The Crocodile in the Room

February 12, 2010

Several years ago, the top, top people at SAP were offered a gigantic bonus if they could “double the stock price by 2010.” Not too soon after, a friend of mine who was in line for the bonus left the company for a start-up. “Why,” I asked, incredulous.

The answer was pretty simple. “It’s not possible,” my friend said.

Not possible, one might have wondered at the time. Then why are all these intelligent people pretending that it is possible. Don’t they see the crocodile in the room?

Somewhat later, I talked to another friend, who had gotten a REALLY good deal if he signed an SAP contract now, before the end of what looked to be a tight quarter. “But all they’re doing is pulling revenue forward,” I said. “That’s right,” said my friend. “They’re taking a huge hit and for no particular reason.” So, I wondered, why are all these intelligent people trying so hard to hit that quarter. Don’t they see the crocodile in the room?

Still later, I talked to an investor who was pretty pleased about SAP’s new margin targets. Henning, you’ll remember, had told the investor community that they’d finished a long, expensive project to upgrade the product, and now they could afford to put the money back into margin. “But the investment didn’t produce the results they wanted,” I said. “So now, if they increase margin by reducing R&D, they’ll be taking away from investment they have to make.” Didn’t the people at SAP see that? Didn’t they see the crocodile in the room?

It seems to me that with this week’s changes at SAP, it’s possible that somebody (Hasso?) actually sees the crocodile. You can be the most forceful, sensible, and astute manager in the world, but if you try to make a technology company more valuable without generating value, eventually, that crocodile will get hungry. You can’t do it by giving out bonuses and hoping. You can’t do it by pulling revenue forward. You can’t do it by saving when you need to invest.

The only way you can do it is to bite the bullet and start using the maintenance that people pay you to make modern products that work well, products that will actually justify the maintenance they spend AND appeal to many other people who don’t yet have relationships with SAP. And if that takes a while, it takes a while. You can’t just say 2010 or else. You have to figure out how to do it, first. And sometimes it takes a while.

Now I’m not saying that the new management can find crocodiles any better than the old management. We’ll see. But if they do see the same crocodiles that I do, and they want a recommendation from little old me, here it is. Come clean. Right now, most investors are disappointed, because they think that SAP is backing off the old CEOs promises, and they don’t know why. If you tell them about the crocodile, admittedly, many of them will run away. But others will realize that it’s a crocodile that can be tamed, and since you trusted them, they will trust you to do the right thing.

PS. If this post makes it sound as if I’m blaming Léo for lack of realism, I apologize, to you and to him. Léo was using all the levers at his disposal to do what he was being asked to do, and he was using them in an insightful way. SAP did need to reduce its workforce, improve its support, and improve its operations, and under Léo, all these things were addressed. My only point is that what Léo was doing could not address the underlying problem. But that’s not what he was charged to do.

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3 Responses to “The Crocodile in the Room”

  1. Colden Says:

    Is giving discounts at the end of a quarter a practice unique to SAP?

  2. i001962 Says:

    I recall that comp scheme also encouraged large acquisitions. It seemed a lazy and/or desperate attempt to retain ‘talent’. Management is not the only thing at SAP that needs to be changed….

  3. toppundit Says:

    One of the things that’s puzzling about these corporate crocodiles is that everybody walks around the room acting as if they weren’t there. This comment, though, inadvertently helps us to understand how it’s done.

    I’m not actually talking about discounting, of course, which is indeed a normal practice in the industry. I’m talking about excessive, extreme discounting, discounting that surprises even the customers.

    How do companies decide to do this, even though they can see it’s a bad idea in the long run? Well, everybody involved can do what the writer is doing and pretend that extreme behavior is actually normal. Instead of saying, “Ooh, maybe we shouldn’t have done that,” you shrug your shoulders and say, “Well, everybody discounts, right?”

    Indeed, this kind of thing is self-reinforcing. If, in one quarter, at any software company, the discounts get to be a little out of hand, by the next quarter, if everybody pretends it’s OK, that level of discounting gets to be the norm, which means that the next quarter’s excessive discounting is, by comparison, not so bad, and the next quarter….

    The only way to stop this kind of thing is to confront it realistically. Now, it’s entirely possible that I’m wrong about SAP and that a knowledgeable person like the writer could come up with good counter-arguments to what I’m actually saying. If the writer would like to return and make one of those arguments, not only would I very much appreciate it, but the writer might also get some practice in calling a spade a spade.


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