Government Exhibit P3036 [Non-designated testimony redacted]
| 00005 | | | | | | | | | | | | | | | | | 6 | Q. Would you, please, state your full | | 7 | name for the record and your business address. | | 8 | A. Yes. Richard Allen, A-L-L-E-N, | | 9 | Knowles. Business address: I'm housed out of Atlanta, | | 10 | Georgia, 555 Glenridge Connector, Suite 900, Atlanta, | | 11 | Georgia 30328. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 00015 | | | | | | | | 3 | Q. Do you know generally how long SAP | | 4 | has had a presence in the United States in terms of a | | 5 | subsidiary here? | | 6 | A. Out of the 31 or so years that SAP AG | | 7 | has been in existence, to the best of my recollection, | | 8 | SAP America has been doing business in the United States | | 9 | since the late 80s, mid to late '80s. | | 10 | Q. And why is it that SAP AG has decided | | 11 | to develop regional headquarters throughout the world? | | 12 | A. I think it fundamentally goes to | | 13 | strategy. Most customers want to do business with a | | 14 | local entity, and they want to have local people that | | 15 | they deal with. So in order to reach our customers the | | 16 | best, it made sense to have a local presence and to | | 17 | have a local infrastructure versus just being running | | 18 | the operation out of Walldorf. So basically for | | 19 | customer acquisition reasons and to build up a local | | 20 | force to show that we are invested and have a | | 21 | significant presence within the local country, which is | | 22 | the U.S. and Canada. | | 23 | Q. And in terms of SAP America, what's | | 24 | the infrastructure that's been established here? | | 25 | A. Infrastructure that's been established |
| 00016 | | 1 | primarily is: We have regional headquarters building, | | 2 | which is this campus that you're in today. We have | | 3 | regional offices out, scattered throughout the United | | 4 | States, which I cannot name them all, but they are in | | 5 | certain cities. The acquisition of an employee base | | 6 | northwards of 4,000 plus employees comprised of sales | | 7 | staff, support, marketing, sales; a good chunk of | | 8 | consulating, our own consultants. That's what I mean | | 9 | by infrastructure. We of course have the back-office | | 10 | function, we have our own finance team here, our own | | 11 | marketing team, etcetera. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 00024 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 15 | Q. And the fourth area of revenue that | | 16 | you identified was the consulting organization. Could | | 17 | you explain that. | | 18 | A. Yes. Consulting, our consulting | | 19 | organization is a service offering that we provide to | | 20 | our clients. Typically in the implementation of | | 21 | enterprise application software, it requires more | | 22 | consultants to support the implementation of these | | 23 | changes inside of a company than even we're capable of | | 24 | delivering. We do have a small, relatively small | | 25 | consulting organization in terms of what the customer |
| 00025 | | 1 | needs. We maybe support anywhere from 10 to sometimes | | 2 | 20 percent of the implementation services needed to | | 3 | install the software. | | 4 | Our consultants are typically viewed | | 5 | as functional experts on our software, and they assist | | 6 | the client in implementing the software inside the | | 7 | company. In addition, there's multiple partners that | | 8 | are typically involved in the implementation. Those | | 9 | companies are some of the bigger names that you may | | 10 | have heard of such as Accenture, Deloitte Consulting, | | 11 | Cap Gemini, etcetera. In general, we support the | | 12 | implementation, not all of it, though. | | 13 | Q. So that the consulting organization | | 14 | is responsible for assisting in implementations; | | 15 | correct? | | 16 | A. Correct. | | 17 | Q. However, in these implementations | | 18 | SAP's role is limited to about 10 to 20 percent of the | | 19 | implementation; is that right? | | 20 | A. Yes; on average. There are occasions | | 21 | where a client will not want to use an outside firm or | | 22 | a partner firm. They'll want us to handle the full | | 23 | implementation. That's a rare case. It does happen. | | 24 | But on average, if you were to say, could we handle a | | 25 | hundred percent of the consulting needed to implement |
| 00026 | | 1 | our software? The answer is, absolutely not, we cannot | | 2 | do it alone, we rely on our partners. | | 3 | Q. Why is it you cannot do it alone? | | 4 | A. Primarily it's a business model | | 5 | question. And the reason why is we are not a services | | 6 | company. We make our revenues and our profit margins | | 7 | are derived primarily from the sale of enterprise | | 8 | application software, not delivery of services. So it | | 9 | is a service but it is not our primary business model, | | 10 | and that's why. | | 11 | Q. In speaking of implementations, given | | 12 | that SAP has a limited role in these implementations | | 13 | typically, is it left to the customer to negotiate with | | 14 | a company to implement SAP software or does SAP partner | | 15 | with an implementer? | | 16 | A. Typically the customer negotiates | | 17 | their implementation fees and services with the partner | | 18 | firm. That is something that we are excluded from. | | 19 | They may want to get some of our consultants on the | | 20 | project, and that is a specific negotiation with SAP. | | 21 | But if they want to deal with IBM or Accenture, they | | 22 | are dealing with IBM and Accenture separately from us. | | 23 | Q. Does SAP play any role in negotiating | | 24 | those implementation contracts with a client? | | 25 | A. No. |
| 00033 | | | | | | | | 3 | Q. So you mentioned that all of the | | 4 | clients have kind of a different way of approaching | | 5 | things, and that requires consultants to come in and | | 6 | kind of help explain how SAP software will work; is | | 7 | that correct? | | 8 | A. In their environment to support their | | 9 | business processes. | | 10 | Q. Now, in this process, are they | | 11 | converting to, I mean, are they maintaining their | | 12 | differences, in other words, is the software they are | | 13 | implementing the same whether it is a national company | | 14 | or multinational company, subsidiaries, all the | | 15 | different examples you used? | | 16 | A. Without explaining the way our | | 17 | systems are coded, because that's not my area of | | 18 | expertise, at the core, yes; the software is similar | | 19 | and the same. However, the way you configure our | | 20 | systems to operate in a single site customer versus a | | 21 | national versus a multinational conglomerate is | | 22 | different. So it is similar but it can be different | | 23 | based on configuration and what the needs of the client | | 24 | are. | | 25 | Q. So between those three types of |
| 00034 | | 1 | organizations, you have differences in how it is | | 2 | configured. How about looking at multinational | | 3 | corporations just as a group, do they have different | | 4 | configurations depending on how they run their | | 5 | business? | | 6 | A. Yes, they do. One of the caveats to | | 7 | make it different is which vertical industry are they | | 8 | operating in? For instance, a multinational or a | | 9 | conglomerate. A multinational conglomerate that's in | | 10 | the retail space typically runs their systems quite a | | 11 | bit different than a discrete manufacturing in high | | 12 | tech. So, yes, the systems have -- at the core the | | 13 | code may be similar or close to the same, but the way | | 14 | they actually use the system is quite a bit different; | | 15 | and that means their configurations are going to be | | 16 | substantially different. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 00041 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 24 | Q. So you think of these as separate | | 25 | categories of product, you have the my SAP Business |
| 00042 | | 1 | Suite as one category, my SAP All-In-One is another | | 2 | category, and then mySAP One is a separate category; is | | 3 | that correct? | | 4 | A. Yes, sure. | | 5 | Q. What is mySAP All-In-One? | | 6 | A. Okay. All-In-One and Business One | | 7 | are products that we've positioned in the market or the | | 8 | way that we're going to market are really designed for | | 9 | what we would consider our channels segment. And what | | 10 | I mean by channels is companies that have revenues of | | 11 | approximately 200 million and below in annual revenues, | | 12 | we sell our solutions through a re-seller channel. And | | 13 | the products that really fall into that space that they | | 14 | can sell, they can try to sell mySAP ERP or Business | | 15 | Suite, but that's a very substantiate sell to a hundred | | 16 | fifty million dollar company. | | 17 | So over the last two years we have | | 18 | developed a smaller solution that's targeted for that | | 19 | segment of companies. And those products are referred | | 20 | to as All-In-One or Business One. So those are | | 21 | products that are designed and targeted for that, the | | 22 | companies of that size. | | 23 | Q. Now, you mentioned these two products, | | 24 | mySAP All-In-One and Business One, these were developed | | 25 | in the last two years; is that right? |
| 00043 | | 1 | A. We -- SAP acquired a company, and I | | 2 | don't remember the date, several years back, and they | | 3 | have expanded on the functionality, added some English | | 4 | language and other languages to it in order to tailor | | 5 | this solution to meet the needs of a smaller enterprise, | | 6 | a smaller company, of the 200 million revenue smaller | | 7 | type companies. | | 8 | From a functional standpoint, it can | | 9 | satisfy some of the same things that a large enterprise | | 10 | company might buy; for instance, financials, human | | 11 | capital, management or human resources, etcetera, but | | 12 | it is targeted for a smaller company. | | 13 | Q. Now, these two products, mySAP | | 14 | All-In-One and Business One, are they two separate | | 15 | products or are they the same code? | | 16 | A. Cannot technically answer that | | 17 | question at the code level. | | 18 | Q. Is it your understanding it is the | | 19 | same product but just with two different names? | | 20 | A. They are designed to meet different | | 21 | needs of the client. So I would, logic says they are | | 22 | different because we're using them in and targeting | | 23 | them differently. Do they share code? I'm sure they | | 24 | share code. What is the level? I do not know. | | 25 | |
| 00044 | | | | | | | | 3 | Q. And then I believe you just said that | | 4 | they are designed to perform different functions? | | 5 | Could you explain to me, what is mySAP All-In-One | | 6 | designed to do? | | 7 | A. Without having the list in front of | | 8 | me, I can't even -- at a high level I can tell you it's | | 9 | going to be similar to my other answers, but without | | 10 | having the specifics in front of me, I'm not going to | | 11 | be able to answer the question to your satisfaction, | | 12 | probably. | | 13 | Q. Maybe it's easier to look at it this | | 14 | way. What do you understand the difference to be | | 15 | between the two products? | | 16 | A. One is really to be, from a positioning | | 17 | standpoint, the way at least we're positioning it in | | 18 | our go-to-market plans, where one is for a single | | 19 | entity or a small entity that's under 200 million | | 20 | dollars in revenues, to be able to use the product | | 21 | within their enterprises is one thing. Whereas, we | | 22 | take Business One, it has the ability to actually scale | | 23 | up. And one of the thoughts from a positioning | | 24 | standpoint is for these larger companies that we do | | 25 | business with today, often times we do not have |
| 00045 | | 1 | software located in a lot of their subsidiaries. | | 2 | And one of the thoughts is to be able | | 3 | to use the scaled-up version of Business One, actually | | 4 | use it in some of the subsidiaries. So if we had to | | 5 | segment where the products could fall, we could | | 6 | actually say, we could take that product a little bit | | 7 | up market, maybe even up to a 500 million dollar size | | 8 | company, whereas the other product is really more for a | | 9 | very small entity, and what we categorically call small | | 10 | entity being under 200 million dollars. | | 11 | Q. Just so I'm clear, mySAP All-In-One | | 12 | is really limited to this 200 million dollar and below | | 13 | company; correct? | | 14 | A. Correct. | | 15 | Q. And the Business One product currently | | 16 | is, the go-to-the-market plan for this is limited for | | 17 | this 200 million dollar company; correct? | | 18 | A. Right. We've not made a determination, | | 19 | but we have looked at trying to position out how we use | | 20 | that with our direct sales force to actually target a | | 21 | lot of subsidiaries of the larger company subsidiaries. | | 22 | Q. The option in the future is to take | | 23 | this Business One product and market it to subsidiaries | | 24 | of companies that are already using the mySAP Business | | 25 | Suite? |
| 00046 | | 1 | A. Right. That might be using a component | | 2 | in their headquarters operation, but yet maybe their | | 3 | local subsidiary has a unique targeted need, and we've | | 4 | not been able to satisfy, that maybe use this because | | 5 | it's a lower price point and a lot less functionality; | | 6 | and maybe a subsidiary might be primed to use that. | | 7 | Q. Now, you mentioned you use your | | 8 | channel partners to resell these products, mySAP | | 9 | All-In-One and the Business One. And if they can, they | | 10 | are free to also market the mySAP Business Suite to | | 11 | these companies as well; is that right? | | 12 | A. Correct. | | 13 | Q. You mentioned that's a pretty | | 14 | substantial sell. Could you explain, what's the | | 15 | challenge in selling this Business Suite to these | | 16 | smaller companies? | | 17 | A. The needs of a 100 million dollar | | 18 | company for maybe their supply chain for a small | | 19 | manufacturer makes about a hundred million dollars in | | 20 | revenue versus the needs of like a multinational | | 21 | conglomerate manufacturing operation. Their needs are | | 22 | going to be substantially different. To say we would | | 23 | like to take mySAP Business Suite and sell it to a | | 24 | hundred million dollar company, the price tag and the | | 25 | processes -- it would be overkill to sell to it them. |
| 00047 | | 1 | They would have more functionality. They would be able | | 2 | to maybe grow into a billion dollar company and not buy | | 3 | another piece of software in their life. | | 4 | The problem is, they wouldn't be able | | 5 | to afford it. Too much functionality for a hundred | | 6 | million dollar company. That's the problem. One of | | 7 | our attempts is to, in order to meet the needs of the | | 8 | lower end of the market, 200 million dollar companies | | 9 | and below, we needed a product that was not as rich in | | 10 | features, as rich in functionality, as big a scale that | | 11 | we have developed with our Business Suite and be able | | 12 | to target it more to specific applications in a much | | 13 | smaller way. So that's why we came up with this | | 14 | product line. That's why we procured the company and | | 15 | have gone to market with these guys. | | 16 | Q. So these companies, these 200 million | | 17 | dollar and below companies, their needs are simpler | | 18 | than, say, customers that are using this Suite. My | | 19 | understanding is there's just too much functionality | | 20 | within the Business Suite for them to be able to use | | 21 | it? | | 22 | A. To benefit from, correct. | | | | | | | | | |
| 00048 | | 1 | Q. Is the mySAP All-In-One product and | | 2 | the Business One product priced differently than the | | 3 | mySAP Business Suite? | | 4 | A. It's priced similar in the way that | | 5 | we price it but the price point is different because | | 6 | there's less functionality, so you don't have to | | 7 | charge, we do not need to charge as much; but the | | 8 | pricing licensing model is the same. | | 9 | Q. And so that the prices between these | | 10 | three products really depends on the functionality of | | 11 | the product? | | 12 | A. That's being delivered, correct. | | 13 | Q. Now, you had mentioned, you've got | | 14 | this line at 200 million dollars and below for a | | 15 | Business One and mySAP All-In-One. Why not sell these | | 16 | two products to companies above 200 million dollars? | | 17 | A. As I said before, we were considering | | 18 | taking one of the products up market to, say, 500 | | 19 | million, 750 million, and allowing our direct sales | | 20 | force to do that. That's still under consideration, | | 21 | still is a possibility. | | 22 | I think your question is a good | | 23 | question except that the premise of your question is a | | 24 | little bit wrong. And the way we look at it is, we | | 25 | have not historically played very well, meaning, we've |
| 00049 | | 1 | not gotten enough penetration. We're not satisfied | | 2 | with the business results in the 200 million dollar and | | 3 | below market, and we want to grow that business. | | 4 | In order to grow that business, we | | 5 | had to develop a much, you know, I'll use the simpler | | 6 | term, a lighter solution offering for that space for us | | 7 | to get some traction in that space. That's why we did | | 8 | it. We're not looking at it the other way, the way | | 9 | your question was phrased. And let me tell you why. | | 10 | The reason why is because we know | | 11 | that in the near future we're going to have a pretty | | 12 | incredible competitive threat that's going to start | | 13 | encroaching on that space and growing up market. And | | 14 | we're doing this as a move to hopefully try to prepare | | 15 | for an ensuing battle in that space. And that space | | 16 | is - and who I'm speaking of is Microsoft. We view | | 17 | Microsoft as a massive competitive threat. | | 18 | And we totally anticipate, and they | | 19 | have already entered this space through their | | 20 | acquisition of Navision and Great Plains. And their | | 21 | penetration rate right now based on our business | | 22 | analysis is greater and better than ours. They have a | | 23 | better distribution channel than ours. They have wider | | 24 | reach, and they have really two very good products and | | 25 | channels that already existed that they acquired. They |
| 00050 | | 1 | are in a much better position than we are. They are | | 2 | growing up market. We know from a business standpoint | | 3 | we have to go down market in order to prepare for the | | 4 | battle. | | 5 | Q. And this battle -- the battle that | | 6 | you've identified is in this 200 million dollars and | | 7 | below market? | | 8 | A. That's just the beginning. The | | 9 | battle we would term is the mid-market. So we would | | 10 | say anything below 1.5 billion in revenues is really | | 11 | going to be the battle ground of the future. And we, | | 12 | from a business standpoint, everything we do from an | | 13 | analysis standpoint going forward is in preparing for | | 14 | Microsoft to come up market. | | 15 | Q. So Microsoft's threat, just so I | | 16 | understand, Microsoft's threat to SAP is in companies | | 17 | currently in this 200 million dollars and below market; | | 18 | is that correct? | | 19 | A. Predominantly. But they are growing | | 20 | rapidly and we anticipate their arrival up market very | | 21 | quickly. When I say quickly, I mean, in terms of a | | 22 | life cycle within a year or two. | | 23 | Q. When you say up market, that's | | 24 | companies 1.5 billion dollars and below; correct? | | 25 | A. Yes, that is correct. |
| 00051 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 19 | Q. Turning back to these mySAP | | 20 | All-In-One and the Business One products. You had | | 21 | mentioned they could potentially, your term is, scale | | 22 | up to 500 million dollars and even 750 million dollar | | 23 | companies; correct? | | 24 | A. Depends on their needs, yes. | | 25 | Q. What's the problem with using those |
| 00052 | | 1 | products for customers even beyond that; why not use | | 2 | one of these products to, why not sell one of these | | 3 | products to companies with even greater revenues | | 4 | perhaps? | | 5 | A. Again, it's going to depend on the | | 6 | customer and their needs and their architectural | | 7 | limitations to the way the product is designed. What | | 8 | those technical limitations are from a code standpoint, | | 9 | I can't speak to, but there are limitations, and the | | 10 | number of things it will do or the number of transactions | | 11 | it will process; so it's a functionality limitation. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 00054 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 24 | Q. So you have an SAP client -- where | | 25 | are they running SAP? If they are not running it at |
| 00055 | | 1 | the subsidiary -- I guess I don't understand why the | | 2 | subsidiary is not running the same thing as, say, the | | 3 | parent company. What is the difference? Why is there | | 4 | that distinction? | | 5 | A. That's a very good question, by the | | 6 | way. If we take a multinational conglomerate who may | | 7 | be organized, they may have multiple companies. The | | 8 | parent company may be running SAP but maybe two of | | 9 | their subsidiaries or three of their subsidiaries they | | 10 | may be running, because they are smaller subsidiaries | | 11 | and they are rolling up to a parent conglomerate, they | | 12 | may be running an older application, the Legacy | | 13 | system. And the price point to solve that need, maybe | | 14 | it's a 300 million dollar company that's rolling up to | | 15 | this conglomerate. | | 16 | For us to go and sell Business Suite | | 17 | down to that 300 million dollar company, maybe we were | | 18 | just not very good at it, maybe price point or their | | 19 | needs were not met with trying to tie them into the | | 20 | Business Suite offering that we did of the conglomerate. | | 21 | So one of our marketing thoughts is that we've really | | 22 | not, we've done really good penetrating some of the | | 23 | bigger names and the bigger companies, but we really | | 24 | haven't focused and been able to go down market fast | | 25 | enough to serve all of the needs of these companies. |
| 00056 | | 1 | So why not go to that 300 million | | 2 | dollar company and say, we also have a solution for | | 3 | you. You don't have to think you're operating this | | 4 | bigger system, we actually have a smaller system that | | 5 | you can use and, you know what, we could probably | | 6 | position out how to tie it into the bigger SAP system, | | 7 | too. That's why. | | 8 | Q. Just so I understand, you've got the | | 9 | corporate entity, say, the headquarters, and they are | | 10 | running mySAP ERP; correct? | | 11 | A. Yes, correct. | | 12 | Q. But then underneath that corporate | | 13 | headquarters you have a number of divisions at certain | | 14 | companies; correct? | | 15 | A. Sure. | | 16 | Q. At each of those divisions they may | | 17 | be running different software than, say, what the | | 18 | headquarters is running? | | 19 | A. Correct. | | 20 | Q. So is it a different group of | | 21 | companies that you may have one company at division | | 22 | one, a different company at division two, and then at | | 23 | the headquarters a completely different company, | | 24 | software vendor? | | 25 | A. Absolutely. We term that as a |
| 00057 | | 1 | heterogenous environment. Most companies have a | | 2 | heterogenous landscape in place. They do not use one | | 3 | software package often times for everything in all of | | 4 | their entities. We would love for them to do that, by | | 5 | the way, but that is not often the case. So let me | | 6 | give you another example. | | 7 | It is not uncommon for a company, for | | 8 | instance, to say, use SAP for their human resources | | 9 | system in the United States, but yet use PeopleSoft in | | 10 | their European operation, and maybe use Oracle in their | | 11 | Asia-Pacific operation all for human resources. For | | 12 | whatever reason, that is a typical heterogenous | | 13 | decision that that company has made. Now, would we | | 14 | like to have human resources globally for that entity? | | 15 | Absolutely, but that's not normally the case. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 00059 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 15 | Q. Sure. I guess the question really | | 16 | is, in marketing to companies above this 200 million | | 17 | dollar threshold, why does SAP have a direct sales | | 18 | force? | | 19 | A. Why do we have a direct sales force? | | 20 | That's an interesting question. The solutions that we | | 21 | sell, if I go back to my supply chain example earlier, | | 22 | it would be somewhat unrealistic to expect a channel | | 23 | partner who is not an employee of our company to be | | 24 | able to walk in and understand the supply chain | | 25 | implications and how our software can help a client |
| 00060 | | 1 | without them being a direct employee trained by SAP, | | 2 | representing SAP. | | 3 | Often times channel partners | | 4 | represent multiple lines of business. They sell other | | 5 | products and services. So to anticipate that they | | 6 | could be an expert or even a functional, be able to | | 7 | speak functionally about our solution and what it can | | 8 | do would be unrealistic. So we have no choice to be an | | 9 | direct sales force because what we sell is complicated. | | 10 | This is not shrink-wrap software that you buy at a | | 11 | store, you know, in a retail establishment. So that | | 12 | the only way to correctly understand the business | | 13 | implications is to have a direct sales force. | | 14 | Q. So this expertise about the product | | 15 | is necessary to effectively market the mySAP ERP or | | 16 | mySAP Financials to a potential client? | | 17 | A. Absolutely. | | 18 | Q. And that expertise can't be really | | 19 | duplicated with your channel partners? | | 20 | A. Not at the level of depth that is | | 21 | required to properly understand the business | | 22 | implications and the processes. | | | | | | | | | |
| 00063 | | | | | | | | | | | | | | | | | | | | | | | 8 | What is the difference, say, between | | 9 | mySAP Human Resources and then the human resources | | 10 | function in these other products Business One or | | 11 | All-In-One? | | 12 | A. Okay. That's a great question. I | | 13 | would need to get you a map, a solution map and | | 14 | actually be able to show that to you. To say I have it | | 15 | memorized, I did not, and I do not have it with me. We | | 16 | would need to look at by solution the differences in | | 17 | functionality. And that is something that internally | | 18 | we use for our own training purposes. For me to | | 19 | articulate it, I would probably be speaking a little | | 20 | bit amiss, and I don't want to be wrong. | | 21 | Q. Let me ask you this, is mySAP Human | | 22 | Resources, can it do more than what the human resources | | 23 | function in the Business One or All-In-One product can | | 24 | do? | | 25 | A. Yes; in general, yes. |
| 00064 | | 1 | Q. Do you have any idea of how big a | | 2 | difference there is between the two? | | 3 | A. No. And it would come down to the | | 4 | function, you know. And for me to say, I do not know | | 5 | this, but to say that, you know, the enablement of your | | 6 | eRecruitment capability is existent in my SAP ERP but it | | 7 | is not in Business One, I cannot off the top of my head | | 8 | tell you that difference right now. | | 9 | Q. Does the customer's choice really | | 10 | come down to its requirements, what it wants? | | 11 | A. Yes. | | 12 | Q. The solutions it needs to do? | | 13 | A. Yes. Typically when we work with a | | 14 | client, it's not about what we're trying to sell them. | | 15 | We don't go in and say, here, we have Business One or, | | 16 | here, we have mySAP ERP. Look at everything we do. We | | 17 | do financials, controlling, operations, HR. We don't | | 18 | go in and do that. | | 19 | The approach we take is, we go into | | 20 | the customer and try to work with them on what business | | 21 | process situation are they dealing with or what is it | | 22 | that they are having the most struggles with? And | | 23 | often times it is, well, I have three things that I'm | | 24 | struggling with and we need to fix. We say, great, | | 25 | that's wonderful. What are those three things? What |
| 00065 | | 1 | are implications of solving those three things? And | | 2 | then go back and say, do we have a solution? Maybe | | 3 | it's just one piece of mySAP ERP. Might be it is | | 4 | three, it requires three components of my SAP ERP in | | 5 | order to fix their issues. It's more of that | | 6 | collaborative type self versus here's a list of all my | | 7 | features and software modules and here's our price; | | 8 | unfortunately it's not that simple of a sell. | | 9 | Q. Why not, why not simply go in there | | 10 | with your product and say, this is what we have, this | | 11 | is what it does for you? | | 12 | A. Why? Because in each vertical | | 13 | industry each customer in those vertical industries | | 14 | tend to try to differentiate the way they run their | | 15 | business. You know, an example is, why is it that no | | 16 | one else in the world has been able to replicate what | | 17 | Michael Dell has done? Right? He's just got a unique | | 18 | business process, a unique supply chain operation in | | 19 | order to operate PCs, and he gets his cash up front. | | 20 | Why hasn't someone else copied him? Why? Because in | | 21 | his vertical industry he's running his business in a | | 22 | very unique way. | | 23 | Well, to say that I can now say that, | | 24 | you know, Compaq or HP now owns Compaq, they should run | | 25 | their PC business the same way, they both have supply |
| 00066 | | 1 | chains, they operate their supply chains differently, | | 2 | they run their businesses around their processes | | 3 | differently. So for us to go in and say, we have | | 4 | supply chain solutions, here's all the features and | | 5 | benefits, would you like to buy it today? That would | | 6 | be a misnomer, because that would mean we would be | | 7 | discounting and trivializing the way they run their | | 8 | business. | | 9 | So it's a competitive advantage for | | 10 | Dell to run his business the way he's done his way, | | 11 | versus Compaq running their business their way using | | 12 | their business processes. So we have to take a very | | 13 | individualistic sales approach in understanding their | | 14 | business issues, their business needs and business | | 15 | process in order to properly propose a solution for | | 16 | them, because we have to support their business their | | 17 | way in their industry; that's why. | | 18 | Q. So it sounds like one of the first | | 19 | things you need to do once you contact a client is to | | 20 | really understand or potential client rather than to | | 21 | really understand how they run their business; is that | | 22 | right? | | 23 | A. Yes. | | 24 | Q. And each business is run slightly | | 25 | different? |
| 00067 | | 1 | A. Yes. | | 2 | Q. Now, does that include -- are there | | 3 | differences between, say, how one company does | | 4 | financials and another company does financials? | | 5 | A. At the rudimentary level? No. | | 6 | Everybody has to agree and abide by GAAP. But there's | | 7 | nuances in the way they might account or recognize | | 8 | revenue, the way they might want to run their expenses, | | 9 | run their, configure their cost of goods sold. There | | 10 | are nuances. And it depends on by industry. You know, | | 11 | the way the chemical industry accounts for certain | | 12 | components in their line of business is going to be a | | 13 | little bit different than the way a retail manufacturer | | 14 | runs their business. | | 15 | Q. Now, within those -- you mentioned | | 16 | broad industry differences. Going back to the example | | 17 | you mentioned earlier, Dell and Compaq, might their be | | 18 | differences between how each of those companies report | | 19 | their financials that is important to SAP? | | 20 | A. Sure, could be. For instance, | | 21 | Dell -- I'm not speaking as an expert on Dell, just | | 22 | know that up front, people -- but for Dell, they may | | 23 | procure all of their parts from out-source vendors, | | 24 | whereas Compaq who now that HP owns them may actually | | 25 | still manufacture a lot of their components. So the |
| 00068 | | 1 | way they are going to account for their in-process | | 2 | manufacturing of raw components to go into their | | 3 | product is going to be quite a bit different than the | | 4 | way Michael Dell is going to have to account for using | | 5 | a sourcing model. They have to roll-up numbers. The | | 6 | way they do it is going to be different and the | | 7 | process, the way they do it, is going to be different, | | 8 | and these differences between not just industries but | | 9 | between companies. | | 10 | Q. Those differences have implications | | 11 | on the software you provide them? | | 12 | A. Oh, absolutely. Again, that comes | | 13 | down to maybe the same solution financials, | | 14 | hypothetically, but the way we configure it to work and | | 15 | configure the processes and the transactions to flow | | 16 | are going to be different. | | 17 | Q. In terms of mySAP Human Resources, we | | 18 | started this discussion on them. | | 19 | A. That's fine. | | 20 | Q. You've had these discussions with a | | 21 | potential client to try to understand how their | | 22 | business works and what are their problem areas; | | 23 | correct? | | 24 | A. Okay. | | 25 | Q. From there you mentioned you have to |
| 00069 | | 1 | configure it differently. What does that configuration, | | 2 | just using Human Resources as an example, what does | | 3 | that entail, what do you need to do? | | 4 | A. That's a technical question. So at | | 5 | the code level and how you actually implement it, that | | 6 | is not my level of expertise. I would probably be | | 7 | misspeaking if I tried to answer it correctly. I would | | 8 | say that's a technical question for a technical | | 9 | expert. | | 10 | Q. But those are important questions to | | 11 | understand if you're going to sell software solution to | | 12 | a company? | | 13 | A. To meet the needs of that client, | | 14 | that specific client, yes. At a high level I can give | | 15 | you an example though for human resources. Part of our | | 16 | human resources is employee self-service. And this is | | 17 | with all the privacy laws that are beginning to take | | 18 | place, employees need to have the ability to update | | 19 | their information, their address, their personal | | 20 | information, things like that. | | 21 | Human resources and a lot of the | | 22 | privacy laws are saying that employees should be able | | 23 | to modify his or her information themselves without | | 24 | having to go to someone in the company or HR, because | | 25 | that's private, that's confidential information, the |
| 00070 | | 1 | employees should be able to do that themselves. | | 2 | To enable employee self-service for | | 3 | all the employees in the company is going to require a | | 4 | configuration different type of setup to enable that to | | 5 | happen in the system versus the company that says, well, | | 6 | we just got a centralized human resources department | | 7 | and we're going to use a bank of, a call center | | 8 | environment. And if an employee needs to update a | | 9 | change of address, they can call this 800 number, and | | 10 | the human resources professional or the call center | | 11 | agent can update that information. Oh, the end result | | 12 | is still the same, right? Change of address, processed. | | 13 | The configuration to support employees doing it | | 14 | themselves versus a call center environment doing it is | | 15 | distinctly different. So our systems have to be set up | | 16 | or configured to do that in a different way. That | | 17 | would be the high level configuration difference. | | 18 | Q. You described the kind of different | | 19 | functions, at least at a broad level, of what human | | 20 | resources does. Could you do the same for mySAP | | 21 | Financials; what are the sorts of functions that that | | 22 | performs? | | 23 | A. At a high level you have traditional | | 24 | cost accounting or accounting. You have controlling or | | 25 | budgeting processes, you have management reporting, so |
| 00071 | | 1 | performance against budget; capital management which | | 2 | deals with how you are handling, I think, your debt | | 3 | financing, your debt equities. | | 4 | Q. So those are some of the functions | | 5 | that the mySAP Financial solution provides? | | 6 | A. Correct. | | 7 | Q. And then there's nuances depending on | | 8 | what customer you're serving? | | 9 | A. Correct, how they want to account for | | 10 | their revenues and expenses, yes. | | 11 | Q. And so to some extent each solution | | 12 | that you provide is unique in the sense of how it is | | 13 | configured for that client's needs; correct? | | 14 | A. Correct. And for that particular | | 15 | client and also by industry. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 00079 | | | | | | | | | | | 4 | Q. Just cycling back when we were on the | | 5 | subject, when we were talking about some of the | | 6 | differences, you had mentioned, well, the 200 million | | 7 | dollar company and below has much different needs today | | 8 | than a multinational corporation; correct? | | 9 | A. Traditionally, yes. | | 10 | Q. So that the multinational corporation | | 11 | has needs that are much different than, say, what a | | 12 | small business, a 200 million dollar and below company | | 13 | would have? | | 14 | A. In the way we work with them, that is | | 15 | usually our findings. But let's use the previous | | 16 | example again. Let's say a 200 million dollar company, | | 17 | we -- they have an HR need -- today our product line | | 18 | for that area would say, you know, we can handle your | | 19 | payroll processing and employee information catalog, | | 20 | that information for your employees. If they came to | | 21 | us and said, what we really need is an eRecruitment | | 22 | process, we really want to do that or we want to do | | 23 | something else, that would be broader than what the | | 24 | Business One product could offer. If that's really | | 25 | their business process issue that we need solved, then |
| 00080 | | 1 | we're probably going to have to talk about Business One | | 2 | and something else or maybe mySAP ERP but only selling | | 3 | the HR function; so it depends. | | 4 | Q. Let's focus on the multinational | | 5 | corporation. What are their needs? You mentioned | | 6 | these corporations, and you said they have different | | 7 | needs. What exactly are those needs? | | 8 | A. It varies. It depends on their | | 9 | solution. If we look at- | | 10 | Q. Let's look at HR, for example, if | | 11 | they are looking for an HR solution, what is it that a | | 12 | multinational corporation needs? | | 13 | A. Okay. The way we architect our | | 14 | solutions are based on what we anticipate the market | | 15 | needing on and/or what customers told us they need. Do | | 16 | we handle every need they need? No. But, in general, | | 17 | for human resources, you're going to be looking at | | 18 | employee services, employee self-service, manager | | 19 | self-service, meaning the manager needs to manage their | | 20 | employees and have access to reports for them. | | 21 | Second is payroll processing, people | | 22 | need to get paid. Third would be the analytics around | | 23 | work force management. And the fourth general category | | 24 | for HR would be human capital management in the | | 25 | acquisition of talent, so that the talent pool, hiring, |
| 00081 | | 1 | firing the management of compensation plans, performance | | 2 | appraisals, reviews, those types of things. Those are | | 3 | four general categories. Under each of those categories | | 4 | there's a litany of things we do, but those are the | | 5 | broad ones. | | 6 | Q. Now, are there unique challenges in | | 7 | looking at a company with operations globally; you have | | 8 | these four general areas, but those four general areas | | 9 | might be shared by a number of corporations and they | | 10 | might not be multinational? | | 11 | A. Correct. | | 12 | Q. Looking at the multinational company | | 13 | globally, are there unique challenges, specifically, | | 14 | looking at human resources first? | | 15 | A. Based on human resources laws, without | | 16 | trying to understand each of the laws and the countries | | 17 | that we operate, there are different laws, for instance, | | 18 | benefits management, and what you have to provide for | | 19 | your employee differ based on country. So the way we | | 20 | would account for that, the software, the way we would | | 21 | actually manage that in the software would be dependent | | 22 | upon that; so, yes. | | | | | | | | | |
| 00082 | | | | | | | | | | | | | | | | | | | | | | | 8 | Q. Are there challenges in designing a | | 9 | software to perform that sort of function, to perform | | 10 | reporting or following human resources functions | | 11 | throughout multiple divisions into a single entity? | | 12 | A. Yes. That is a -- it can be a | | 13 | complicated process. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 00083 | | | | | | | | | | | | | | 5 | Q. Looking at HR, what are some of the | | 6 | things you would have to track globally, what does the | | 7 | software have to be able to handle globally? | | 8 | A. If we just think on the payroll side | | 9 | of the process, each region that we operate in different | | 10 | countries have different requirements surrounding what's | | 11 | taken out of the person's paycheck, whether it be | | 12 | Social Security or the equivalent in a European | | 13 | country, the taxation tables are usually localized, | | 14 | state and local taxes or state and local fees are | | 15 | usually localized and changed sometimes on a yearly | | 16 | basis. So those things are changed readily and have to | | 17 | be updated in the systems in order to make sure payroll | | 18 | processing occurs correctly. | | 19 | To use your other example of | | 20 | financials, when we roll-out financials for multiple | | 21 | countries typically the financial systems have to | | 22 | support the local currency at the operation, but yet | | 23 | when you role it up to the parent head, it has to be | | 24 | converted into local currency for financial reporting. | | 25 | So if you have a U.S.-based operation, everything will |
| 00084 | | 1 | be converted to US dollars for reporting. | | 2 | Q. So the mySAP Human Resources package, | | 3 | first, that will allow you, if you're a global | | 4 | corporation, to track payroll benefits administration | | 5 | in a number of different countries? | | 6 | A. Absolutely. | | 7 | Q. Is that a challenge to the software, | | 8 | is that difficult to do? | | 9 | A. Yes, that's difficult to do, because | | 10 | not only is that the function that has to be developed | | 11 | or built to do, but we also have to internationalize | | 12 | the software, which means we have to develop the | | 13 | software in the local country language. So it's not | | 14 | only that it's HR, it's HR written in your language, in | | 15 | French, but yet in the US it's delivered and viewed | | 16 | from the US employees' language, but yet the process | | 17 | is, we still account for certain pieces of information | | 18 | on an employee, whether they are in France or in the | | 19 | US, and we have payroll processing requirements for | | 20 | French employees and US employees. | | 21 | So it's actually two different | | 22 | levels: One is, how do you interact with the software | | 23 | and the ability to make sure it's communicating with | | 24 | you correctly from a language perspective? And then | | 25 | underneath it, in the operation of the process, be able |
| 00085 | | 1 | to handle the French requirements versus the US | | 2 | requirements versus the Canadian requirements. I would | | 3 | consider that pretty complex, yes. | | 4 | Q. And those two kinds of areas that you | | 5 | have just identified, those are demands that | | 6 | multinationals need from their software. Let me | | 7 | rephrase. I apologize. | | 8 | You had mentioned, first you have | | 9 | this language difference, and then underneath that | | 10 | there's the way the process is and how it is reported | | 11 | in each country? | | 12 | A. Correct. | | 13 | Q. And this creates certain demands on | | 14 | the software? | | 15 | A. Correct. | | 16 | Q. That's not easily, it's not easy to | | 17 | develop those sorts of funtionalities? | | 18 | A. I'd be careful in using the word | | 19 | saying, not easy. It really comes down to, in the | | 20 | software world, a function of time and money. You can | | 21 | almost do anything if you have enough time and you have | | 22 | enough money to do that. We happen as SAP to develop | | 23 | our software, and we handle, I can't remember off the | | 24 | top of my head say, 35 different currencies or 28 | | 25 | different languages, I'm not positive of the real |
| 00086 | | 1 | numbers, but then of course a lot of it is in English, | | 2 | and some countries still rely on the use of English if | | 3 | we don't support their local language. But, yeah, is | | 4 | it difficult? No. It requires time and effort. | | 5 | So, I mean, if someone wanted to and | | 6 | they only had English today, and they wanted to develop | | 7 | a French language and understand the French laws, then | | 8 | it requires then to go to France and make sure they | | 9 | develop the code to support French language and French | | 10 | laws. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 00093 | | | | | | | | | | | | | | | | | | | | | | | | | | 9 | (Exhibit No. Knowles-4 "Lawson Attack | | 10 | Plan 2004," 12 pages marked for ID.) | | 11 | BY MR. ANDEER: | | 12 | Q. I'd like to show you a document, and | | 13 | I'll mark this as exhibit number 4. Mr. Knowles, I'd | | 14 | like to hand you a 12-page document entitled, "Lawson | | 15 | Attack Plan 2004." I've labeled this as Knowles | | 16 | exhibit number 4 for identification. | | 17 | A. Yes. | | 18 | Q. Do you recognize this document? | | 19 | A. Yes. | | 20 | Q. And can you describe this document? | | 21 | A. Yes, I can. This is a positioning | | 22 | document that we have internally inside SAP. And what | | 23 | we do with this document is, we compile it through our | | 24 | market intelligence team in order to help our | | 25 | salespeople sell against Lawson. |
| 00094 | | 1 | So in a competitive situation, when | | 2 | they go up against Lawson in a sale, that we know | | 3 | about, sometimes we don't, that we know about, these | | 4 | are the things that we have gained from insight from | | 5 | previous sales cycles and/or publicly-held information | | 6 | that we have gathered to try to arm our salespeople | | 7 | with the information to differentiate SAP versus | | 8 | Lawson. | | 9 | In this document, as you can see, | | 10 | there is, we take - point out positions, we position | | 11 | what is our strength and what -- list the weakness of | | 12 | Lawson and categorize that as an attack position; | | 13 | that's their weakness. | | 14 | Q. I'd like to turn your attention to | | 15 | page 3 of this document. And the heading is, | | 16 | "Positioning Against Lawson," and there are several | | 17 | points underneath. | | 18 | A. Okay. | | 19 | Q. Looking halfway down the page under | | 20 | "Issue," it says, "Only six percent of Lawson revenue | | 21 | is from international operations." Underneath that it | | 22 | reads, "Attack: Lawson talks about global expansion | | 23 | but has failed to execute." | | 24 | A. Okay. | | 25 | Q. What is meant by Lawson talks about |
| 00095 | | 1 | global expansion, what do you understand that to mean? | | 2 | A. By the way, the reference is 58 | | 3 | languages there. So I stand corrected. | | 4 | Q. You're talking there, when you say 58 | | 5 | languages? | | 6 | A. That's the strength. We have 58 | | 7 | language support. What this means is, in our analysis | | 8 | of Lawson, either from speeches that they've given or | | 9 | publicly-made available information or reports that | | 10 | have been written or magazine reports, or maybe even | | 11 | sales cycles where we've got firsthand knowledge from a | | 12 | client, we have been told that Lawson talks about | | 13 | global expansion, meaning they are going to enable | | 14 | other country support: they are going to grow; they | | 15 | have aggressive growth plans to go international. | | 16 | And we have found that to be weak, | | 17 | because if we look at their revenues and the way they | | 18 | report their earnings, they clearly state that, you | | 19 | know, approximately six percent or less of the revenues | | 20 | come from outside the United States. So we adjust find | | 21 | that as a contradictory statement. So the position why | | 22 | it is here is, not that we want to call that into | | 23 | question in a sales cycle, what we wanted to is | | 24 | position to tell our sales people that when they are in | | 25 | a sales cycle, especially if they happen to have |
| 00096 | | 1 | operations in a global scale, and they are looking at | | 2 | Lawson, that's a question that should be at least | | 3 | asked. And we should position our strength. | | 4 | Our strength is, we have a global | | 5 | reach, 120 countries, X-number of installations, | | 6 | support 58 licenses, we understand the global needs, | | 7 | and we're in a better position to serve your needs than | | 8 | Lawson is. That's the way it is positioned. | | 9 | Q. And positioning yourself against | | 10 | Lawson this way, do you similarly position yourself | | 11 | against PeopleSoft in the same way in terms of | | 12 | PeopleSoft, say, taking out Lawson, PeopleSoft, talks | | 13 | about global expansion but has failed to execute? | | 14 | A. We would probably not make the same | | 15 | type of declarative statement on PeopleSoft in that way | | 16 | because PeopleSoft has expanded. We would actually | | 17 | spin it a little differently. We would say, PeopleSoft | | 18 | has expanded and, but actually in recent years they've | | 19 | actually withdrawn from some markets, from what we can | | 20 | tell, they've cut their support for some international | | 21 | work. And we would probably actually say they have | | 22 | tried to re-entrench. | | 23 | Q. But they certainly have a larger | | 24 | footprint than what Lawson would have? | | 25 | A. Absolutely, that's why we wouldn't |
| 00097 | | 1 | make this statement. | | 2 | Q. Substitute that with Oracle. Oracle | | 3 | talks about global expansion but has failed to execute, | | 4 | would that be a statement that you would try to position | | 5 | yourself? | | 6 | A. No, we would not make that statement | | 7 | about Oracle at all. We would say, Oracle has done a | | 8 | fairly decent job expanding globally, but what they | | 9 | have failed to execute on is meeting the needs of the | | 10 | local market. They've not done a very good job meeting | | 11 | the local needs of the country that they are operating | | 12 | in; and we would call that into question. | | 13 | And we would actually call into | | 14 | question their track record. Look at our track record, | | 15 | we've consistently grown, invested, expanded into other | | 16 | countries in order to meet the needs of our clients. | | 17 | Can Oracle say those three or four things in the same | | 18 | sentence? The answer is, no. That's the way we'd | | 19 | pitch it. | | 20 | Q. In terms of this positioning against | | 21 | Lawson, what type of client would you make this | | 22 | statement to; is it the multinational corporation | | 23 | that's looking for a global roll-out? | | 24 | A. Anyone that's operating outside the | | 25 | United States, we would probably be inclined to make |
| 00098 | | 1 | the statement. Again, the way this positioning | | 2 | document is used, it is used as a sales and training | | 3 | aid internally and as for reference. It is up to the | | 4 | account, up to the account executive to determine what | | 5 | they say or how they positioned SAP inside those sales | | 6 | cycles. | | 7 | We don't actually say, use this only | | 8 | in this situation. So understand that as the backdrop. | | 9 | Looking at, you know, the way we've compiled this | | 10 | information, anyone that has operations outside the | | 11 | United States or around, that are operating in multiple | | 12 | countries, to me this would be fair game to call into | | 13 | question what is going to be their support. | | 14 | Q. Looking at the next page, page 4 of | | 15 | exhibit 4, the first point: "Lawson offers solutions | | 16 | for few industries. | | 17 | "Attack: Lawson does not offer | | 18 | solutions for manufacturers." | | 19 | A. Correct. They don't. | | 20 | Q. So is this to say that, I mean, first | | 21 | let's take the first thing. What is the relevance or | | 22 | significance of the fact that Lawson offers solutions | | 23 | for few industries? And I ask with respect to how SAP | | 24 | is positioning itself versus Lawson. | | 25 | A. It would depend upon the sales cycle |
| 00099 | | 1 | in this case. If it isn't -- Lawson attempts to -- | | 2 | typically where this would come up is, Lawson would | | 3 | attempt to sell their solution to maybe a company that | | 4 | they've, or to a company and an industry that they've | | 5 | really not supported. | | 6 | For instance, they offer financials, | | 7 | and maybe they think they are really good at financials, | | 8 | and maybe they are, but the needs of say a chemical | | 9 | company in financials, maybe they are trying to sell to | | 10 | this chemical company. If we were up against Lawson in | | 11 | that sales cycle, we would say, why would you go with | | 12 | Lawson when, one, Lawson doesn't really have their | | 13 | software developed to serve the chemical needs, your | | 14 | chemical needs? They don't really understand your | | 15 | industry. And, as a matter of fact, all of their | | 16 | business typically is in these other industries, | | 17 | typically service related industries or healthcare. | | 18 | Now, if you're going to make a | | 19 | choice, Mr. Customer, who would you rather go with, | | 20 | with someone who actually understands and is associated | | 21 | with vertical industries, such as ourselves, 23, and/or | | 22 | someone who has a lot of deep experience in the | | 23 | chemical industry, such as SAP? Who are you willing to | | 24 | invest and risk doing business with in choosing a | | 25 | partner for the future? That's kind of how we would |
| 00100 | | 1 | use that as a position. | | 2 | Q. In working through Knowles exhibit 4, | | 3 | I'd like to turn your attention to page 6 of this | | 4 | document. I believe this is a point we talked about | | 5 | earlier in terms of Sap's investment in research and | | 6 | development. At the top of the page it says, "Issue: | | 7 | Lawson's spent far less than SAP and R&D, parentheses, | | 8 | $53 million. | | 9 | "Attack: Lawson spent 14 percent | | 10 | less on R&D over the past year." | | 11 | And, finally, "SAP Strength: SAP | | 12 | spends more money on R&D than any other business | | 13 | application vendor." | | 14 | Looking first at the significance of | | 15 | Lawson's spending on R&D, which in this document says | | 16 | 53 million dollars, what is the relevance or significance | | 17 | of that figure in positioning SAP in competition with | | 18 | Lawson? | | 19 | A. The way that this is used for | | 20 | positioning purposes is not so much the issue as it is | | 21 | the attack line. What we have seen with Lawson is that | | 22 | they have actually curtailed their R&D spend over the | | 23 | years, whereas SAP has on average consistently increased | | 24 | our R&D spend as a percentage of our revenues. The | | 25 | fact they've reduced their spend by 14 percent in one |
| 00101 | | 1 | calendar year should be a signal and to a client should | | 2 | be a concern, how serious are they willing to continue | | 3 | to invest to improve their products? | | 4 | The argument is, SAP has not had a 14 | | 5 | percent decline in any one year. It has consistently, | | 6 | from a trend line perspective, increased our R&D spend, | | 7 | which basically says we are more committed to our | | 8 | customers, more committed to the products, and are | | 9 | willing to put more money behind it to be make sure we | | 10 | deliver the best enterprise application software in the | | 11 | world. | | 12 | That would be the way we would | | 13 | position it, not so much the fact they spent 53 and we | | 14 | spent 910 million. That's not a fact, that's just | | 15 | scale. The fact is, what is important is what they've | | 16 | just done. So the reason we position it is to say, how | | 17 | committed are you to make a decision for Lawson when | | 18 | they are not even putting the dollars behind that | | 19 | product to improve it, Mr. Customer? That's the way we | | 20 | would position it. | | 21 | Q. And are customers -- what has been | | 22 | customers reactions to that message from SAP; is that | | 23 | something they find significant? | | 24 | A. Some customers it resinates very well | | 25 | with, some customers it's just another data point. |
| 00102 | | 1 | Again, any one of these issues slash attack positioning | | 2 | things could be critical. If you have a buyer, you | | 3 | know, buyer selection and buyer mind-set, you may have | | 4 | someone that's really a high end technical guy that | | 5 | believes in R&D, loves to talk about R&D. To him or | | 6 | her R&D is really important. Well, then our sales | | 7 | person should be smart enough to say, wow, I should | | 8 | probably be hitting on this point versus someone who | | 9 | could care less about R&D. It just all depends on the | | 10 | sales cycle. | | 11 | Again, in Lawson's case, this is a | | 12 | relatively fresh document. From a competitive | | 13 | standpoint, we don't -- since they don't handle | | 14 | manufacturing or typically selling to manufacturing, we | | 15 | don't see Lawson like everyday. I mean, Lawson is very | | 16 | specialized, they have a very good solution set for the | | 17 | vertical industries that they serve. | | 18 | Q. Looking at this spending and | | 19 | reductions in spending at Lawson, and referencing the | | 20 | earlier point on their talking about global expansion, | | 21 | does this figure have or this 14 percent reduction have | | 22 | any impact on that sort of message? | | 23 | A. Sure. We would combine the two | | 24 | points together, depending on the sales cycle, to use | | 25 | that. We would call into question, maybe that 14 |
| 00103 | | 1 | percent was to cutback on maybe some development work | | 2 | that they were planning to expand. I don't know. | | 3 | Maybe you should be asking Lawson that. That's the way | | 4 | we would position it. Mr. Customer, we haven't done | | 5 | that. I don't know Lawson's business but my information | | 6 | tells me they've actually cut back on their R&D spend. | | 7 | Maybe it's a fair question for you to ask. We want you | | 8 | to be really comfortable with the decision you're about | | 9 | to make, Mr. Customer. | | 10 | Q. So if Lawson was serious about | | 11 | expanding globally, you would expect a higher spending | | 12 | in R&D? | | 13 | A. We would see -- we should see a | | 14 | positive trend line going up. | | | | | | | | | | | | | | | | | 20 | Q. The "Attack: Lawson focuses on | | 21 | mid-market, North American centric businesses. | | 22 | "Sap's Strength: SAP has long had | | 23 | the reputation for being the most scalable ERP system | | 24 | on the market. Its highest sales and distribution | | 25 | benchmark claims 47,528 users with transaction times of |
| 00104 | | 1 | under two seconds." | | 2 | A. Correct. | | 3 | Q. Starting with the first point issue, | | 4 | looking at the point, scalable, I know we defined the | | 5 | term earlier, but is it the same definition here; what | | 6 | do you understand the meaning of "Lawson's solutions | | 7 | are not scalable"? | | 8 | A. This goes to architecture in the way | | 9 | they build their product. The way we position Lawson | | 10 | in this issue is that -- and we do not have Lawson's | | 11 | benchmarks, but that's why we didn't write it -- but | | 12 | inherently Lawson's technology, and the way they've | | 13 | architected their product, they are limited to the | | 14 | number of users that their systems can support, and the | | 15 | speed at which they can process transactions through | | 16 | their system. | | 17 | So can they handle 47,000 users on | | 18 | the system and give a response time of less than two | | 19 | seconds? Answer is, no, absolutely not. What is their | | 20 | response time? I'm not sure. Maybe it's 10 seconds. | | 21 | Maybe it's a minute. Maybe they can only handle up to | | 22 | 2,000 people, but they can't handle 47,000 users on the | | 23 | same system at the same time. So the way they've | | 24 | architected their product, because they made an | | 25 | architectural decision in way they write and develop |
| 00105 | | 1 | their code, has created a capacity limitation for how | | 2 | their software functions and which business processes | | 3 | and the number of transactions those processes can | | 4 | handle. | | 5 | That is a limitation, a capacity | | 6 | limitation that they've designed. They made a | | 7 | strategic choice to do it that way. All we're doing is | | 8 | saying, they are limited, you cannot grow and scale up | | 9 | your organization. So if you have a customer that's on | | 10 | a growth acquisition binge, and they need scale or they | | 11 | have a lot of employees or a lot of transactions they | | 12 | are going to process, this would be a weakness, and we | | 13 | would need to point that out. | | 14 | Q. Just in terms of scale-ability, this | | 15 | would be relevant to human resources? | | 16 | A. Human resources, financials. | | 17 | Q. Across the board? | | 18 | A. Across the board. | | 19 | Q. So all of their products have these | | 20 | scale-ability limitations? | | 21 | A. They have scale-ability limitation | | 22 | based on the architecture of their product, that is | | 23 | correct. | | 24 | Q. You mentioned the architecture for | | 25 | Lawson has these limitations. And we've talked about a |
| 00106 | | 1 | couple of other vendors. Do you know whether this | | 2 | would be an issue that you would raise in a competition | | 3 | with PeopleSoft? | | 4 | A. It would not be nearly the issue with | | 5 | PeopleSoft or with Oracle because their architecture, | | 6 | from what I understand, their architecture is quite a | | 7 | bit differently; they can handle a lot more transactions | | 8 | at a much faster rate. | | 9 | Q. In today's marketplace, is it an | | 10 | issue you would raise if you were positioned against | | 11 | Microsoft? | | 12 | A. Today, yes, we would use that as an | | 13 | argument against Microsoft. Microsoft's Great Plains | | 14 | product, Navision product is limited. They have a | | 15 | scale-ability issue. They are designed for one, | | 16 | two'zs, three operations. They are not designed for an | | 17 | enterprise yet. If you look at their R&D spend, that's | | 18 | a totally different animal. We would project their | | 19 | spend to be substantially increasing, and that's why we | | 20 | are tracking them as a serious competitor. | | | | | | | | | | | | | | | |
| 00107 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 14 | Q. First, could you kind of explain, | | 15 | what is involved with configuration; can you describe | | 16 | it? | | 17 | A. Only at the crude level. I mean, the | | 18 | technical terms and explanation, that's more on the | | 19 | consulting side. I will not be able to actually tell | | 20 | you the detail. Only thing I can tell you is that from | | 21 | a process standpoint, if you need to configure | | 22 | different types of transactions and the way they flow | | 23 | through the system, that is a configuration issue. | | 24 | Now, the depth by which how you actually go into the | | 25 | code and configure it, I cannot tell you that. |
| 00108 | | 1 | Q. But you have an ability, looking | | 2 | first at mySAP Human Resources, you can conform that to | | 3 | the buyer's business practices? | | 4 | A. Correct. | | 5 | Q. And for mySAP Financials, you can | | 6 | conform that software application to the buyer's | | 7 | business practices? | | 8 | A. Correct. | | 9 | Q. Looking at some of the products we've | | 10 | looked at earlier, Business One and mySAP All-In-One, | | 11 | can you configure those products? | | 12 | A. Business One, you can configure it | | 13 | slightly. It's severely limited, for instance, in HR | | 14 | it only does the two functions. So it's very limited | | 15 | in functioning. All-In-One, it's not designed to be | | 16 | configured. It's designed to be an out-of-the-box | | 17 | solution. You know, it's beyond shelf ware, I mean, | | 18 | shrink-wrap software, but it is designed to be operated | | 19 | out of the box. This is what it does. It does A to Z, | | 20 | and if you want to change things, it's really not | | 21 | designed for changing. Business One is, you know, semi | | 22 | configurable, and then everything else is, you know, | | 23 | highly customized and configurable. | | 24 | Q. In terms of the ability to configure | | 25 | Human Resources applications or, say, Financials |
| 00109 | | 1 | applications, does it require, does it put certain | | 2 | demands on the way you architect your software? | | 3 | A. Configuration - I may be a little | | 4 | off on this, but I don't think I'm going to be too | | 5 | far. The way our software is architected, our | | 6 | technology platform, etcetera -- that's one set of | | 7 | decisions. Configuration is the ability to modify the | | 8 | way a transaction moves through the system. That is | | 9 | part of our foundation for the way we architect it, but | | 10 | it is not core to the architecture. So that is the | | 11 | best answer I can give you. | | 12 | Q. Now, I've also heard another term, | | 13 | and perhaps it is the same as configuration and perhaps | | 14 | it is different; if it is, I'd like you to explain it. | | 15 | Customization, is that something different than | | 16 | configuration? | | 17 | A. Traditionally it's considered | | 18 | different. Configuration is enabling processes to do | | 19 | different things or to move through the system in a | | 20 | different way. Customization is when you want to do | | 21 | something that is outside a configuration that is | | 22 | unique, where we need to write additional code to make | | 23 | the software do something; maybe it's a special | | 24 | application that the client wants us to enable that we | | 25 | don't have in our standard offering today. So, yes, |
| 00110 | | 1 | they are different. | | 2 | Q. And is the mySAP HR application, is | | 3 | that customizable, can you customize that to, say, a | | 4 | customer's demands? | | 5 | A. You can customize any piece of code | | 6 | to a customer's demands. | | 7 | Q. Is that something SAP does regularly? | | 8 | A. Yes. We have an organization that | | 9 | writes customer code for customers. | | 10 | Q. And that's HR Financials across the | | 11 | board of the suite? | | 12 | A. It doesn't -- it's not dependent upon | | 13 | the title, it's based on the need of the client. We | | 14 | don't call it anything. It's just, you know, what is | | 15 | it you need us to do that we don't currently do today? | | 16 | We'll develop it for you. | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 00126 | | | | | | | | | | | | | | | | | | | | | | | 8 | Maybe it's helpful to look at some of | | 9 | these other areas. In terms of banking, what are the | | 10 | opportunities there, and what has your analysis told | | 11 | you about that market? | | 12 | A. Okay. Banking is a great opportunity. | | 13 | We are not, as you can tell by what we anticipate | | 14 | getting revenue out of there, it's less than a million | | 15 | dollars, so it's not a very good operation for us. We | | 16 | have banking solutions around the world that serve | | 17 | other world clients adequately. However, the United | | 18 | States for whatever reason has unique needs that our | | 19 | solution does not compute. | | 20 | As an example, if I recall correctly, | | 21 | there's a need in the US, for whatever reason | | 22 | Americans like to have average, we run our banking | | 23 | operations based off of average daily balances, and | | 24 | that's how we compute fees in the banking environment. | | 25 | Well, our software is not designed to compute average |
| 00127 | | 1 | daily balances for whatever reason, because that's, you | | 2 | know, in Europe that's not the way they run their | | 3 | banking operations. We do need to remember we did grow | | 4 | out of a European centric need development organization. | | 5 | So can we sell a banking solution? | | 6 | Not really. Now, can we sell them financials for their | | 7 | own internal use? Yes. However, there's other | | 8 | competitors out there that can solve or commit to | | 9 | solving the banking needs far better than SAP today. | | 10 | Is that an area where we think we can compete? Yes, | | 11 | but it requires more investment on our part to really | | 12 | be a contender in banking. And we've just not made | | 13 | that investment yet. We sell into banking on an | | 14 | opportunistic level. | | 15 | Q. You had mentioned that it takes some | | 16 | investment to, at least in the banking area, to tailor | | 17 | your solution to American banks needs. | | 18 | A. Correct. | | 19 | Q. What kind of an investment are you | | 20 | talking about? | | 21 | A. Development investment, typically. | | 22 | Q. That's time and money? | | 23 | A. Time and money. We have to take so | | 24 | many developers and pay them to develop the requirements | | 25 | and the solution to meet the local banking needs, and |
| 00128 | | 1 | that is, that's a business case. How much time and | | 2 | money does it take and what is our opportunity cost to | | 3 | do that? Because we only have so many developers. We | | 4 | would have to pull them off other projects to customize, | | 5 | to make it work for the US What does that cost | | 6 | versus if they did that in development back in Germany | | 7 | or wherever and developed it to us, how much revenue | | 8 | can we get and how fast can we makeup that cost | | 9 | differential? So how quickly can we recover our cost | | 10 | from a return? | | 11 | Based on the way we see other | | 12 | opportunities in the landscape here, in the United | | 13 | States, one of our elements of determination is, | | 14 | banking represents an area of growth, but we can get | | 15 | growth in other areas, so I think we'll focus our | | 16 | attention on other areas. But if a bank really wanted | | 17 | to do business with us, we'll do business with them if | | 18 | they are willing to make the investment. So it's a | | 19 | trade-off for us. | | | | | | | | | | | | | | | | | | |
| 00132 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 12 | Q. Returning to these emerging markets. | | 13 | Banking I believe you described as kind of an | | 14 | opportunistic market, that is, if an opportunity | | 15 | presents itself to SAP, you'll take advantage certainly, | | 16 | but it is not an area that SAP has decided it really | | 17 | wants to invest? | | 18 | A. Correct. | | 19 | Q. Is that true for some of these other | | 20 | markets listed here? | | 21 | A. Yes. Opportunistically we, the | | 22 | industries we view opportunistically are hospitality, | | 23 | transportation, healthcare, and all financial services | | 24 | companies, with the exception of, I can't remember the | | 25 | breakdown for financial service, there's one category |
| 00133 | | 1 | in financial services that we don't chase. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 00152 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 11 | Q. So looking at this first bullet | | 12 | point, "Reputation for being costly and difficult to | | 13 | implement," I guess the first question is, what does | | 14 | that mean? | | 15 | A. We're usually higher priced and our | | 16 | solution is more complex than other solutions, and it | | 17 | requires extra effort to implement it; in certain | | 18 | cases, depends on what you're implementing, that's | | 19 | true. | | 20 | Q. And in what cases is it true? | | 21 | A. It depends on the situation. | | 22 | Q. Are there certain situations that | | 23 | jump to mind in which this would be an accurate | | 24 | statement? | | 25 | A. None that I can recall. Again, it's |
| 00153 | | 1 | the reputation, it's what we're being told. We don't | | 2 | necessarily believe it ourselves, but we tend to be on | | 3 | the higher side of the cost, at least in the past we | | 4 | have been, not in the last couple of years, our costs -- | | 5 | our pricing has come under pressure. So, no, I mean, | | 6 | the way we work with our sales force is, these are | | 7 | perceptions that have to be oversold in a sales cycle, | | 8 | because these are, you know, we tell sales guys, this | | 9 | is what the customer's mindset is being viewed like. | | 10 | You're going to be sold: SAP, I | | 11 | don't even want to consider you because you're too | | 12 | expensive. SAP, you're hard to implement, don't even | | 13 | want to go there. These are the things the sales guys | | 14 | have to learn to sell around. | | 15 | Q. These are still, specifically looking | | 16 | at this, this is still a perception that exists today | | 17 | in the marketplace? | | 18 | A. Sure. | | 19 | Q. Is this something that, say, your | | 20 | competitors, Oracle, PeopleSoft, might use against SAP? | | 21 | A. Oh, absolutely. Yeah. And the | | 22 | reason why we put it here is that, for instance, if | | 23 | PeopleSoft goes into a sales cycle versus us, often | | 24 | times what we anticipate and what we think we know is | | 25 | that PeopleSoft will go in and say, look how easy our |
| 00154 | | 1 | system is, look how easy it is to implement, look how | | 2 | fast we can implement it. SAP, one, it's going to cost | | 3 | you a lot more, and it's going to take you a lot longer | | 4 | to get it operational. | | 5 | That's why, from PeopleSoft: That's | | 6 | why we're a better company; that's why we have a better | | 7 | solution; you should buy it from us. Thank you very | | 8 | much, Mr. Customer. | | 9 | That's the trap they are going to try | | 10 | to sell against us. We put this out and we work our | | 11 | sales people, this is the trap we anticipate PeopleSoft | | 12 | using against it, so be prepared to sell around it; and | | 13 | if you have an objection, how to overcome that objection. | | 14 | Q. So this strategy on the part of | | 15 | PeopleSoft and others has been at least somewhat | | 16 | effective? | | 17 | A. It's been effective to pose | | 18 | uncertainty in dealing with SAP. | | | | | | | | | | | | | | | | | | | | | |
| 00163 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 23 | Q. I'd like to ask you a few questions | | 24 | about the sales cycling topic we kind of touched on a | | 25 | few times. Maybe as a first step, maybe you could |
| 00164 | | 1 | identify or describe the steps involved in the typical | | 2 | sales cycle, and perhaps it might be useful just as a | | 3 | frame of reference to use a multinational corporation. | | 4 | So to just flush out kind of the | | 5 | example, you have a multinational company going to | | 6 | market for HR for financials. What are the steps from | | 7 | beginning to the end? | | 8 | A. First and foremost, there is not a | | 9 | typical sales cycle in the enterprise application | | 10 | software space. So I wish there was because it would | | 11 | make our lives a lot easier. However, I'd like to at | | 12 | least give you a general description of some of the | | 13 | steps that we would normally go through. | | 14 | In your example I'm going to assume | | 15 | that in this a multinational corporation, that the | | 16 | headquarters is in the US, and the decision-maker or | | 17 | the decision-making process is actually in the US Is | | 18 | that acceptable? | | 19 | Q. Absolutely. | | 20 | A. Okay. Our account executive usually | | 21 | is the first person to get into the company, and our | | 22 | traditional line of business approach is to work with | | 23 | the CIO, chief information officer of the company, CIO | | 24 | or CTO, chief technology officer. That's Sap's | | 25 | strength, that's who we have most of our established |
| 00165 | | 1 | relationships with, that's who we speak to most | | 2 | fluently in understanding his or her needs. And it | | 3 | would be their responsibility to be the one to go and | | 4 | procure an HR or a financial type system. | | 5 | If it's a financial system, another | | 6 | key influencer, and could even be the ultimate | | 7 | decision-maker along with the CIF would be the CFO, so | | 8 | it would be up to our account executives to, one, work | | 9 | a relationship with the CIO and the CFO in order to | | 10 | understand what are their needs specifically around the | | 11 | financials solution that they are looking for. Again, | | 12 | financials is a, we have a suite of things our | | 13 | financial solution can do. So they may not need all of | | 14 | that, they only may need a certain component, a certain | | 15 | part of it. They may only be dealing with trying to | | 16 | solve two or three problems versus, you know, replacing | | 17 | their whole system. It just depends. | | 18 | The goal, the role of the account | | 19 | executive is to basically distill that information down | | 20 | to find what is the key motivation and the key decision | | 21 | drivers that is motivating this account to select a | | 22 | financials package. In this case this being a | | 23 | non-governmental entity, more than likely they do not | | 24 | have an RFP. RFPs would be nice in this case because | | 25 | they tell you what the problem is, they tell you what |
| 00166 | | 1 | they are looking for, and a list of criteria that you | | 2 | have to have to work against. In this case usually the | | 3 | RFP does not exist in the early stages. | | 4 | So it would be up to the accounting | | 5 | executive to map to those two individuals inside the | | 6 | company and to also work with their respective | | 7 | departments to understand their needs. | | 8 | At some point the sales cycle at some | | 9 | point, maybe it's a month, maybe it's two months after | | 10 | multiple discussions, multiple contact, multiple | | 11 | meetings, at some point the account executive needs to | | 12 | make a determination and find out as best as he or she | | 13 | can: One, does that company have budget to procure? | | 14 | Who the decision-maker is. What is the criteria by | | 15 | which they are going to make a decision? And, last, | | 16 | what is their time frame? | | 17 | Based on those four areas or four | | 18 | metrics, it is up to the account executive then to | | 19 | determine when to engage additional resource. And | | 20 | additional resources could include and are not limited | | 21 | to maybe bringing in an industry principal, because | | 22 | maybe it's a financial solution for a unique industry | | 23 | that maybe the account executive is not that | | 24 | comfortable with because he or she doesn't have a lot | | 25 | of experience. |
| 00167 | | 1 | So they may call in an industry | | 2 | principal who happens to be a functional vertical | | 3 | industry expert, all I know is chemicals, I know | | 4 | chemicals forwards and backwards, and I know how the | | 5 | financials are used in a chemical company like that. | | 6 | They might bring in an industry principal to help out | | 7 | in the sales cycle. And at some, then at some point | | 8 | they are going to decide when is the best time to build | | 9 | a demonstration and put the customer in front of a | | 10 | demonstration. | | 11 | The key for the demonstration is the | | 12 | set-up, meaning, we do not want to bring a client into | | 13 | a demonstration and show the client everything our | | 14 | solution does. We would rather show the client exactly | | 15 | the business process they are trying to solve and how | | 16 | we address that issue. So identifying all these needs | | 17 | up front helps us to then only demonstrate what the | | 18 | customer needs to answer their question. | | 19 | So at some point there's going to be | | 20 | a demonstration; that demonstration often times is done | | 21 | on-site, maybe 50/50, and the others in our offices. | | 22 | During this demonstration process at some point the | | 23 | account executive with his or her manager will need to | | 24 | determine with the client who is their implementation | | 25 | partner, who do they have a current relationship with? |
| 00168 | | 1 | If it's IBM, if it's Accenture, who have they used in | | 2 | the past for similar situations? | | 3 | It is at this point that we would | | 4 | normally have the account executive and/or his manager | | 5 | maybe reach out to the partner, Accenture and IBM, and | | 6 | also try to find out, are they going to be the ones | | 7 | implementing whatever solution? Is the implementation | | 8 | proposing an alternative solution to SAP? And, also, | | 9 | is the implementation partner competing for the | | 10 | services business? | | 11 | So is it IBM services, Accenture or | | 12 | just IBM? IBM owns the account and they got a great | | 13 | relationship. So we try to determine that because that | | 14 | helps us determine the type of mix in the decision-making | | 15 | process. We go through the demo. Post demo, most of | | 16 | the companies will bring in anywhere from two to four | | 17 | companies to go through a demo cycle. So as this is | | 18 | occurring, we're constantly being measured against | | 19 | other companies. And one of our goals we try to get to | | 20 | is try to determine what is the key decision factors | | 21 | coming out of the demo? Who's winning? Who's not | | 22 | winning? What went wrong? And what do we need to do | | 23 | to win? | | 24 | A demo cycle for, say, three or four | | 25 | competitors could easily take a month, easily. It is |
| 00169 | | 1 | not uncommon for some demos to go for four or five days | | 2 | eight hours a day, depending upon the complexity of | | 3 | their need. So if it is four competitors, that's one | | 4 | month's cycle time at the end of the month, and then | | 5 | they have to have a period of time that they determine | | 6 | selection criteria. I want to whittle it down to two | | 7 | competitors. I may want to begin parallel negotiations | | 8 | with two competitors. | | 9 | And they would begin some level of | | 10 | negotiating with us and whoever maybe the other | | 11 | competitor is. Often times at the end of the sales | | 12 | cycle it is whittled down to two. At some point in the | | 13 | sales cycle, some selection is made that will go with | | 14 | one. And that could be a cut out of a negotiation | | 15 | process, it could be they don't like our terms and | | 16 | conditions, they may not like our pricing, maybe we are | | 17 | not willing to budge on price because we believe we are | | 18 | delivering superior value. | | 19 | Whatever the factors are, at some | | 20 | point they eventually whittle it down to one and then | | 21 | finalize negotiations. That is at a high level is the | | 22 | typical sales cycle. In the sales cycle multiple | | 23 | people interact. For instance, for the demonstration, | | 24 | it could be one to 10 people involved in presenting our | | 25 | solution, and they are called solution engineers. In |
| 00170 | | 1 | order to write the proposal, we may have our proposal | | 2 | team involved in writing the proposal to help the | | 3 | account executive write the proposal. | | 4 | We may have a value engineer involved | | 5 | in actually going on site to the customer in order to | | 6 | determine value or help the customer to determine by | | 7 | changing your process from A to B, you could save a | | 8 | hundred million dollars. And you need to be ready to | | 9 | benchmark this in two years. Or here's the set of | | 10 | metrics you need to operate against for, say, the next | | 11 | year or two. So, I mean, there's multiple people that | | 12 | come in and out of the sales cycle, as I like to call | | 13 | it, some virtual team. The account executive is of | | 14 | course the focal point. | | 15 | Also, then towards the end of sales | | 16 | cycle, during the negotiation period, especially, | | 17 | that's when we normally have our consulting involved to | | 18 | try to get positioned into the job, if we are selected, | | 19 | and also our education and training services to make | | 20 | sure that we are going to handle their educational | | 21 | needs to get them, their users up to speed on how to | | 22 | use our software. | | 23 | The sales cycle itself average length | | 24 | for SAP in our established industries like core | | 25 | manufacturing, average sales cycle is about 6.7 |
| 00171 | | 1 | months. In our emerging market industries it's | | 2 | anywhere from eight to nine months. And in public | | 3 | sector, which is totally different, we have some sales | | 4 | cycles that are multi-year, because we can't get the | | 5 | federal people to cough up the cash. | | 6 | Take that out. Strike that part. | | 7 | Strike that part. No digging into federal. | | 8 | But that's the average sales cycle | | 9 | timing, and kind of process. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 00180 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 16 | Q. Does SAP encourage it's account | | 17 | executives to really understand who the competition is | | 18 | prior to this demonstration phase? | | 19 | A. I wouldn't say SAP encourages, I | | 20 | would say it's just an expectation. If you're going | | 21 | into a demonstration, you should know as much about who | | 22 | you're going to compete against than not. I don't | | 23 | think there's a policy or mandate or anything. It's | | 24 | just accepted practice. | | 25 | |
| 00183 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 21 | Q. When do you become aware that you're | | 22 | one of the finalists that is being -- at what point do | | 23 | you understand you're either in negotiations or not in | | 24 | negotiations? | | 25 | A. Usually when the client tells us. |
| 00184 | | 1 | Q. So that the client will tell you | | 2 | you're out or you're in? | | 3 | A. Yes. They will signal, you're in the | | 4 | running. | | 5 | Q. At that point - | | 6 | A. Give me -- you've given me a proposal | | 7 | but now I'd like to see a real proposal. Go back and | | 8 | sharpen your pencils. Those are the signals that we | | 9 | typically get. | | 10 | Q. Once typically you said they may | | 11 | engage two of you in the early negotiations? | | 12 | A. Yes. | | 13 | Q. How long do these negotiations last? | | 14 | A. It totally varies on the client; some | | 15 | are fast, some are drawn out and long. | | 16 | Q. And what are the terms of these | | 17 | negotiations, what's being discussed and negotiated? | | 18 | A. Often times licensing, the pricing, | | 19 | terms and conditions, and our standard contract, and | | 20 | intellectual property rights to process, or maybe | | 21 | something that we'll discover in their processes. | | 22 | If there's any customer development | | 23 | that we need to do to help get the solution to work, | | 24 | they want to negotiate rights to it so we can't resell | | 25 | it to other people, things like that. |
| 00185 | | 1 | Q. Looking at all these different stages, | | 2 | when is it that SAP begins to share its pricing or give | | 3 | price quotes to a client? | | 4 | A. In the determination phase, usually | | 5 | clients, that's when we're trying to determine how much | | 6 | they have in the budget; in other words, are they | | 7 | serious about this and do they have a budget set aside | | 8 | in their capital plan? | | 9 | Usually there's a feel of ballpark | | 10 | pricing at that phase, but usually where they say, we | | 11 | really cannot give you a good price until after we see | | 12 | a demonstration and really nail down your specific | | 13 | requirements, and see if you agree. And if you agree | | 14 | we can proceed to a more formalized proposal. | | 15 | Typically after the more formalized | | 16 | demonstration, they would receive some level of | | 17 | proposal post detailing out how we're going to solve | | 18 | their issue and the associated costs with it. | | | | | | | | | | | | | | | | | | | | | |
| 00186 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 13 | Q. How does SAP price the mySAP Business | | 14 | Suite? | | 15 | A. Okay. We standardize by pricing on | | 16 | the type of user that's going to be necessary and the | | 17 | functions that that user will have access to. That's | | 18 | the traditional pricing model that we have in place | | 19 | today. | | | | | | | | | | | | | | | | | | |
| 00187 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 11 | Q. Now, correct me if I'm wrong, it's | | 12 | late in the day. You said the determination phase | | 13 | generally the customer's interested in some idea of | | 14 | what pricing is? | | 15 | A. That's based on budgeting. In other | | 16 | words, we try to understand what their budget is. It's | | 17 | up to the accounting executive to say, you know, is | | 18 | this realistic? Based on what the client's saying they | | 19 | need, do we think that's a ballpark realistic number to | | 20 | procure those types of things? The reason is, we don't | | 21 | want to book a bunch of resource time against a client | | 22 | that has way, unrealistic expectations. You know, I | | 23 | want a Ferrari for a dollar. That's not going to | | 24 | happen. So why should I spend time with this client to | | 25 | help him understand. He's going to have to substantially |
| 00188 | | 1 | increase his budget. | | 2 | Q. So the first, this is kind of an | | 3 | internal determination? | | 4 | A. Yes. | | 5 | Q. What's the client's budget? What do | | 6 | we think this solution is going to cost? | | 7 | A. Right. We call that internally, | | 8 | opportunity assessment, where it is up to the account | | 9 | executive to work with his or her manager to say what | | 10 | is the opportunity, what does it look like, is this | | 11 | something we think we can win? Do we have solutions? | | 12 | Do we think we can help this client? Is there going to | | 13 | be enough delivered value? If so, we should probably | | 14 | continue the sales cycle. | | 15 | Q. When does the client start asking for | | 16 | pricing information? | | 17 | A. Normally they are asked -- they are | | 18 | usually asking around the demonstration phase: What do | | 19 | you think this is going to run? What do you think this | | 20 | is going to cost in order to do this, this and this? | | 21 | So I would say probably middle way | | 22 | through they are asking that. Sometimes it's earlier | | 23 | in determination. They may be saying, hey, I only have | | 24 | X in my budget. Do you think you'll even be able to | | 25 | help me in this area. But those typically are just |
| 00189 | | 1 | verbals. | | 2 | Q. When will SAP share that information? | | 3 | Will it share it upon request? | | 4 | A. Yeah. We'll give ballpark. The | | 5 | account executives will give ballpark. But it is until | | 6 | after the demonstration where we want to see it, we | | 7 | want the client to weigh off and say, we agree this is | | 8 | the process, before we like to give stuff in writing. | | 9 | Q. Prior to the completion of the | | 10 | demonstration process, these are all kind of verbal | | 11 | ballpark figures? | | 12 | A. Yes, verbal conversations. | | 13 | Q. Once the demonstration phase is | | 14 | engaged and the company has signaled that, okay, SAP, | | 15 | we'd be interested in pursuing this a little further | | 16 | with you? | | 17 | A. Yes. | | 18 | Q. Does SAP then submit a written | | 19 | proposal covering, I would gather a number of different | | 20 | things, but including pricing? | | 21 | A. Yes, post demonstration we would | | 22 | normally prepare a proposal for the client; yes. | | 23 | Q. That would be a written proposal? | | 24 | A. Yes, often times. | | 25 | Q. What are the types of things a |
| 00190 | | 1 | written proposal would cover? | | 2 | A. What is the solution definition? | | 3 | What is the cost? What we anticipate are going to be | | 4 | their education and training needs. What is the | | 5 | ongoing annuity or maintenance cost going forward? | | 6 | What is, if we had a value engineer or we had ROI work | | 7 | done on the occasion, we would try to establish a | | 8 | return on investment and show them their savings. | | 9 | Q. Is that the final word on these | | 10 | negotiations, that first proposal? | | 11 | A. No, that's just what it is, it's a | | 12 | proposal. So it's usually really the key starting | | 13 | point in the process of negotiations. | | 14 | Q. In terms of pricing, is the pricing | | 15 | quoted close to what the list prices might be? | | 16 | A. Close, yes, probably close. | | 17 | Q. The account executives are encouraged | | 18 | to try and track the list price at least in that | | 19 | initial proposal? | | 20 | A. Absolutely, because the way our | | 21 | pricing work is based on the size of the organization, | | 22 | they are entitled, this is unusual, but they are | | 23 | entitled to standard discounts. So based on the size | | 24 | of the opportunity, they may be entitled to a 40 or 50 | | 25 | percent discount up front. That would be noted in the |
| 00191 | | 1 | proposal offer. And the account executives are | | 2 | encouraged to start using that as a starting point. | | 3 | Q. So once that starting point happens, | | 4 | I'm guessing you submitted your proposal, the company | | 5 | or potential client then reacts with its own proposal; | | 6 | is that right? | | 7 | A. You mean, the client coming back to | | 8 | us with a proposal? | | 9 | Q. Yes. Right. | | 10 | A. Typically not, it's usually verbals. | | 11 | It's a collaborative process. | | 12 | Q. You had mentioned that, at least, | | 13 | that there are some standard discounts based on the | | 14 | size of the opportunity? | | 15 | A. Yes. | | 16 | Q. Are there also guidelines that SAP | | 17 | uses in discounts further along in the process? | | 18 | A. No, I would not say there's any | | 19 | standard policy beyond the standard discount. Beyond | | 20 | that it's up to negotiation and terms of the value of | | 21 | the client: How big the client is? Is it a brand | | 22 | name? Are we trying to get penetration in an | | 23 | industry? Do we need to show momentum in an industry? | | 24 | Are we trying to get attraction in an industry? | | 25 | There's a multiple of factors that would consider why |
| 00192 | | 1 | or why not we would even consider a discount. | | 2 | Q. Is one of those factors that may be | | 3 | considered who else has been chosen as kind of a | | 4 | finalist? | | 5 | A. Sure. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 00199 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 21 | Q. You've mentioned R/2 and R/3, and now | | 22 | we're in mySAP Business Suite. How much time elapsed | | 23 | between those sorts of product evolutions? | | 24 | A. Okay. That's a great question from | | 25 | the product life cycle standpoint. If we look at the |
| 00200 | | 1 | evolution of the company, you're looking at a technology | | 2 | platform range probably somewhere between 8 to 10 | | 3 | years. The evolution that you just spoke of is R/2 to | | 4 | R/3, and our new platform is called NetWeaver. And | | 5 | you're looking at a 10, 8 to 10 year cycle between each | | 6 | of those major architectural change, innovations. | | 7 | Today it is NetWeaver. Business | | 8 | Suite is the software component that our technology | | 9 | stack is called NetWeaver which replaces the foundation | | 10 | for R/3. | | 11 | Q. Was there a significant investment on | | 12 | the part of SAP from going from R/3 to developing the | | 13 | mySAP Business Suite? | | 14 | A. Not for the Business Suite but for | | 15 | NetWeaver, yes. | | 16 | Q. For NetWeaver. | | 17 | A. There was significant net resources. | | 18 | Q. Do you have a ballpark figure of what | | 19 | it took in terms of time and money? | | 20 | A. Don't know money. I can speak to | | 21 | approximate time and approximate labor. We're talking | | 22 | somewhere in the neighborhood of like 2,000 people over | | 23 | a year's time. | | 24 | Q. And they were that building off of | | 25 | what the development that already had gone on with R/2 |
| 00201 | | 1 | and then R/3, there was -- | | 2 | A. And changing it for what is now | | 3 | NetWeaver, because we went from a closed environment | | 4 | appropriate technology stack to now an open standards | | 5 | technology stack, so we can integrate easier with dot | | 6 | NetJ2EE, XML, and have an open integration platform; | | 7 | whereas, R/3 was somewhat closed. | | 8 | Q. So that effort to go from R/3 to | | 9 | NetWeaver took about a year? | | 10 | A. Plus. | | 11 | Q. Plus? | | 12 | A. 2,000 some odd people. | | 13 | Q. So you were looking to create | | 14 | NetWeaver from scratch, and you didn't have R/3, | | 15 | something equivalent to NetWeaver. Do you have an idea | | 16 | of what time or cost it would take to develop an | | 17 | equivalent? | | 18 | A. I would have no guess. | | 19 | Q. Would it take more than a year plus | | 20 | and 2,000 people? | | 21 | A. I think the premise of the question | | 22 | is just a little bit off. Your premise of the question | | 23 | is, if I were to start from scratch. If I were to | | 24 | start from scratch, I would not try to build NetWeaver, | | 25 | because NetWeaver is just the foundation for what the |
| 00202 | | 1 | software applications sit on. | | 2 | Most companies in the evolution cycle | | 3 | for building software are not going to worry about the | | 4 | technology platform, they are going to use an open | | 5 | standard and work on the technology side. The | | 6 | technology is going to come much later in their life | | 7 | cycle. They would never begin there. That's the wrong | | 8 | end of spectrum to work on. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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U.S. Department
of Justice
