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

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1	there, you have, say there is a unionized work
2	force versus a more white collar work force. Is