do | | 20 | project management scheduling on Excel. Why | | 21 | haven't they converted over to Microsoft Project or | | 22 | another project scheduling system? We are talking |
| 00077 | | 1 | huge discrete manufacturing companies that actually | | 2 | run their manufacturing floor off Excel for project | | 3 | management, and they do Gant charts in Excel. Can | | 4 | it be done? Sure. It's crazy, but there's | | 5 | companies out there that do that. | | 6 | Q. The costs are much greater if you do it | | 7 | that way than if you implement SAP? | | 8 | A. From a manual standpoint, yes, because | | 9 | you are not automating the process and you are | | 10 | making it more labor intensive. | | 11 | Q. So you have more employees tracking and | | 12 | inputting data? | | 13 | A. Correct. You may not even necessarily | | 14 | have more employees, but there is much more room | | 15 | for error and you aren't allowing your data to be | | 16 | updated in real time. | | 17 | Q. So what does SAP do to position itself | | 18 | versus, say, one of these companies that may be | | 19 | using just stuff they bought off the shelf? | | 20 | A. We look at their business process, how | | 21 | they actually do it. We look at the cost that it | | 22 | takes to do it. We look at the cost, their |
| 00078 | | 1 | opportunity costs, meaning if they were to do it | | 2 | differently, would they make any substantial gains | | 3 | in productivity, would they save cost. And if so, | | 4 | we build out a business case that says here is the | | 5 | opportunity that is presented before you if you | | 6 | want to automate it, and lay out a business case to | | 7 | say here is what it's goes to cost, here is what | | 8 | it's goes to save, and here is the gap. | | 9 | Q. Do you price your product to compete with | | 10 | that off-the-shelf product? | | 11 | A. Absolutely not. | | 12 | Q. Why is that? | | 13 | A. Because you are comparing an apple to an | | 14 | orange. SAP is not a packaged software solution | | 15 | that you would buy at an office products store. | | | | | | | | | | | | | | | | | | | | | |
| 00080 | | | | | | | | | | | | | | | | | | | | | | | | | | 9 | Q. How long will it take SAP to have a | | 10 | complete financial services offering? You | | 11 | mentioned parts of it are mature, that parts are | | 12 | not. | | 13 | A. Are you meaning in terms of revenue or | | 14 | are you just meaning in terms of what we believe is | | 15 | the solution we need to bring to market? | | 16 | Q. The latter. The solution you need to | | 17 | bring to market. | | 18 | A. Based on what we believe is the path that | | 19 | we are on, I would think we are -- and this is just | | 20 | a rough guesstimate. I would think we believe | | 21 | probably in the neighborhood of maybe three solid | | 22 | years out. |
| 00081 | | 1 | Q. And how long has SAP been working on, | | 2 | say, a complete solution set for the financial | | 3 | services industry? | | 4 | A. We have had solution offerings for | | 5 | financial services for many, many years. However, | | 6 | a dedicated effort to better understand the | | 7 | industry and offer a complete solution set, I would | | 8 | say has been renewed probably in the last maybe | | 9 | year to 18 months. And that is evidenced by our | | 10 | recent announcement with Accenture, to try to | | 11 | incorporate their body of knowledge from serving | | 12 | financial services, to understand their solution | | 13 | set and try to work with them on shoring up and | | 14 | continuing the development of ours. | | 15 | Q. And this is to help SAP better -- when I | | 16 | say this, the better, the relationship with | | 17 | Accenture, and I guess that was announced in | | 18 | September, 2003; is that right? | | 19 | A. Correct. Specifically targeting | | 20 | primarily the banking industry within the financial | | 21 | services umbrella. | | 22 | Q. SAP's motivation in engaging in this |
| 00082 | | 1 | relationship is to draw on their body of knowledge | | 2 | with respect to the financial services industry? | | 3 | A. Correct. If we go back to the learning | | 4 | curve, it made better, from a strategy standpoint | | 5 | it made better sense for us to work with Accenture, | | 6 | who have, has already gone through the learning | | 7 | curve and understands the market needs of say a | | 8 | bank, and particularly the U.S. banking process, | | 9 | than it was to have us do it ourselves. | | 10 | Q. Does the relationship with Accenture | | 11 | shorten the development time? | | 12 | A. That is a goal. That is the intention, | | 13 | yes, from a strategy standpoint. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 00085 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 20 | Q. I would like to turn to, again, Exhibit | | 21 | 26 and then SAP 01191. In the first issue there, | | 22 | Lawson spent far less than SAP on research and |
| 00086 | | 1 | development. The number there quoted is $53 | | 2 | million; is that right? | | 3 | A. Yes. | | 4 | Q. Then the attack point. "Lawson spent 14 | | 5 | percent less on research and development over the | | 6 | past year." How is that used as an attack? What | | 7 | is the significance of spending less year-to-year | | 8 | on R&D? | | 9 | A. It goes to momentum within the | | 10 | enterprise, within their company. It's critical in | | 11 | the software world to show that you are in tune | | 12 | with the market and that you are making progress to | | 13 | innovate and develop your product. | | 14 | One of the things we train our sales reps | | 15 | to do is in a sales cycle such as going against | | 16 | Lawson, to point this out. The reason is this. | | 17 | Ask the question, why did Lawson spend less money. | | 18 | Maybe their product was less important this year. | | 19 | Maybe they aren't investing in, innovating and | | 20 | making their solution the best it can be in the | | 21 | world. Maybe they are having financial difficulty | | 22 | and they had to cut costs. So if they have cut |
| 00087 | | 1 | costs on their product, then the product is not | | 2 | going to improve next year. | | 3 | These are just questions that this one | | 4 | line in a publicly traded piece of information | | 5 | opens for our sales reps to ask the questions. We | | 6 | don't say that we know the answer. We are just | | 7 | saying to the sales rep that in a sales cycle, if | | 8 | they are up against Lawson, this is something you | | 9 | should call into question, because R&D investment | | 10 | and the stability of R&D investment over the long | | 11 | term goes to product integrity and the product, the | | 12 | way it innovates into the future. So either they | | 13 | are improving their product or they are stagnating. | | 14 | If they reduce their R&D investment, they are | | 15 | stagnating, especially by that large of a percent. | | 16 | That is a red flag. Something is wrong at Lawson. | | | | | | | | | | | | | | | | | | |
| 00102 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 20 | Q. Now, you mentioned this was a growth | | 21 | strategy. What was SAP's traditional base? If | | 22 | this was a new market for SAP or new opportunity, |
| 00103 | | 1 | what was, how would you describe their traditional | | 2 | market? | | 3 | A. Traditional market, loosely defined, I | | 4 | would think would be like $500 million and up, | | 5 | would be our good, core, always do business at. | | 6 | Q. Are there, beyond the industry | | 7 | differences which we discussed, are there | | 8 | differences in your success depending on a | | 9 | company's revenues? I mean, you mentioned the | | 10 | decision to create this new sales force for $200 | | 11 | million to $1.5 billion and then $1.5 billion and | | 12 | above. | | 13 | A. Yes. | | 14 | Q. And we talked about some of the reasons | | 15 | behind that. Now, consistent with that, I guess | | 16 | I'm still trying to understand, what is the need | | 17 | for this dedicated sales force for the $200 million | | 18 | to $1.5 billion market. | | 19 | A. We see that there is a huge opportunity | | 20 | in that segment. If we look at just the volume of | | 21 | business and the amount of revenues that we extract | | 22 | from the $1.5 billion market and up, we do fairly |
| 00104 | | 1 | well. And from a strategy standpoint, we would | | 2 | call that growing our customer share or growing our | | 3 | wallet share of a client. Meaning if they have an | | 4 | installation of SAP, we would be focused on cross | | 5 | selling other applications, trying to expand the | | 6 | SAP footprint within the enterprise. | | 7 | In the segment of $1.5 billion and below, | | 8 | just the sheer volume of business, it did not | | 9 | equate to the same ratio for the effort. We would | | 10 | call that our market share strategy. Just because | | 11 | of the sheer number of enterprises, we feel that we | | 12 | are underserving that market. And the reason why | | 13 | we are underserving that market is because our | | 14 | sales reps are focused, the sales reps that we had, | | 15 | focused on the large enterprises. Their time was | | 16 | being eaten up by these large enterprises. When | | 17 | you are dealing with a multinational conglomerate, | | 18 | one sales or two salespeople, it takes a lot of | | 19 | time from that person to be knocking on doors and | | 20 | try to sell to other smaller-sized companies. | | 21 | So for us to grow, we decided that one of | | 22 | our growth strategies was to actually take a sales |
| 00105 | | 1 | force, dedicate it to what we were calling the | | 2 | mid-market in order to drive our market share up, | | 3 | meaning bring in net new business. Historically if | | 4 | you look at business, the business cycle for SAP | | 5 | over the last couple years, the vast majority of | | 6 | our business has been customer share business, | | 7 | meaning customers that were already a client, | | 8 | adding net new solutions or upgrades, et cetera, | | 9 | but we were not bringing in a good share of net new | | 10 | business. Not when you compare it to that of, say, | | 11 | Oracle, PeopleSoft, Siebel, JD Edwards. They were | | 12 | growing net new clients at a much greater rate than | | 13 | we were. | | 14 | So we viewed that from a pure strategy | | 15 | standpoint. We were leaving that market unserved. | | 16 | It was to the best interest of SAP in order to fuel | | 17 | our growth to dedicate someone and hold them | | 18 | accountable for selling to that segment. So it was | | 19 | because of our own internal efforts of viewing | | 20 | ourselves as an opportunity that we said let's | | 21 | create a separate sales force. | | | |
| 00112 | | | | | | | | 3 | Q. Are there differences in how SAP | | 4 | positions its products to, say, a customer with | | 5 | $800 million in revenue versus say a customer with | | 6 | $8 billion in revenue? | | 7 | A. Yes. There is a difference. | | 8 | Q. What would those differences be? | | 9 | A. It would go to, more to our marketing and | | 10 | perception areas. Oftentimes SAP is viewed as | | 11 | being too costly, too long to implement, very | | 12 | complex software solution. So for some of the | | 13 | smaller organizations that might be like an $800 | | 14 | million company or smaller, those are going to be | | 15 | the typical answers or statements that a company | | 16 | may make to us. | | 17 | So we work with our sales reps to help | | 18 | them answer those questions. It costs too much. | | 19 | Well, we have redesigned and repackaged our | | 20 | solutions over the years. They have evolved and | | 21 | now it doesn't cost too much, and cost is relative. | | 22 | We look at total cost of ownership. So we make a |
| 00113 | | 1 | commitment to the client that if the business case | | 2 | doesn't prove it, we don't want them buying our | | 3 | solution. And that is a commitment we make up | | 4 | front with the client. | | 5 | Second is on, it takes too long or costs | | 6 | too much to implement. What we work with a client | | 7 | on in that case or in that regard is we actually | | 8 | have done some research to look at the average time | | 9 | it takes to implement our software given different | | 10 | sizes of companies. And we will show them that | | 11 | for, I think your example was an $8 billion | | 12 | company. Yes, the complexities that surround that | | 13 | company are going to be from a scale standpoint, | | 14 | people changes, technology changes, the amount of | | 15 | systems they have already in place. Their | | 16 | environment will be a little more complex, so it | | 17 | may take longer to implement the solution, | | 18 | depending on what they are buying, versus that of | | 19 | an $800 million company. But we have an average | | 20 | implementation graph that we typically will refer | | 21 | to or show and say for companies within your size, | | 22 | the average implementation time in that case might |
| 00114 | | 1 | be six to nine months, whereas with the $8 billion | | 2 | company it might be more like 12 to 15 months. So | | 3 | that is how we try to answer that question. So the | | 4 | sales approach is going to be a little different in | | 5 | the messages that we deliver. So that is how there | | 6 | would be a difference. | | 7 | Q. So it sounded like, and correct me if I'm | | 8 | wrong, messaging to an $800 million company there | | 9 | are three areas that SAP has found it needs to | | 10 | address. One is too costly; two, that it takes too | | 11 | long to implement; and three, that it's too | | 12 | complex; is that right? | | 13 | A. Not the too complex, to an $800 million. | | 14 | Oftentimes it's the $800 million and below customer | | 15 | that would say your software is too complex. It | | 16 | might be too much for what we need. That, we don't | | 17 | want to buy something that we don't need. We | | 18 | normally don't hear that from an $8 billion | | 19 | company. We hear that from an $800 million | | 20 | company. | | 21 | Q. I'm sorry, I meant to reference the $800 | | 22 | million company. The $8 billion company, what |
| 00115 | | 1 | makes these three things not concern, why aren't | | 2 | these concerns of the $8 billion company? | | 3 | A. These are typically the top three things | | 4 | that we will hear from a variety of sources. An $8 | | 5 | billion company, the internal complexities that | | 6 | govern their structure, their IT landscape, their | | 7 | business processes, typically are going to be | | 8 | oftentimes more complex than an $800 million | | 9 | company. Again, depending on which industry they | | 10 | are in. | | 11 | Generically at the top, if you ask any of | | 12 | our SAP clients what do you think of SAP, or maybe | | 13 | someone that is not a client, regardless of size, | | 14 | that is going to be the top three things they will | | 15 | probably rattle off the top of their head. At | | 16 | least that is the analysis and data input we have | | 17 | gotten back from our research. | | | | | | | | | | | | | | | |
| 00116 | | | | | | | | 3 | Q. What makes that so different? Why is the | | 4 | $8 billion company so different from the $800 | | 5 | million company? | | 6 | A. The best answer is that it depends. | | 7 | There's no set of, there's no five reasons why. | | 8 | Each company is going to be different. Just the | | 9 | sheer size and scope, and depending on which | | 10 | industry, the business processes that they deal | | 11 | with are typically going to be on average larger | | 12 | and more complex and the solution set is going to | | 13 | be needed to solve that, going to need to be larger | | 14 | and more detailed versus an $800 million company. | | 15 | That is not to say that an $800 million | | 16 | company does not have a lot of the same business | | 17 | issues or even some of the same complexities. | | 18 | Certain industries might be just as complex, | | 19 | especially companies that are in maybe a high | | 20 | growth or fast growth mode. | | 21 | You take a small company that is, say, | | 22 | $500- to $800 million that is growing annually at |
| 00117 | | 1 | 20 to 25 percent, there's only a few of those | | 2 | around today. If they are growing at a clip of 20 | | 3 | percent a year, then they are going to have a | | 4 | totally different set of challenges than an $8 | | 5 | billion company that is averaging 1 percent or 2 | | 6 | percent growth. So in that case the complexities | | 7 | that surround that smaller company are going to be | | 8 | even more challenging. They are having to add more | | 9 | people, more systems, changing the way they do | | 10 | business. If they are a manufacturer, they are | | 11 | having to bring on new production lines. Each | | 12 | customer is different. To categorically lump a | | 13 | client together based on revenues, that is doing a | | 14 | disservice to each of our clients who are just into | | 15 | the general market overall. | | | | | | | | | | | | | | | | | | | | | |
| 00118 | | | | | | | | | | | | | | | | | | | | | | | 8 | Q. One of the complexities you mentioned was | | 9 | the pace of growth. The $800 million growing at 20 | | 10 | percent annually presents challenges to, say, a | | 11 | vendor attempting to sell them an enterprise | | 12 | software application; is that right? | | 13 | A. It could, yes. | | 14 | Q. Can you think of other examples in which | | 15 | the characteristics of the company create | | 16 | challenges for the enterprise software application | | 17 | vendor? | | 18 | A. There's a variety of potentials. Another | | 19 | example, to give you an example, would be, let's | | 20 | say you have a company that has decided from a | | 21 | strategy standpoint that they are going to change | | 22 | their manufacturing processes. Maybe they are |
| 00119 | | 1 | changing their locations of plants or maybe they | | 2 | are going to go from a make to a buy, where they | | 3 | are going to outsource most of the manufacturing. | | 4 | That is a pretty complex decision and has | | 5 | ramifications on labor, plant location, assets, | | 6 | human capital, for a potential outsourcing. That | | 7 | is a highly complex, that one decision becomes a | | 8 | highly complex set of factors that would say how am | | 9 | I going to do this. | | 10 | If they have a software solution from SAP | | 11 | or anyone else, that is going to require quite a | | 12 | bit of changes in order to facilitate that. Any | | 13 | type of strategy change that a board wants to | | 14 | implement typically will have ramifications across | | 15 | all lines of business, and that is just one | | 16 | example. So pick any business scenario and it | | 17 | could have the same ripple effect, and it could | | 18 | affect software. | | | | | | | | | | | | |
| 00120 | | | | | | | | 3 | Q. What is involved with implementation? | | 4 | Why isn't it simply just plugging in SAP software, | | 5 | loading the disk and letting it run? | | 6 | A. The reason is usually when you load a | | 7 | disk and let it run, that would lead me down the | | 8 | path that you are talking about desktop software, | | 9 | where it's going to be installed on one computer | | 10 | and probably going to be used by one person making | | 11 | a simple process like typing a Word document or | | 12 | maybe creating an Excel spreadsheet. | | 13 | When you install enterprise application | | 14 | software, oftentimes it's going to be touching or | | 15 | controlling what we would call a mission critical | | 16 | system of a company. You use financials or HR, | | 17 | let's say, how are you going to pay your people. | | 18 | If it doesn't work right, your people don't get | | 19 | paid. You have a whole bunch of upset employees. | | 20 | That's totally different than your desktop computer | | 21 | hung up and you have got to reboot your computer to | | 22 | get your Word document back, or you lost your Word |
| 00121 | | 1 | document. Losing a Word document and comparing | | 2 | that to having payroll not run on time, that is | | 3 | comparing apples and oranges. | | 4 | In our previous deposition I gave you the | | 5 | example of supply chain and compared it to desktop | | 6 | solutions. If you try to schedule your raw | | 7 | materials into your production line incorrectly, | | 8 | you could shut down your whole production line, | | 9 | impacting not only your inventory, but downstream | | 10 | effects to your consumers and all of your employees | | 11 | who are in manufacturing. And to stop a production | | 12 | line, you are going to cost the corporation | | 13 | literally millions of dollars a day. Comparing | | 14 | that to something that you can just install | | 15 | yourself on one desktop or something like that, | | 16 | you, it's not a fair question. | | | | | | | | | | | | | | | | | | |
| 00124 | | 1 | MR. LINDSTROM: Let me break in and offer | | 2 | a suggestion, if it would be helpful to you. I'm | | 3 | not sure if it would be, but I notice in the past | | 4 | few minutes there have been references back and | | 5 | forth to testimony given during the CID proceeding. | | 6 | That transcript has been marked as Exhibit 27 at | | 7 | today's deposition. I have read it, and if it | | 8 | would expedite matters, I would be happy to | | 9 | stipulate for purposes of this deposition that | | 10 | either side could use the CID examination, Exhibit | | 11 | 27, as though it were a deposition taken in this | | 12 | proceeding, pursuant to the Federal Rules of Civil | | 13 | Procedure, and that way we won't need to go over | | 14 | the same matters, unless there's further | | 15 | questioning that you want to conduct on those. | | 16 | And, of course, I would be free to cross, if I | | 17 | thought it was appropriate, based on Exhibit 27. | | 18 | MR. ANDEER: Okay. Sure, I will agree to | | 19 | that. I believe that will save us some time. | | | | | | | | | |
| 00128 | | 1 | Q. Does SAP have the right to increase | | 2 | maintenance prices annually? Is there a lock, do | | 3 | you lock in -- strike that. In your typical | | 4 | contract, does SAP commit to the 17 percent level | | 5 | for the life of the software? | | 6 | A. No. No. | | 7 | Q. Is it an annual commitment? Is it | | 8 | renegotiated annually? | | 9 | A. It's not renegotiated at all. A typical | | 10 | contract is, today's pricing is 17 percent, and | | 11 | it's for one year. And we bill it annually at the | | 12 | beginning of the year, and it's subject to terms | | 13 | and conditions of the pricing. So if we have a | | 14 | price increase, then they will be subject to the | | 15 | price increase going forward. When we work with | | 16 | the client on that, we are talking 17 percent of | | 17 | what could be potentially millions of dollars for a | | 18 | sale. They typically will want some reassurances | | 19 | on pricing, and that is where we will then fall | | 20 | back and say we have not had a price increase for | | 21 | almost 10 years, so the likelihood of that going up | | 22 | to 18 or 22 next year is, the probability is |
| 00130 | | | | | | | | 3 | Q. Are the customers using -- we had | | 4 | referenced earlier, I guess 2,800 entities that SAP | | 5 | America has a relationship with, that you sold | | 6 | software to. | | 7 | A. Approximately. | | 8 | Q. What percentage of those buying entities | | 9 | are also using SAP or making themselves availed of | | 10 | SAP's maintenance services? | | 11 | A. The exact number I'm not positive of. | | 12 | However, with a great deal of, a good number, I | | 13 | would say we are probably talking about probably | | 14 | high 90s. Very few instances of SAP are not | | 15 | maintained. Very few. | | 16 | Q. In discussing maintenance with customers | | 17 | or in the sales cycle, let's look more broadly. In | | 18 | the sales cycle you are looking at, obviously, your | | 19 | software license pricing at some point, as well as | | 20 | your maintenance pricing at some point. Are they | | 21 | also interested in future versions? Say several | | 22 | years ago I'm looking at R/3 enterprise. Were they |
| 00131 | | 1 | interested in where SAP was going to develop its | | 2 | product to the point where it's now mySAP ERP? Was | | 3 | that a subject of discussion? | | 4 | A. Oftentimes it is. The clients don't, | | 5 | oftentimes the clients don't refer to it the way | | 6 | you asked the question. What they want to know is, | | 7 | as part of the sales cycle, the clients typically | | 8 | will ask us for what is your product road map, in | | 9 | which they would like us to tell them where is the | | 10 | product headed, what are our R&D efforts that are | | 11 | currently underway with that particular element, | | 12 | that module, that package or piece of | | 13 | functionality. | | 14 | And what we do is during the sales cycle | | 15 | we will share with the client the product road map | | 16 | that we make publicly available to all clients | | 17 | going forward. What we do not do is tell a client | | 18 | here is the real deal that we are going to do with | | 19 | this product. We are going to change it this way | | 20 | and that would be three years out. That may be a | | 21 | strategy for us three years out, but we are not | | 22 | going to tell a client that. |
| 00132 | | 1 | We are extremely conservative on what we | | 2 | show a client, because one thing that SAP wants to | | 3 | make sure of, because competitively I think it's | | 4 | another differentiator, is we are very true to what | | 5 | we commit to. So if we say here is the product | | 6 | road map, here is what we know and this is what we | | 7 | plan to deliver, then that is what we work toward. | | 8 | So we don't try to promise anything in the future | | 9 | that we don't know that we have a good probability | | 10 | of delivering. | | 11 | Then at the same time we don't paint a | | 12 | picture for each client that is different. It's | | 13 | the same picture. You want the product road map, | | 14 | corporation A, B or C, they are going to get the | | 15 | same product road map at all companies. | | | | | | | | | | | | | | | | | | | | | |
| 00133 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 16 | Q. Are the costs, are you aware of the costs | | 17 | involved with transitioning customers -- strike | | 18 | that. Are the costs, you have identified there are | | 19 | some costs going from R/3 enterprise to mySAP ERP? | | 20 | A. Yes. | | 21 | Q. Is it your understanding there are | | 22 | similar costs associated in going from an earlier |
| 00134 | | 1 | PeopleSoft version to a PeopleSoft 8? | | 2 | A. Yes. Anyone in this space would have a | | 3 | cost differential. | | 4 | Q. Anyone meaning any vendor going from one | | 5 | version to another, there is a cost difference. | | 6 | A. In any software company going from one | | 7 | version to another, there is going to be an | | 8 | incremental cost. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 00135 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 17 | Q. Are there costs to that customer in going | | 18 | from PeopleSoft 7 to SAP? | | 19 | A. Yes. | | 20 | Q. What are those costs? | | 21 | A. Costs off the top of my head would be | | 22 | licensing, maintenance, implementation. That would |
| 00136 | | 1 | be the three broad costs. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 18 | Q. Can you explain or list some of the | | 19 | differences between the two implementations? Where | | 20 | are some of the differences? Why is it different | | 21 | implementing it in kind of a, what we will call | | 22 | greenfield opportunity versus, say, a company that |
| 00137 | | 1 | already has PeopleSoft 7 or an Oracle 10.7 | | 2 | installed? | | 3 | A. It's going to vary by -- in terms of what | | 4 | you are trying to get to, I think it's going to be | | 5 | hard to contrast the two, because each client is | | 6 | different. So with the greenfield opportunity, | | 7 | there would be a whole bunch of caveats, like do | | 8 | they even have any other type of technology | | 9 | implemented or are they just using desktops, so | | 10 | they don't even have an infrastructure. Do they | | 11 | have any other type of software? HR. How do they | | 12 | do their financials. If they have experience with, | | 13 | say, Oracle or Lawson or someone else on the | | 14 | financial side, then the implementation may not be | | 15 | nearly as bad. | | 16 | If they are totally manual and they are | | 17 | just now going to the first enterprise-type | | 18 | solution and this is the first time they ever | | 19 | bought software of this magnitude to run an | | 20 | automated process, business process, that is going | | 21 | to create a whole set of challenges and skill set | | 22 | issues that they are going to need to have a |
| 00138 | | 1 | learning curve on, versus a client that is a | | 2 | PeopleSoft customer or an Oracle customer that has | | 3 | an older version that, just by that very nature, | | 4 | knowing that, that means they at least understand | | 5 | the use of technology. They understand the use of | | 6 | automated business processes. They understand the | | 7 | implications that it has on culture within the | | 8 | company and the dynamics that surround it. | | 9 | So to take those two and contrast them, | | 10 | it's going to be very different. At the highest | | 11 | level, the learning curve that the PeopleSoft or | | 12 | the Oracle shop has is going to help them on their | | 13 | implementation, versus someone that is going from a | | 14 | totally manual, because totally manual means there | | 15 | will have to be a lot more change in management | | 16 | that will have to happen. Whereas with PeopleSoft | | 17 | or Oracle shops, they have already started that | | 18 | change in management. They have already changed | | 19 | the way they do the business process. That is | | 20 | talking highest process. That is not talking | | 21 | operations and people and skill set. That is just | | 22 | trying to compare the two here in a brief |
| 00140 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 17 | Q. Another one of these campaigns is one | | 18 | targeted at I believe a company you said was Baan? | | 19 | A. Baan; correct. | | 20 | Q. Is that campaign, could you go into that | | 21 | a little bit more? Is that campaign the same sort | | 22 | of strategy as what you are doing with the JD |
| 00141 | | 1 | Edwards/PeopleSoft campaign? | | 2 | A. Not exactly. The Baan campaign was an | | 3 | early campaign, if my memory, if I recall it | | 4 | correctly. It was one we launched in January of | | 5 | 2003. And the idea there was Baan I believe had | | 6 | just been sold again, and their market share and | | 7 | revenues had continued to decrease over the last | | 8 | couple years, and they had been I think sold or | | 9 | acquired several times in like the last two to | | 10 | three years. So we just viewed that as a unique | | 11 | opportunity to walk in and help these Baan | | 12 | customers out, because the Baan product was | | 13 | stagnant. Their technology stack was stagnant. No | | 14 | R&D was really being invested there. There was | | 15 | really no good product road map, at least from our | | 16 | assessment, so we figured these customers were | | 17 | literally left holding the bag with no future | | 18 | development. SAP viewed that as a unique | | 19 | opportunity. | | 20 | Q. When you say the Baan product was | | 21 | stagnant, what do you mean? | | 22 | A. If you look at the time in between their |
| 00142 | | 1 | product releases or updates or new product roll | | 2 | outs, it had become slow and the time gap started | | 3 | to widen. Their R&D spending went down. Their | | 4 | sales went down. So we viewed that as the product | | 5 | is not maturing and advancing. Innovation stopped | | 6 | and they become stagnant or actually not keeping | | 7 | pace with the new technologies in the marketplace. | | 8 | So we viewed that as a competitive opportunity. | | 9 | Q. So it's important, or you viewed it as an | | 10 | opportunity because you saw that there was no | | 11 | ongoing development with the product? | | 12 | A. Correct. | | 13 | Q. Was the product being maintained? | | 14 | A. I don't know. I believe so. I believe | | 15 | they were still reporting decent maintenance | | 16 | revenues, but maintenance and innovation are two | | 17 | different things. | | 18 | Q. Why are those -- could you explain why | | 19 | are those two different things? I mean what -- | | 20 | strike that. When you say innovation, what do you | | 21 | mean by that? | | 22 | A. Software. The area that we work in, the |
| 00143 | | 1 | enterprise application software market, the | | 2 | technology that we use and have evolved to solve | | 3 | business problems fosters itself in the capability | | 4 | that a software matures. In other words, software | | 5 | evolves over time. It becomes better. It can do | | 6 | more. It can solve more issues. It can integrate | | 7 | with other systems. It can, it morphs over time. | | 8 | We viewed Baan as lacking those things, and we | | 9 | didn't see any insight or future direction for | | 10 | their product. So if a customer, if a Baan | | 11 | customer -- at least this was our position -- if a | | 12 | Baan customer wanted to improve a business process | | 13 | and it was XYZ business process, the Baan product | | 14 | probably would not be able to support them to do | | 15 | that, because it's not new, it's not been kept up | | 16 | to date, or at least from our estimation it was | | 17 | not. | | 18 | So we viewed that as an opportunity to go | | 19 | in and say, well, we can help you do X, Y and Z. | | 20 | So evidently Baan hasn't, so why don't you just | | 21 | come on over to SAP and we will help do you that. | | 22 | And by the way, we are going to be around a while. |
| 00144 | | 1 | And we have got great momentum and we are going to | | 2 | have a lot of customers in your industry and we | | 3 | invest a lot of money in R&D and they don't and all | | 4 | those other things. That's why. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 00147 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 11 | Q. Let's focus on 29, since that is the one | | 12 | you are probably at least somewhat more familiar | | 13 | with. This is the e-mail is from Bill McDermott, | | 14 | who you identified as the CEO of SAP America, to | | 15 | you and Greg McStravick. Who is Greg McStravick? | | 16 | A. Greg McStravick is, at the time of this | | 17 | document, he was the senior vice president of | | 18 | marketing, and why I was probably copied on this is | | 19 | that I had the role that Greg has this year, last | | 20 | year. Prior to his arrival, I ran marketing, so | | 21 | that is probably why we are both on the e-mail. | | 22 | Q. It looks like Mr. McDermott has forwarded |
| 00148 | | 1 | a message from Mr. Apotheker containing two | | 2 | attachments. I would like to focus on the second | | 3 | of these attachments, which starts at SAP 29031. | | 4 | A. Yes, I'm there. | | 5 | Q. What is CMI? | | 6 | A. Competitive market intelligence. | | 7 | Q. Are these regular alerts? Is that | | 8 | something you regularly receive? | | 9 | A. Yes. | | 10 | Q. Who prepares these documents? | | 11 | A. They are prepared out of the CMI group | | 12 | that reports through global marketing, and they | | 13 | send these alerts out to our worldwide organization | | 14 | as what it is, as an alert, to notify people of | | 15 | things that are happening within the marketplace. | | 16 | Q. And CMI, is that, you said they report up | | 17 | through the global marketing group? | | 18 | A. That is correct. | | 19 | Q. Where is that group located? | | 20 | A. CMI is, the bulk of these individuals are | | 21 | housed in the Waldorf, Germany area. Global | | 22 | marketing's headquarters is located in New York, |
| 00149 | | 1 | New York. | | 2 | Q. Are these alerts something you would read | | 3 | and rely on in the ordinary course of business? | | 4 | A. Broadly speaking, yes. | | 5 | Q. Do you know who within the CMI group | | 6 | prepared this particular alert? | | 7 | A. No. And the reason for that is this is a | | 8 | team effort. This document is a team effort. | | 9 | Components of this document were probably, is | | 10 | oftentimes gathered from the field organizations, | | 11 | such as the market intelligence team in SAP | | 12 | America. They would work with their counterparts | | 13 | in CMI, the global team, to provide input from the | | 14 | field organization, and then they would compile all | | 15 | of the analysis from the field and their own | | 16 | analysis to create this type of a document. This | | 17 | is a collaborative document. | | 18 | Q. Looking at SAP 29032, which is the second | | 19 | page of this attachment, looking at the first | | 20 | column, the final bullet point, would you mind | | 21 | reading that for the record? | | 22 | A. "PeopleSoft customers are the ones hurt |
| 00150 | | 1 | the most. With Oracle abruptly devaluing users and | | 2 | their investment in PeopleSoft applications, Oracle | | 3 | plans to end future enhancements to products and | | 4 | will force customers to incur switching costs in | | 5 | the future." | | 6 | Q. Do you agree with that statement? | | 7 | A. Yes. | | 8 | Q. Why do you agree? I mean, could you | | 9 | explain why you agree with that statement? | | 10 | A. The reasoning, again, this goes back to | | 11 | the timing of this document and the timing of where | | 12 | this analysis comes from. Oracle, in its initial | | 13 | bid to buy PeopleSoft, one of the statements they | | 14 | made was that they presented an end-of-life | | 15 | campaign or end-of-life statement concerning the | | 16 | PeopleSoft applications and made a declarative | | 17 | statement that their products would have to morph | | 18 | or transition into the Oracle suite. Because of | | 19 | that, that is why this paragraph is in there. This | | 20 | is our analysis based off of what the | | 21 | representatives from Oracle stated. It totally | | 22 | devalues the investment that PeopleSoft has made to |
| 00151 | | 1 | their shareholders, to their product line and to | | 2 | their customers, to totally dismiss it and say that | | 3 | it is of no value, and the customers they have | | 4 | today and the process they are running is of no | | 5 | value and that it's going to have to transition to | | 6 | Oracle. That was what we consider a very | | 7 | overheated, hard-handed approach to the clientele | | 8 | and to their shareholders. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 00152 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 14 | Q. Sure. Oracle has publicly said it will | | 15 | upgrade PeopleSoft customers to the most recent | | 16 | version of Oracle eventually. | | 17 | A. Okay. | | 18 | Q. Is this upgrade to the next release of | | 19 | Oracle, whenever that is going to take place, is | | 20 | that as easy or as painless as Oracle has made it | | 21 | sound? | | 22 | A. No. |
| 00153 | | 1 | Q. And why is that? | | 2 | A. Based on the knowledge that I have, | | 3 | Oracle's products only run, for instance, on an | | 4 | Oracle database. Oracle typically integrates only | | 5 | with itself, aggressively. PeopleSoft has a little | | 6 | bit of a different approach, where they are a | | 7 | little more open in working with multiple databases | | 8 | and tend to operate in a little bit more of a | | 9 | heterogeneous environment. Oracle tends to not be | | 10 | that way. | | 11 | So therefore to go from a more | | 12 | heterogeneous type of environment and stating that | | 13 | you must now come to Oracle and only use Oracle | | 14 | databases and only have all your infrastructure on | | 15 | Oracle and become more, a little more homogeneous, | | 16 | that is going to be painful, especially if you have | | 17 | a PeopleSoft shop that is quite diversified in a | | 18 | heterogeneous environment. To say that the | | 19 | conversion is easy and they will just convert over | | 20 | to Oracle, that is not a solid claim. | | 21 | Q. What makes it so painful? You said this | | 22 | would be a painful process. Could you kind of |
| 00154 | | 1 | discuss what is involved with that? What does it | | 2 | take to take a PeopleSoft customer and change it to | | 3 | an Oracle customer, or just not even looking at | | 4 | PeopleSoft, is it similar to what it would take to | | 5 | convert a PeopleSoft customer to an SAP customer? | | 6 | A. Yes and no. Yes in regard that to switch | | 7 | any type of enterprise system to another, that is a | | 8 | pretty substantial change. Why is it more | | 9 | difficult in this situation? To go from an SAP or | | 10 | from a PeopleSoft to an SAP, we tend to be a little | | 11 | bit more open, especially with our NetWeaver | | 12 | technology stack. We basically say that we are | | 13 | totally open, totally integratable with other | | 14 | systems. | | 15 | We have an infrastructure that supports | | 16 | that. We are .NET compliant, J2EE compliant. We | | 17 | have an XI or exchange infrastructure layer to show | | 18 | that we have connectors and integration points to | | 19 | other systems. PeopleSoft is not nearly as robust | | 20 | as us, but has at least some of the same | | 21 | capabilities, and they tend to be much more open. | | 22 | So there still is going to be a |
| 00155 | | 1 | monumental task. The reason why this is in this | | 2 | document is because Oracle tends to be much more | | 3 | closed in their systems infrastructure, because | | 4 | they want everything. So we believe that | | 5 | directionally and from a strategy standpoint, that | | 6 | is a disadvantage for PeopleSoft. But to be clear, | | 7 | to go from Oracle, PeopleSoft, SAP, Lawson, any of | | 8 | the others, to switch, it's going to be costly and | | 9 | it will require a good labor of time and effort. | | 10 | And the other thing I will add is, though | | 11 | I'm not a technologist, as I stated earlier, JD | | 12 | Edwards core architecture is distinctly different | | 13 | than the PeopleSoft core architecture. Those are | | 14 | two competing architectures that have to come | | 15 | together, and somebody has got to win or the | | 16 | product has to become rearchitected to blend those | | 17 | two lines together. | | 18 | Oracle is a totally different set of | | 19 | architecture. So in this situation you are talking | | 20 | about taking three architectures, merging them into | | 21 | one company and saying that the Oracle architecture | | 22 | is the one that is going to win, and discounting |
| 00156 | | 1 | the value of the PeopleSoft architecture and | | 2 | discounting the value of the JD Edwards | | 3 | architecture. That has massive ramifications on | | 4 | the way technology would be used by any company. | | 5 | Q. So it sounds like there are costs | | 6 | associated any time you are going from one | | 7 | application to another vendor's application. | | 8 | A. Yes. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 21 | Q. You have testified that you don't believe | | 22 | that the process will be all that easy if Oracle |
| 00157 | | 1 | attempts to transition existing PeopleSoft | | 2 | customers to the new version of Oracle? | | 3 | A. Correct. | | 4 | Q. What is your basis for that belief? | | 5 | A. My basis would be reliant upon fact, and | | 6 | the fact that I will draw on is SAP's history. If | | 7 | you look at the history of this market and you look | | 8 | at the players within this market, you do not see a | | 9 | large amount of switching between different | | 10 | systems. | | 11 | So, for instance, even though we have a | | 12 | PeopleSoft/JD Edwards campaign, we have not had | | 13 | like a hundred or even a thousand customers come | | 14 | running, saying yank out my PeopleSoft system | | 15 | because I fear Oracle and let me give you a bunch | | 16 | of money, SAP. We have just not seen that. I'm | | 17 | talking less than a handful may have chosen to do | | 18 | that. So though it's nice in documents, in | | 19 | practicality there is a lot of money in investment | | 20 | and human capital and emotional intelligence built | | 21 | into these systems. You don't go and rip them out | | 22 | and replace them overnight. |
| 00158 | | 1 | And to trivialize them, that they can | | 2 | just transition from PeopleSoft to Oracle, is a | | 3 | total disregard to the investments into the process | | 4 | that these companies are running. We are talking | | 5 | about running a core company's foundation. The | | 6 | shareholders should be shaking in their shoes. | | 7 | What if their manufacturing plant closes | | 8 | or production line stops? So to trivialize it, | | 9 | that you can just upgrade it and they will | | 10 | transition, we view that as not accurate, and our | | 11 | history would say we don't go around replacing a | | 12 | lot of systems. That is not our core business. | | 13 | Our core business is selling net new, and if it's | | 14 | PeopleSoft HR that is implemented, we would be | | 15 | selling around them to sell a supply chain. We | | 16 | would sell them financials. We would sell them | | 17 | something else. | | | | | | | | | | | | | | | |
| 00161 | | | | | | | | | | | 4 | Q. In the sales process, in the sales cycle | | 5 | we identified, when is price first mentioned? | | 6 | A. It varies by client. | | 7 | Q. So customers may ask in the discovery | | 8 | phase how much your products cost? | | 9 | A. Yes. | | 10 | Q. And how do you answer that question, how | | 11 | does SAP answer that question? | | 12 | A. Early in the discovery process we would | | 13 | typically answer that it depends on the solution | | 14 | set you are trying to drive and what business | | 15 | process you are trying to solve. So without having | | 16 | a good solution definition, which would be kind of | | 17 | like toward later in the evaluation phase to know | | 18 | what the client really needs, it's hard to really | | 19 | determine a price. We can definitely give ranges | | 20 | and ballparks, but it would be just a guess. | | 21 | Q. So if I'm a company in the market for an | | 22 | HR solution and I'm just beginning the process and |
| 00162 | | 1 | I ask how much is HR going to cost me, your | | 2 | response would be -- | | 3 | A. It depends on what functions of HR you | | 4 | would like. What functions of HR or what business | | 5 | issues or bottlenecks in your company are you | | 6 | trying to solve. | | 7 | Q. So SAP needs to learn about that | | 8 | particular customer's needs, as well as plans, in | | 9 | order to price the product. Is that fair? | | 10 | A. Correct. That's why that phase is called | | 11 | discovery. We have to discover those things and | | 12 | have a good understanding in order to craft or | | 13 | portray back to the customer the right set of | | 14 | solutions. | | 15 | Q. I believe the second phase was what I'm | | 16 | going to call the solution phase or the | | 17 | demonstration phase. | | 18 | A. Evaluation, yes. | | 19 | Q. During that phase, can SAP offer a more | | 20 | realistic price or can it quote a price to a | | 21 | potential customer? | | 22 | A. It's during that phase where we begin to |
| 00163 | | 1 | get a handle on what the customer is going to want, | | 2 | because what we end up having to demonstrate is | | 3 | typically what they are going to need to procure. | | 4 | So it's at that phase that we actually are in a | | 5 | better position to start pricing out the scenario | | 6 | for the client. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 00164 | | 1 | Q. In the sales process, does SAP generally | | 2 | quote one price and that's it? Is there just one | | 3 | price for the product and end of negotiations? Let | | 4 | me rephrase. I can see I asked another poorly | | 5 | worded question. You said the pricing is dependent | | 6 | on a number of different metrics. You have got | | 7 | types of users, number of users, these different | | 8 | engines, how many things you are going to be - the | | 9 | number of transactions perhaps through these, the | | 10 | software is going to be accounting for. Those are | | 11 | all different metrics in calculating a price for | | 12 | the product. | | 13 | A. Could be, yes. | | 14 | Q. Once that price has been determined by | | 15 | SAP, is there an engagement with the customer to | | 16 | explain that price? Is it a collaborative effort | | 17 | in terms of SAP working with the customer to | | 18 | explain how its products are priced? | | 19 | A. Yes. We would work with the client and | | 20 | explain based on the solution they need in their | | 21 | definition what we would be able to provide them | | 22 | and the pricing that it would entail and give them |
| 00165 | | 1 | a price and what we would consider, like a total | | 2 | cost of ownership. Here is the maintenance | | 3 | component. If you want us to work with you on | | 4 | education and training, here is what we would | | 5 | recommend for education and training. Also, if you | | 6 | want us to run the implementation or if it's a | | 7 | partner and they are going to do that separately, | | 8 | that's fine. We would leave that part out. So it | | 9 | is a definitely a collaborative effort. It is not | | 10 | a here is one price, call us when you are ready to | | 11 | order. This is very collaborative. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 00170 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 17 | Q. And that level would be what? At what | | 18 | level are you starting to review discount approval | | 19 | requests? | | 20 | A. Anything that goes to Bill McDermott or | | 21 | higher. | | 22 | Q. So according to this document, that is 75 |
| 00171 | | 1 | percent commercial, 85 percent public services? | | 2 | A. Right. Or greater. | | 3 | Q. Is that in fact what you are reviewing? | | 4 | A. Correct. | | 5 | Q. What sorts of information is included in | | 6 | these approval requests? Let me ask you a | | 7 | different question. What ideally would you like to | | 8 | see in these approval requests? | | 9 | A. One would be the pricing in general. | | 10 | What are they buying at? What is the list price? | | 11 | What is the standard discount? What is the | | 12 | non-standard discount? What is the final price? | | 13 | To make sure that maintenance is being represented | | 14 | properly, that it's 17 percent or more based on | | 15 | what services they want. | | 16 | Understanding what is the sales | | 17 | background for why this request is being submitted, | | 18 | especially at this level above, to CEO's office or | | 19 | greater. There has to be compelling reasons why we | | 20 | would want to offer a greater than 75 percent or | | 21 | greater than 85 percent discount. What are the | | 22 | reasons? What are the market conditions? Maybe |
| 00172 | | 1 | the customer has a unique situation. Maybe they | | 2 | want to use our software in a different way than | | 3 | maybe we price. | | 4 | So there has to be, in my mind when I'm | | 5 | working with our executive management team, there | | 6 | has to be a business, some level of a business case | | 7 | and firm reason to offer this level of a discount. | | 8 | So I'm looking for the business justification, and | | 9 | if it doesn't satisfy myself, I will work with Joe | | 10 | LaRosa to go back to the account team, to go back | | 11 | and say this doesn't look warranted. Please | | 12 | resubmit, rework. | | 13 | Q. Do you verify the information with the | | 14 | account team? | | 15 | A. That is part of Joe LaRosa's job. I only | | 16 | get involved if it's, if something just doesn't | | 17 | seem right or I need extra clarification to make | | 18 | sure if it's called into question at Bill | | 19 | McDermott's level or Mark White's level that I'm | | 20 | prepared with the answer. | | 21 | Q. Is competition, are competitors or | | 22 | competitive solutions a part of this deal summary? |
| 00173 | | 1 | A. Yes. | | 2 | Q. Is that something that is always | | 3 | included, sometimes included? | | 4 | A. It's always included. It's always asked, | | 5 | as part of the deal summary. One of the standard | | 6 | questions is, is there a competitor involved. If | | 7 | yes, explain the competitive nature of the sales | | 8 | cycle. | | 9 | Q. What is typically found in the | | 10 | competitive nature? What are you looking for? | | 11 | A. Who the competitor is, if known. What is | | 12 | the competitive offering, if known. Maybe how the | | 13 | competitor is positioning the software solution, if | | 14 | known. How the competitor is pricing their | | 15 | product, if known. If we have any intelligence | | 16 | around that that we have gained. Things like that. | | 17 | Q. And that information is all useful to you | | 18 | in crafting your e-mail message that goes up the | | 19 | chain? | | 20 | A. Correct. | | | | | | |
| 00174 | | | | | | | | | | | 4 | Q. So in your approximately year and a half | | 5 | of experience, what sorts of deals do you see? You | | 6 | are seeing deals with substantial discounts. What | | 7 | sort of deals are you seeing? What comes across | | 8 | your desk? | | 9 | A. Anything greater than 75 or 85 percent. | | 10 | Q. Is it a common occurrence to see that | | 11 | sort of request? | | 12 | A. No, not a common occurrence, no. | | 13 | Q. Out of the opportunities being pursued by | | 14 | SAP, do you have a feel for what percentage of | | 15 | those opportunities may call for this kind of | | 16 | request? | | 17 | A. If my memory serves me right, in the | | 18 | first quarter -- the best way I can answer the | | 19 | question is to give you an example. In the first | | 20 | quarter I think, if I recall correctly, we did in | | 21 | excess of 300 transactions. In the first quarter | | 22 | deals that I was involved with, at this level of 75 |
| 00175 | | 1 | or 85 or greater, probably talking less than 10, | | 2 | maybe 12. | | 3 | Q. How often are those requests denied by | | 4 | your office, at your level, the CEO level? | | 5 | A. I wouldn't say -- never. In 18 months. | | 6 | Q. How often have you seen a request denied | | 7 | by Leo? | | 8 | A. None. | | 9 | Q. In your 18 months of working in this | | 10 | role? | | 11 | A. Correct. And the reason for that is | | 12 | there's a pretty hard filter before it gets to Bill | | 13 | McDermott. So if anything, the justification is | | 14 | built aggressively or it doesn't get to Bill | | 15 | McDermott or to Leo. So it's not that me in the | | 16 | middle, that I'm denying it, it's that we are | | 17 | proving out of business case, and if there is not a | | 18 | business case, it has to be reevaluated or we need | | 19 | to understand the situation better in order to get | | 20 | it to Bill or to Leo. | | | | | | |
| 00178 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 20 | Q. What vendors are you seeing most often at | | 21 | your level, in terms of competition? | | 22 | A. Generally speaking? |
| 00179 | | 1 | Q. Sure. | | 2 | A. Oftentimes it is Oracle, PeopleSoft. | | 3 | Public sector side it would be PeopleSoft, maybe | | 4 | AMS. More times than not. | | 5 | Q. And I believe you had testified earlier | | 6 | account executives are encouraged to discover early | | 7 | on who the competition might be for a particular | | 8 | opportunity? | | 9 | A. Absolutely. | | 10 | Q. Why is that important? Why is that | | 11 | important to SAP? | | 12 | A. To make sure that we know how to position | | 13 | our product in the best light possible. So we | | 14 | highlight our strengths, we minimize our weaknesses | | 15 | as it relates to the competitor that we believe is | | 16 | competing for the business. | | 17 | Q. So SAP will position itself differently, | | 18 | depending on who they believe the competition is | | 19 | for a particular opportunity? | | 20 | A. Absolutely. If we have a way to | | 21 | differentiate ourselves, then we exploit that. | | | |
| 00183 | | | | | | | | 3 | Q. When we are talking about positioning, | | 4 | one part of that is positioning during the | | 5 | demonstration phase or the kind of explaining to | | 6 | the client what your solution offers; is that | | 7 | right? | | 8 | A. Yes. | | 9 | Q. And so during that process you are also | | 10 | explaining what perhaps a competitor doesn't offer? | | 11 | A. Yes. | | 12 | Q. Are there other ways in which SAP | | 13 | positions itself beyond simply this kind of | | 14 | technical feature-to-feature comparison? | | 15 | A. Yes. | | 16 | Q. What are some of those ways? | | 17 | A. Could be industry expertise. It could be | | 18 | momentum within a particular industry. For | | 19 | instance, let's say in a given industry, say the | | 20 | top six leaders within that industry based on, say, | | 21 | the Fortune 500, let's say the top six of those | | 22 | companies are SAP clients. |
| 00184 | | 1 | From a momentum standpoint, let's say we | | 2 | are selling to a company that is not even in the | | 3 | top 20. We can say hey, we handle the processes | | 4 | for the top six. Subliminally meaning you want to | | 5 | be like the top six, don't you? If we can handle | | 6 | theirs, think of how you are going to benefit | | 7 | because we can handle yours. And don't you want to | | 8 | become one of the best run companies in the world, | | 9 | just like the top six? | | 10 | So the body of knowledge of having a | | 11 | customer base is healthy and also showing that you | | 12 | have momentum in an industry, saying you have got | | 13 | this type of presence or this type of footprint | | 14 | within the given industry. That helps. | | 15 | Q. So just to summarize, one, you position | | 16 | yourself feature to feature. This is what we | | 17 | offer, this is what they don't offer. Two, you | | 18 | kind of leverage your industry experience in a | | 19 | particular group or your industry knowledge to win | | 20 | deals, as well; is that right? | | 21 | A. Yes. | | | |
| 00187 | | | | | | | | | | | | | | | | | | | | 7 | Q. Just so I'm clear, in terms of pricing | | 8 | and what matters and what doesn't matter in terms | | 9 | of your deal approval process, if you are looking | | 10 | at a financial opportunity, financial management | | 11 | opportunity at a Fortune 1000 company. This is for | | 12 | a corporate implementation. If the only competitor | | 13 | identified is, say, IFS, IFS's pricing will have no | | 14 | impact on the pricing, SAP's pricing? | | 15 | A. In general, that is correct. However, | | 16 | since you said IFS, we would say oh, what industry | | 17 | is this? Because IFS is strong in a couple of | | 18 | particular industries. So if they are actually | | 19 | making a play in an industry that we view as one of | | 20 | their weaker industries, we may not discount nearly | | 21 | as much, because we know IFS really, at the end of | | 22 | the day, no matter what price they are offering, |
| 00188 | | 1 | they are probably going to be in a situation that | | 2 | is going to put the client at risk, and if we | | 3 | position strong, we think our position will hold. | | 4 | Q. So it's not simply the identity of the | | 5 | competitor, it's the whole kind of competitive | | 6 | picture, what industry you are in? | | 7 | A. Correct. | | 8 | Q. What, who the customer is? | | 9 | A. Correct. | | 10 | Q. What their needs are; right? | | 11 | A. Correct. That is why I said you can take | | 12 | the competitor's name and remove it. We are | | 13 | agnostic to the competitor. It's all the factors | | 14 | that surround it, to your point. What industry? | | 15 | What is the situation? What are they wanting to | | 16 | use it for? How strong is our business case? Did | | 17 | they allow us to help them with the business case | | 18 | so we understand what their payback will be or | | 19 | their anticipated ROI? All those factors have to | | 20 | be taken into consideration. Then you can plug in | | 21 | a competitor's name. That's fine. But we are | | 22 | agnostic to that. What matters is the client. |
| 00189 | | 1 | Q. But part of what matters to a client, it | | 2 | sounds like, and correct me if I'm wrong, is the | | 3 | functionality or features of the product? | | 4 | A. That is selfishly, from a SAP | | 5 | perspective, that is what we would typically say | | 6 | from a product standpoint. By the end of the day | | 7 | most clients, we would like to think they would | | 8 | have brand preference toward SAP, but at the end of | | 9 | the day, the customer is not looking for a brand to | | 10 | buy. They are looking for a solution. The best | | 11 | solution that is going to satisfy their business | | 12 | needs and solve their problems in the most | | 13 | cost-effective way with the greatest return. Take | | 14 | our name, any competitor's name. | | 15 | Whoever does the best job positioning | | 16 | that business case, that value case for that client | | 17 | is going to win the business. Functionality, | | 18 | hopefully they have the right functionality to | | 19 | deliver on what they need, and if the client has | | 20 | done a good job doing that, the due diligence, they | | 21 | will know that. But functionality is one of the | | 22 | many variables the client should be looking at. |
| 00190 | | 1 | Q. I'm sure you have mentioned it, but what | | 2 | are some of those variables, if you wouldn't mind | | 3 | simply listing for my benefit what are the | | 4 | variables you believe the customer should be | | 5 | looking at? | | 6 | A. Total cost of ownership, scalability, | | 7 | multinational, whatever the multinational features | | 8 | that they will need. What is the value case for | | 9 | delivering it? What is the implementation proposed | | 10 | time frame? What business solutions and what | | 11 | processes are being resolved or solved through the | | 12 | software implementation? What is the potential | | 13 | impact to the organization, meaning level of effort | | 14 | to actually do this project, and what is the | | 15 | cultural impact from a changed management | | 16 | standpoint. | | 17 | Price enters into it, also. Is it, does | | 18 | it need industry functionality and industry support | | 19 | besides just a general solution, and who has the | | 20 | best industry expertise? What is the amount of R&D | | 21 | and research and development that is dedicated to | | 22 | that particular industry or that solution set going |
| 00191 | | 1 | forward? What is the product road map? I think | | 2 | that's 12 things off the top of my head. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 00195 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 17 | Q. In terms of the subject matter of this | | 18 | document, ERP, first maybe it would be helpful to | | 19 | start, what is ERP in terms of this document, what | | 20 | does it refer to? | | 21 | A. Those elements that comprise the ERP | | 22 | suite, which depending on which analyst firm you |
| 00196 | | 1 | want to refer to, they define ERP a little | | 2 | differently. ERP again was, initially the term ERP | | 3 | was dubbed by Gartner several years back and now | | 4 | they, their definition of this market or this suite | | 5 | area is called ERP 2, which includes core ERP plus | | 6 | CRL. At the heart of ERP is financials, human | | 7 | resources, controlling, treasury, some elements of | | 8 | procurement, et cetera. | | 9 | Q. So in terms of ERP, it includes both | | 10 | human resources and financials? | | 11 | A. Correct. | | 12 | Q. Now, in terms of that ERP, who is SAP's | | 13 | most frequent competitor? | | 14 | A. Oracle first. | | 15 | Q. Who is SAP's most, second most frequent | | 16 | competitor? | | 17 | A. PeopleSoft. | | | | | | | | | | | | | | | |
| 00272 | | | | | | | | | | | | | | | | | | | | | | | | | | 9 | Q. Would you look at the HR column, please, | | 10 | and tell me, do you consider yourself to be | | 11 | competing with each of the entities listed in this | | 12 | column in the U.S. market? | | 13 | A. No. We would consider ourselves main | | 14 | competitor with everybody with the exception of | | 15 | ADP. Traditionally we would not compare ourselves | | 16 | to an ADP today. | | 17 | Q. Why is that? | | 18 | A. Because they sell services and we sell | | 19 | software. | | 20 | Q. Can you ever think of an instance where a | | 21 | customer decided to outsource a particular | | 22 | functionality such as its HR processes to ADP or |
| 00273 | | 1 | Fidelity or another BPO outsourcer rather than buy | | 2 | your HR suite? | | 3 | A. Based on my knowledge of our win/loss | | 4 | process, I have never seen ADP come across as a | | 5 | loss, so to answer your question, no. | | 6 | Q. Do you know of any circumstances where | | 7 | you have competed in the final round against ADP in | | 8 | a particular procurement? | | 9 | A. Not that I have working knowledge of, no. | | 10 | Q. Okay. | | 11 | A. Or tracking knowledge of. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 00367 | | | | | | | | | | | 4 | Q. I just had a few follow-up questions | | 5 | based on Mr. Lindstrom's examination. You had | | 6 | talked about efforts, your efforts to track SAP's | | 7 | position, vis-a-vis I believe you called it your | | 8 | top seven competitors; is that right? | | 9 | A. Yes. | | 10 | Q. And those were identified at the time, | | 11 | one grouping was SAP, Oracle, PeopleSoft, | | 12 | JD Edwards, Siebel, Manugistics and i2. | | 13 | A. That is correct. | | 14 | Q. Out of that listing, which of those | | 15 | companies offers a human resources application | | 16 | product? | | 17 | A. Oracle, PeopleSoft, SAP. That's it. | | 18 | Q. And JD Edwards? | | 19 | A. I'm sorry, JD Edwards. I consider them | | 20 | PeopleSoft now. Sorry. | | 21 | Q. Same question now with respect to | | 22 | financial management software. Which of these |
| 00368 | | 1 | companies offers a product in that space? | | 2 | A. The same. Everybody except Siebel. | | 3 | Q. So those three don't offer an HR solution | | 4 | or financial management solution? | | 5 | A. No. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 00369 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 15 | Q. Looking at finance, Sage, is Sage a | | 16 | software vendor that SAP competes with in small, | | 17 | medium businesses, as we have defined it, under | | 18 | $200 million? | | 19 | A. Yes, but I think we have seen, if I | | 20 | recall, I think we have seen them up in the lower | | 21 | end of the mid-market, above $200 million. | | 22 | Q. So where is kind of the top end in which |
| 00370 | | 1 | you encountered Sage? | | 2 | A. Below $500 million. | | 3 | Q. Below $500 million. Can you think of any | | 4 | instance in which you competed for Sage or perhaps | | 5 | in a best subsidiary software in accounts above | | 6 | $500 million dollars? | | 7 | A. Not to the best of my recollection, but | | 8 | if I do recall though, if I remember right, Sage is | | 9 | a company that not only has a best, but they have | | 10 | grown through acquisition. We view them as a | | 11 | viable competitor that is growing up market. | | 12 | Q. When you say up market, where are they | | 13 | growing up market? | | 14 | A. In other words, instead of just competing | | 15 | in the less than $200 million space, I think we | | 16 | will in the future see them more aggressively come | | 17 | and try to serve the needs of the $200- to $500 | | 18 | million dollar market and attempt to grow even | | 19 | north of that. Above $500 million. It's part of | | 20 | this, part of our intelligence tells us that they | | 21 | are continuing to improve their product, they have | | 22 | an acquisition feeling about them and they want to |
| 00371 | | 1 | grow and become a much more viable competitor in | | 2 | the financials area. | | 3 | Q. Do you anticipate their competing in | | 4 | accounts above a billion dollars? | | 5 | A. Not any time soon. | | 6 | Q. And I believe you testified under | | 7 | Mr. Lindstrom's examination that Intuit is a | | 8 | commercial off-the-shelf solution; is that right? | | 9 | A. Yes. Intuit? | | 10 | Q. Yes. | | 11 | A. That is correct. | | 12 | Q. Turning to HR, Kronos, does Kronos offer | | 13 | a full HR functionality to your knowledge? | | 14 | A. No. | | 15 | Q. Again, there's another mention of Sage | | 16 | here. Would the same sorts of market metrics that | | 17 | we mentioned with respect to their financial | | 18 | business apply to their HR business? | | 19 | A. Yes. | | | | | | | | | |
| 00372 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 18 | Q. We talked a little bit earlier about the | | 19 | infrastructure, the technology stack and enterprise | | 20 | applications and their relationship to one another. | | 21 | Does SAP sell databases? | | 22 | A. No. I mean, we have a reseller's |
| 00373 | | 1 | agreement with Oracle, so we can actually sell the | | 2 | Oracle product, but we don't have our own. We used | | 3 | to have our own database. We divested of that | | 4 | either in late 2002 or early 2003. So we do not | | 5 | today have our own software. | | 6 | Q. How often do you resell Oracle's | | 7 | database? | | 8 | A. Quite often. We are their number 1 | | 9 | distributor of their database. | | 10 | Q. Do you have an understanding of what, we | | 11 | identified 2800 to 3,000 buying entities in the | | 12 | United States that SAP America has a relationship | | 13 | with. How many of those buying entities are using | | 14 | an Oracle database under your products,nd your | | 15 | application? | | 16 | A. I wouldn't exactly know the correct | | 17 | percentage, but I would say the vast majority, over | | 18 | a majority, over 50 percent. | | 19 | Q. Over 60 percent? | | 20 | A. Probably closer to 60. We characterize | | 21 | Oracle as a well established, phenomenally great | | 22 | database company, and we happen to be their number |
| 00374 | | 1 | 1 reseller and partner. | | 2 | Q. How long have you had this arrangement | | 3 | with Oracle to resell its database? | | 4 | A. For many years. I don't know the | | 5 | inception date of it, but for a long time. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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U.S. Department
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