SAP's Turnaround: Why Internal Focus Made One Company Sick

Last Updated May 25, 2010 3:28 PM EDT

Red TapeWhen a company begins to flounder, it's always difficult to locate the real source of the problem. The bigger the company, the harder it is. And these days, you don't have much time to figure out the answer. While you're testing one theory or another, a competitor who's firing on all cylinders will leave you in the dust.

That's exactly what happened to German software maker SAP. SAP and archrival Oracle used to be about the same size. Then SAP began to lose its way. It had too many irons in too many fires, a growing bureaucracy, and a lack of vision of how to grow the company. All the while, Oracle acquired one company after another, spending $42 billion on 65 companies since 2005. Revenues and profits have doubled since then, while SAP remained essentially flat.

Then, in 2009, SAP's software license sales fell off a cliff, dropping a whopping 28 percent and forcing the company's first big layoff. Finally, the board had had enough. In February of 2010, amidst declining revenues, plummeting employee morale, and growing contention with its own customers, SAP's board ousted CEO Leo Apotheker and installed co-CEOs Jim Hagemann Snabe and Bill McDermott.

Together, their focus is clear: eliminate bureaucracy, grow by acquisition, and get products to market fast. They've wasted no time doing that. In just three months, they've shaken things up in what may prove to be a remarkable turnaround.

Surprisingly, they determed that the company was actually too internally focused. One of their first acts was to kill a long-standing project that consumed precious executive time examining corporate values. According to Bloomberg Business Week:
"Companies that are too internally focused are sick," McDermott said. "There's nothing healthy about being obsessed with your own internal nonsense. If there was a project that built bureaucracy into the company or required people to think about our internal stuff, we've killed those projects."
McDermott also streamlined customer sales and support by combining nearly 10,000 field sales reps with 14,000 consultants that customize products. And Snabe is implementing an aggressive program to consolidate and streamline the product development process.

In another groundbreaking move, SAP announced it will acquire California-based database and mobile software maker Sybase for $5.8 billion. Despite Oracle's aggressive spending spree, SAP's former executives had little interest in acquisitions.

Turnarounds are way harder than they appear from the outside. Still, I think the SAP story is going to be one for the ages. Here are five key takeaways that apply to any turnaround situation:
  1. In a turnaround, time is not your friend. Move quickly in identifying a turnaround and making leadership change. These days, boards have precious little time to determine that the company is stuck and make the right leadership change.
  2. Source customers and key employees. New leadership must get out and spend time with key customers and employees. Forget surveys; the best way to figure out what's really going on is qualitative and one-on-one. These insights are surprisingly dead-on.
  3. Analyze successful competitors. It's shocking how few executives pay attention to their competitors. Oracle was a highly visible lesson that SAP executives ignored.
  4. Cut through red tape and streamline decision-making. When companies stall, a common symptom in nearly all cases is bureaucracy and organizational dysfunction.
  5. Focus on barriers to growth and execution and nothing else. The "nothing else" part is the key. First you fix what's broken. Everything else will follow.
At any given time, there are dozens of SAPs in the making, companies that haven't figured out they're stuck or have yet to determine how to get unstuck. Know any examples?

Image CC 2.0 via Flickr, by grifray

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