Technology and Global Growth: A Conversation with Bill McDermott

Thursday, April 12, 2012

SAP Co-Chief Executive Officer Bill McDermott shares his view on how SAP is dealing with the changing effects of technology on the global economy and on policymakers.

This meeting is part of the Corporate Program's CEO Speaker Series, which provides a forum for leading global CEOs to share their priorities and insights before a high-level audience of CFR members. The series aims to educate the CFR membership on the private sector's important role in the policy debate by engaging the global business community's top leadership.

PETER COOK: Good morning, everyone. I'm Peter Cook with Bloomberg Television. Welcome. Thanks for joining us this morning and taking time out of your busy days to be here at the Council on Foreign Relations Speaker Series -- CEO Speaker Series, with our guest of honor today, Bill McDermott, the co-CEO of SAP.

First of all, welcome, Bill.

BILL MCDERMOTT: Thank you, Peter.

COOK: Glad you could join us. As well, my thanks to the council for inviting me to participate this morning.

And a couple housekeeping details before we get things under way: The format here -- I'm going to start asking Bill some questions for about 25 minutes or so, at about 9:00 going to open it up to you all. So I would hope that you all have tough questions ready for Bill McDermott today.

I should point out this is the quiet period for SAP, before their next earnings release. We may not be able to answer every single one of our questions, but I trust there's a large amount of territory we can cover this morning. So -- looking forward to that.

A few other housekeeping details: Cellphones, pagers -- if you could turn those off right now, that would be great, so they don't mess up the audio system in the room here. And a reminder as well that this session is on the record, so if you want to make some news today, Bill or anyone else in the room, there's a chance that that will indeed happen. That's a Bloomberg Television camera back in the room, with my friend John Cooper (sp). John (sp), good to see you.

And a little biography now, a little background on Bill McDermott -- and you have some of it in the paperwork that's been handed out this morning, but again, he's the co-CEO of SAP. And this is a company that is in its 40th year now, just celebrated its anniversary and, I should point out, in 2011 just had its best year ever.

MCDERMOTT: Thank you.

COOK: So congratulations on that.

Before taking over as co-CEO in February of 2010, he helped -- he ran the Americas operations for SAP, also the Asia-Pacific and Japan regions, and before that worked at Siebel, Gartner, top positions there, and 17 years at Xerox. And as you can see from the biography, a lot of honors and commendations along the way. So it's fair to say that Bill McDermott is a player in the world of global business, and we're very pleased to have him here today.

MCDERMOTT: Thank you.

COOK: I wanted to start -- first of all, this is a foreign policy group of course, keeping track of what's going on around the world. I want to get your take. You are an American running a German company that does business all over the world. What are you seeing right now in terms of the macro picture, the global economy and the challenges not only facing SAP but facing a whole host of other companies operating around the world?

MCDERMOTT: I keep telling everybody at SAP we're neither German nor American, but we're truly global. So the idea of creating a global culture in our company is the essence of our growth strategy.

If you look at the mature markets, whether it's the United States or Germany, Japan, these markets are pretty steady. If you look at Europe, Europe's relatively steady, with the exception of some locations in Southern Europe. But overall, things are pretty good. Latin America's strong. Most all of Asia's strong for our business. So I would just say the global economy right now -- I'm an optimist, and I think it's a lot better than most people think it is.

But if you're not innovating, if you don't have something that moves the needle for customers and you're in the technology industry, you're in trouble. So if you're a commodity, you don't deliver business outcome, you won't grow.

COOK: As you look around the world, there have got to be some storm clouds on the horizon. I'm a reporter; I have to be skeptical of things.

MCDERMOTT: Of course.

COOK: What is it that's worrying you right now? And let me start, first of all, on that subject, with the European debt crisis. Looked like things maybe had been somewhat solved. Things were starting to improve. Now we look at the markets, we see what's been happening this week. There have to be some worries about the European debt crisis and what that might mean.

MCDERMOTT: Absolutely. I mean, if there is a, you know, huge European debt issue that spirals into something much worse than we know about today, that would be a crisis equivalent to what we saw in 2008, undoubtedly.

On the other hand, I don't think that's going to happen. And we're actually relatively optimistic that the fiscal and monetary policy over there will remain steady enough that we can navigate our way through Europe.

And I say that because in our business, we have tremendous visibility not only in what's happening in this quarter but what's happening on a rolling four-quarter average. So when you look at the pipelines, they look very good. And in fact they actually look very good even in Southern Europe, which for most companies haven't really invested much in technology these days.

The other factor that I would mention to you is we have a global ecosystem that supports SAP. So for every one SAP person, nearly 60,000 in the world, there's five times or six times that of partners that surround what we do. And they're relatively optimistic, because we talk to them every day.

So I feel more optimistic about Europe. Of course, there are risks; there's risks everywhere. Geopolitical things can happen, but steady as you go right now.

COOK: On the geopolitical front, again, you've run a -- biggest maker of business software in the world. Things like Iran, oil price increases -- we don't necessarily think of a software company being directly affected by that. What is the impact that's having? And what else, again, are you watching geopolitically right now that might affect SAP?

MCDERMOTT: Well, the situation in Iran obviously would impact everybody. So it's all relative, and hopefully, we'll all get through that situation. But rising oil prices do have an impact because as the commodity prices get higher for our customers, they have less margin to drop through to their shareholders, and they're probably not going to be able to pass on too many price increases to their consumer. So overall, there is just less to go around and less to spend and invest.

Having said that, what's unique about what we do -- if you're in a highly regulatory situation, you're going to need technology to manage through that. If commodity prices are rising and you have less margin dollars to provide to your shareholders, you're going to have to get more efficient to deal with that.

And many of the technologies today that we see growing our business are highly disruptive to the status quo, and they can radically improve the efficiency and the effectiveness of companies. And that's where we grow.

So that's why I go back to if you're just selling a commodity and you (can ?) change the business outcome, you're irrelevant; you're just another one at the party. You have to create an environment where you're relevant in the boardroom of companies no matter where they're located in the world, where you can help them manage a crisis.

For example, in the tsunami in Japan, one of the things that we learned is our business went down in the heart of the tsunami, like everyone else's, for a very short period of time. Why did it come back, and why did it grow in triple digits after the tsunami? Because we had every customer in real time being managed, and we kept their system live somewhere in the world where there wasn't a tsunami. So they had business continuity. Their operations were successful, and they were executing. And they didn't forget. As soon as they got through the crisis, they overinvested in SAP.

Again, it's being relevant in the downtimes, being courageous in the downtimes, not being a commodity. You know, you look at different phone manufacturers -- in The Wall Street Journal today that, you know, five years ago had a cap -- market cap at 90 billion (dollars), and today it's 16 billion (dollars). Why? They got commoditized. They didn't hit the next technology wave. And you know, now they're fighting for survival.

COOK: You mentioned -- again, a global perspective here -- we got the European debt crisis, you've got a lot of places that -- companies that are hurting right now. They're trying to make ends meet as well, trying to cut costs.


COOK: In that environment, and -- even governments -- a lot of people would like to see the United States government perhaps have a little bit more fiscal contraction here -- fewer dollars to spend by governments and companies on things like software. Is that a threat to you or, again, as you talk about it, an opportunity for those companies, those governments to do more with less?

MCDERMOTT: Absolutely an opportunity to do more with less, Peter. I'll give you an example. Today about half the hardware that companies in governments are investing in is completely irrelevant and unnecessary. Today 85 cents on every U.S. dollar is spent on hardware or services, and only 15 percent is spent on software.

Software is the innovation layer of technology. It is the thing that enables you to run a process differently, whether you're automating a supply chain, connecting differently with your customers, managing data in a compliant way, in a transparent way, or you simply -- helping your people to be more productive. You can't do that without the software.

I would argue that the objective here is to integrate processes using software intelligently, leverage cloud computing where you can get economies of scale on the digital infrastructure of governments and companies and then digitize everything where you can connect people through their mobile devices and tablets to the flow so they're far more productive. In doing so with innovations like in-memory computing, which hopefully we'll cover it a little bit, we can cut the hardware out of a company by up to 50 percent, out of government by up to 50 percent.

So these legacy systems that are choking the profits of companies and governments are completely irrelevant and unnecessary, and that's what we have to deal with. Status quo has to change, and you can't change it unless people start to change the way they're thinking.

So the disruptive technologies are mobility; they're big data and how you manage big data; they're cloud computing and how you get economies of scale and the infrastructure in a cloud; and finally, it's social and social networking and how you can tie all these things together in real solutions that change the status quo.

COOK: You and I were talking earlier again in terms of the technology. And for those of us who aren't in the business software space, the business enterprise space, there's so much focus on Facebook, on Twitter, on these social media outlets. Those are the names that are in the news more often.


COOK: Yet the game-changing technology that's taking place in your space -- just as compelling and arguably maybe more money to be made there. Talk to me about what that change -- what's happening there, for those of us who don't live in the cloud, who don't totally understand exactly what those technological advances are that are -- that are happening right now.

MCDERMOTT: Sure. Well, if you look at Arab Spring, look at the tsunami in Japan, look at any information that you want on current election status, the Twitter will give you the information; the Facebook will give you the information probably a lot faster than even Google if you go to the Internet and start, you know, Googling your way to success. So these real-time insights are coming from real-time people that are participating in social networks. And tapping into that is everything.

I'll give you an example. If you're a company like Medtronic, and you're making medical devices in Minneapolis, you care a lot about the knee replacement and how your consumer is receiving it, feeling about it and commenting on it, whether it be the Twitter accounts, the Facebook accounts or simply the feedback that he gives to the hospital care provider or the insurer on how things turned out.

If you can capture that data and that insight from these social networks, you will know more about your consumer than your competitor. By knowing more about your consumer than your competitor, you can provide a total customer experience that's unmatched.

This is also true in the public, for example. If you're providing solutions to your citizens and your constituents and they can somehow receive early-responder information, in the case of a crisis, on their mobile device, and they can be safe and secure and they can get the services necessary to get through a hurricane or a tornado, as an example, or even some terrorist-type event, wouldn't that put government in a much better light than, gee, they were slow to get there, the process really wasn't good, and things were falling apart at the seams; I can't believe we can't run better than this?

All of this taps into social; it taps into mobile; it taps into cloud computing.

COOK: And in terms of mobile -- you and I were talking about the example earlier -- the opportunity for people in a sales force for a company or whether it's someone working in government, to be able to get this information on their iPad, on their smartphone -- we're seeing this now on a -- on a daily basis. But what's going to happen in the future? What's different two years from now than what we're seeing right now?

MCDERMOTT: It's going to explode even more. What we're learning is if you look at the power of small and you think about small businesses as an example, for every 10 mobile devices that get added to a population, even in the emerging markets, every 10 devices out of a hundred people, you'll move GDP by a half to a full point. If you look at China, for example, there's 900 million of these mobile devices and tablets running around in China. And this is also true in India. So the emerging economies of the world have totally adapted mobile and cloud much faster than we have in the more mature markets.

In the more mature markets, everybody wants to be connected with the mobile. You're not relevant unless you're connected with the mobile because that's how you make people productive. People are productive when they're on the move, when they're out visiting with customers or they're doing things for their constituents. They're not productive when they're sitting behind a desk doing things that a machine and an automated system should be doing for people. People need to be with people to make things happen.

So this trend is going to just continue and continue and continue. And the race is on. And these device manufacturers will continue to try to outinnovate each other and try to win the wallet share of the consumers that are out there.

Our job as the software market leader is to make it easy for businesses to connect to their people and their business networks. We call this business network transformation, where you can connect your data and your processes business to business or government to government in the cloud, and you can enable access to that data and productivity with that data on mobile devices.

And of course how you manage this massive amount of data is absolutely material to mobile. Data will double in the world every 18 months. Data is not only coming from systems; data is also coming from things. Things like your car, things like your refrigerator, things like your phone -- all have digital transistors that are feeding this data explosion, and things will communicate with things.

And by doing all of these things together in a synchronized way, the data continues to explode, the access and the need for that data continues to go up, and the company or the governments or the businesses that can capture data manage business in surreal time, because it has to move much faster and mobilize people with devices (whence ?).

COOK: Should I be worried what my refrigerator is saying about me? (Laughter.)

MCDERMOTT: You know what? You should not be worried because it's YOUR refrigerator, and I think that -- I think the key is, how can you take, like -- take a Centrica in the U.K. How can you take the provision of electricity to the home and manage that in a smart way?

So maybe what your refrigerator should say to you is it should say, you know what? Maybe the door shouldn't be open while the kids are sourcing everything possible on every shelf because this is the impact to your bill. Or maybe your dryer shouldn't be on in the hours of 4 to 7 because, 8 to 9, it runs at half the price. So this smart metering, this smart grid technology in digitizing the things that participate in the Internet is part of the equation.

COOK: Let me talk about HANA. I hadn't heard much about it until I started looking a bit more into the company and your background. This is technology that you all are using which, if you listen to analysts, is making a big difference in your bottom line certainly going forward. It did last year, more so than you all had even expected. What is it and why is HANA, in the view of SAP, a game-changing technology that's distancing you from the competition?

MCDERMOTT: Most data is stored on disks or tapes. Most companies, most governments are extraordinarily complex. The infrastructure of this data is just everywhere. It's not in any coordinated fashion. They hire people and teams to extract this data from these systems. Companies and governments are running around with spreadsheets giving you answers to your questions three weeks after you ask the question. And by the time you get the data, the game has already changed again. So there's a lack of relevancy in the status quo. The whole system is messed up.

What HANA does -- it enables you to take all that data and put it in main memory. So, in a sense, it becomes your Google for the enterprise, where it doesn't have to take a trip to disk or to tape. And you can also keep unstructured data in HANA -- voice, video, things like this. And now I can just simply query my information and ask it any question I want an answer to, without (having teams ?), without analysis, without spreadsheets. So it's enabling companies to move at surreal speed, speed that's 100,000 times faster than anything on the market today. I looked at The Wall Street Journal this morning, and there's a vendor in there saying they're 20 times faster than so-and-so, and that's why they keep winning.

Our biggest challenge is just getting the word out there that we're 100,000 times faster than so-and-so, and we're completely changing the way computing is done and revolutionizing the user experience, because now you can get an answer to any question you have instantaneously. That's why HANA's a winner.

COOK: I look at the competition between you and Oracle, some of the other names in this space. And although those social media companies may be getting more of the attention, this sort of Greco-Roman wrestling match between the companies involved in business software has been noticeable as well over the years. This is an intense, very competitive field. Tell me how you distinguish yourself from Oracle going forward? This is -- you all have talked about 20 billion euros in revenue by 2015, 35 percent operating margin, a billion customers. How do you get there?

MCDERMOTT: Make the world run better. So we took our entire (focus ?) division in the company and said, our ambition, our higher purpose is to make the world run better and improve people's lives. We got 60,000 people that get up every day to do just that. So I believe our real battle is not with them; I believe our real battle is with ourself to stay true to that vision and truly execute on that vision.

That's why we believe strongly that we had to move first and fast into mobile, which we did; we became the mobile market leader. But we're still going to build that out in the way companies run business applications, in a secure way, in a way that makes their workers happy and productive, in a way that executives can reach their people and get the message through from strategy to execution.

The second thing is this idea of analytics. Analytics has to move in surreal time, and it has to be part of all the workflow in a company, and you have to connect the processes, and you to leverage new innovations like HANA.

And finally, you have to be in the cloud. You know, we have success factors in the cloud because the most important --

COOK: This is a relatively new acquisition for the company that moved you into -- more so into the cloud space.

MCDERMOTT: Exactly. And you know, you have to look at yourself in the mirror. And if you don't like what you see, you have to change it. And we didn't have enough cloud DNA in the company. So we bought it. But we didn't only buy it for the asset, which was very good; we also bought it for the leader. And we said, now you will run the SAP cloud. And we'll start with the most important thing, which is people, because leaders of companies, leaders of governments, they have a strategy, but the big issue is how do you execute it; how do you align all your goals to your people so everybody is in the flow.

And we'll just keep going on the innovation curve because the innovation is what determines the outcome. If you don't innovate in this environment, you're an also-ran. So we're going to just keep doing what we have to to move the company forward.

COOK: Let's bring it back to the global picture here. Give us a sense -- 55,000 employees -- where are they in the world, and how is your business divided up around the world? Where is -- where do you see the most growth going forward?

MCDERMOTT: Well, it's a really balanced portfolio in SAP. We operate, you know, strongly in 130 countries of the world. So it's a really very global company. There's no doubt that BRIC -- Brazil, Russia, India, China -- will be faster-moving markets than the more mature ones. But it doesn't mean the more mature ones aren't every bit as significant, because you could never make up for a deteriorating big market with a fast-growing smaller market. The Middle East, Africa -- these are all huge investment cycles for us.

I will say that --

COOK: Can I -- can I stop right there?

MCDERMOTT: Sure. Of course.

COOK: To what extent is that happening because of the Arab Spring?

MCDERMOTT: Well, it's very interesting. There's no doubt that the Arab Spring has led to a much more innovative Middle East, a much more open to innovation and technology Middle East. Whether you're in the Kingdom of Saudi Arabia, Qatar or United Arab Emirates, every place I've been recently, they want to focus on digitization -- of government in particular -- providing better services to the constituents and getting the young ones to work.

We're all in a talent war. And the idea of small businesses exceedingly growing, big businesses doing well -- it all stems from innovation and people and talent. So we're setting up what we call value universities in places like the Middle East, in places like India, places like China. We've already done this in the U.S. and of course the mature markets, where we give our technology to the young students; we teach them how, so when they come out of the university, they have a good job, a job that's not just in government. For example, in Saudi Arabia, most of the kids go right into government, but they want to participate in this global economy in the high-tech industry.

So we're trying to create a learning path for them to come into tech, whether it's for us, with our partner ecosystem or working for our customers that will need help deploying these technologies so they can win in the new economy. So that's the virtuous cycle we see.

COOK: How hesitant has SAP been to move into some of these countries, North Africa, the Middle East, simply from a stability standpoint?

MCDERMOTT: Well, you know, you have to be in it for the long haul. And what we believe in with this global footprint -- like as you were asking me questions earlier, Peter, you know, what if such-and-such in Europe or, you know, this crisis hit somewhere else -- we look at it as a portfolio. And you've got to invest. You've got to build these coalitions and these partnerships and these open ecosystems because these business networks shouldn't be thought of as a 90-day or even a nine-year cycle; you should think of it in terms of a century. And if you're not in it early, you'll miss the market.

For example, in China, you know, we made a decision last year to invest 2 billion U.S. dollars in China by 2015 because you have to be in China. It's not an easy market to win, but if you're not in it and you look back 10 years from now, you'd say your legacy as a CEO probably wasn't that strong because you missed China. You can't miss these markets.

COOK: To what extent is your role as the co-CEO -- are you diplomat as much as business leader?

MCDERMOTT: Well, I think I'm more the -- a business leader, but I definitely feel that diplomacy and being involved in the governments, being involved in the education, being involved in -- not just business to business but also foreign relations in government. I mean, government and business has to work together today.

So from that perspective, whether I'm in Washington on the Business Roundtable or I'm performing in other functions in other parts of the world, we really want to bring business and government together because, you know, all the problems can't be solved by government. Business can't do everything, but we can certainly be candid about regulatory environment, you know, and how you can make it simpler for small businesses to get off the ground. We can certainly get involved with projects like providing equity to small businesses so they can draw from that fund if they have difficulty getting money from banks. It's things like that that really matter.

The other thing is the young people of the world. We are very dedicated to education at our company, and we put all of our corporate social responsibility behind young people, not just because they're the future of the world, but they're also the future of our company because this cycle, this technology move that we're all in right now, they understand it better. I can take someone out of school as 21 years old without any business training, and they'll pick up a mobile device and the cloud and the various social networking schemes of a business network in about a day. And you know, that would take retraining somebody who might have been doing a job the same way for the last 20 years a little bit longer than a day. So young people -- key to the equation.

COOK: You're describing my 13-year-old son. (Laughter.) He showed me how to use the TV remote at home. So --

MCDERMOTT: Well, I'll tell you, if I want to get in touch with my 15-year-old at home, I just text him.

COOK: Let me ask -- just a few moments left before I open it up to questions here -- the co-CEO responsibilities that you have. I know you get asked about it a lot to a lot of folks here in Washington who understand leadership being one person at the top of the chain. How does it work for you all? Your co-CEO colleague, Jim Hagemann Snabe -- how do you all divide the responsibilities, and how do you make it work?

MCDERMOTT: Sure. Trust is the ultimate human currency. Without trust, it could never work. But I knew Jim about nine years before we took on the co-CEO structure together. He has a very different skill set than I have. And I've always believed that if two people are in the same room and they have the same answer, one of them is redundant.

So we try to focus Jim on the development and the processes, and I try to focus on the external matters of the company and really zero in on the customer, because I've always felt in the end the customer determines whether or not we have a job. So getting that value chain right is everything.

Fortunately, he and I have enough trust and a symbiotic enough relationship that we both understand that. But we're on different continents, we're managing different parts of the equation, but in the end we come together.

And we come together in strategy in particular. I think a CEO, co-CEO, owes their people a good strategy, because you could work your tail off; if you've got a bad strategy, you're just digging a deeper ditch for yourself.

And the second thing we have to do is stay true to the values of the company and what we've decided is really important on making the world run better, improving people's lives and abiding by a certain set of core principles. And if in the end we were able to translate that to, you know, 55-plus thousand people and get an ecosystem to revolve around that in a thoughtful way, we did our job. And that's pretty much what we're doing each and every day.

We also -- as much as we care about the short term, you can't measure everything in 90-day cycles. You got to measure things in 90-day cycles -- (chuckles) -- six-month cycles, one-year cycles, but also five and even 10-year cycles. So we're going to be the kind of leaders that will make a decision in the short run that's really good for the long-term health of the company, as opposed to sacrificing the long-term health of the company for a short-term benefit. And so far, you know, it's really come together in a really nice way.

I would conclude the remarks by saying people like a balance of power. So if you look at a really global company, it's, like, tough for one person sitting in any one particular geography or coming from one particular nationality to lead all the people all the time because there's so much travel; there's so much interdependence and cultural disparity in global companies today that I think it's helpful to have different personalities coming from different parts of the world so you can, you know, show a balance of power, but also divide and conquer the workload.

I mean, I never want to be in the same room with Jim at the same time if I can help it because if I am, that means something is not getting done that could be getting done somewhere else in the world. And he feels the same way. That's why it's pretty rare when we're both together in the same place.

COOK: What happens in those rare moments when you disagree?

MCDERMOTT: Well, you know, we do -- we have those. I mean, if you can't have a healthy, passionate, even, like, wild debate on something that really matters, then there really wasn't the foundation of trust in the first place. It's a farce. So we can really get at it, but we do it in a way that's totally respectful. And in the end, the better idea wins.

So I'll change my mind if he's got a better idea. And he often does -- I like your idea better, or I had this feeling, but when you add your nuance to it, I think the one plus one equals three. And he would say the same thing. We just want to win. So it doesn't matter whose idea is better; it just matters that we win the game. That's the key. You focus on the win, not on the internal, you know, who had the -- you know, I outedged Bill in the argument, didn't I? Who cares? If you don't win the game, it doesn't matter.

COOK: Listen, I'd like to open it up to questions from the audience now. And there is a microphone -- a couple microphones here in the room. If you do have a question, please make sure you identify yourself, your affiliation as well.

And sir, we'll start with you over here on the left.

QUESTIONER: Thank you. Very interesting comments. I'm Rick Johnston with Citibank. You've talked a bit about the relationship between business and government. And we, for example, are a highly technology-based enterprise now. But we're also finding that governments are stepping in quite aggressively to control data flow as well as data processing for various regulatory reasons. How are you factoring this growing role of government in data flow, cross-border data flow, in your business model?

MCDERMOTT: Well, Rick, thank you for your comments. And you're a hundred percent right. When I'm in the financial services boardrooms -- and I was this week in New York -- I mean, the whole Dodd-Frank situation, the whole compliance, the whole transparency issue -- it's just unbelievable.

So we think a lot about global trade, global business network and the interdependence of that. We think a lot about the tactical things like, you know, how you manage your cash. You know, most banks, they close their day at 4:00, and by 8:00 in the morning they'd better figure out where all that cash is so they can invest it appropriately.

So HANA, for example, for Bank of America, will take all that cash, and instead of taking eight hours and a whole bunch of people trying to figure out where the cash should go, HANA does it for them in a few minutes. So that's a -- like, a breakthrough.

The other thing is we build extreme applications. So we'll take a legislative issue like Dodd-Frank and say, what is the extreme application that we can offer to the financial services industry to help them be compliant and transparent with this piece of legislation. So we become a relevant part of the solution in the boardroom because I know how much pain is on your right now to deal with the structured and the unstructured data not only out of the analytic systems, but also the transactional systems. And those are the things that we're tackling right now.

And I, you know, really -- you know, first of all, you're a very good customer on the transactional application side. But we should also talk about the analytics and also Dodd-Frank as an example specifically.

My hardest thing, Rick -- and I could use your help on this -- is getting in there, you know, because there's so many people that we have to see and get to. And the biggest thing -- if I did anything today, I changed your mind that the status quo of the way things are now is good enough or that somebody can walk in there and tell you, I can make the problem go faster for you. We have to totally rethink, wipe out waste and rethink the way we architect a solution so you get a much lower cost, a much faster solution, much more in touch with the times and the current regulatory environment. That's what our business is all about. That's what I was, you know, trying to convey in this meeting today.

And what I'll do -- and I'll make an offer to any one of you on this -- I'll do an outside-in analysis of your problems based on externally available facts. You could help me on the things that are really pertinent to you that I can't get externally. And I'll put a value engineering document together for you that basically says, from (two ?), here's the business outcome and benefits, here's the time cycle that it would take to do it, here's the savings or the cost, and here's the return on invested capital. I make everyone in this room that offer today. I will personally take charge and do it for you.

COOK: You heard the offer, everyone. (Laughter.) So write that down.


COOK: Sir, over here?

QUESTIONER: Thank you, yes. I'm John Yochelson, Building Engineering and Science Talent.

Bill, could you tell us a little bit how the forces of transformation that you described have affected R&D at SAP? Maybe you could reflect on how that model has changed since you were at Xerox. And maybe you could say something about where U.S. human capital comes into driving innovation for a global company.

MCDERMOTT: Sure, absolutely.

Well, let me start with our R&D. You know, first of all, as a percent of sales, we spend more on R&D than any of our peer group competitors, and we think that it is absolutely essential.

But we have also changed the cycle of that R&D. So if you look at our business today, 67 percent of our business is coming from products that weren't here five years ago. So the R&D now is being geared up around mobility, around analytics, around big data, around the cloud, and around the interaction points of the social networking and business networking. It's not just social, but it's also business. This is really critical, and you have seen the R&D budget change in those buckets from what used to be just applications or enterprise resource planning. You still do that because you're running the hearts and lungs of companies, but you've now migrated the R&D to the new action where the markets are going.

If you look at a company like Xerox -- you know, I was there for 17 years -- and it was funny, because I met with somebody from FedEx and obviously they acquired Kinko's and created a service around that. And I told them that I had a vision for Xerox around digital document management that I always thought it would need to move away from the box, that it was -- would always be about the digital documents and how you can move information at breathtaking speed. And you could consider a document not just in paper form, but also in digital form, and you could put that into 3-D imaging and various things that a customer would look at the document in a whole new way. And that was the idea behind the document company Xerox and not just Xerox.

So I think Xerox needed to make a bold move away from the boxes, more into the solutions, services and digital documents, and I would have swung the entire R&D budget in favor of doing that because, again, if you're in the commodity space, over time you become less relevant. When you're in the high-value space and you create an experience that's unmatched, you become more and more relevant.

And then your last question, which --

QUESTIONER: The U.S. piece.

MCDERMOTT: The U.S., yeah. Huge! I mean, the U.S. is unbelievable.

When you think about the United States of America and the innovation cycle in the United States of America and the ability to take startup venture capital and turn that money into innovation and new ideas and breathtaking change, there's nobody anywhere that does it quite like the United States. And I think that advantage we've tried to build into our business model.

For example, if you look at the jobs -- I've been here since 2002. At that time, we had about 3,000 jobs in the U.S. Now we're up to about 13,000, which is why I made the comment neither German nor American, but truly global, because as you innovate in one part of the world, it creates value everywhere else. And it enables you to create jobs, grow in certain markets, but then expand.

So we're building a lot of this innovation in Palo Alto; we're building this innovation in Philadelphia, Pennsylvania, and obviously many other parts of the world.

So the U.S. does a couple things really right, and the U.S. should be proud of that. One, I think we take startup companies and venture capital money and create innovation like nowhere else. Two, I think our ability to change on the fly and realize that, you know, if there is a crisis, we can actually stare at a crisis and improvise -- it's a culture than can really improvise and change. And three, I think our passion for philanthropic deeds is unmatched and our ability to pull together capital and coalitions around solving problems. And you know, these are all massively important things that the U.S. brings to the whole world.

COOK: We have an 8.2 percent unemployment rate right now. Yet we're hearing a lot of tech companies, in particular U.S. companies, saying they're having a hard time --


COOK: -- matching open jobs with skilled workers. Are you having a problem finding qualified talent here in the United States?

MCDERMOTT: You know, it's interesting. The answer is yes, and you know, we know the whole H1B visa thing and all that. The biggest issue that companies have today is there are not enough people with the skills and training to go after these new markets of opportunity. That is the number-one thing I would focus on in the United States. It's how you can take a conversation like today and, if I'm right in these categories or roughly right, how you can create a movement to get people trained and retrained around these topics.

The other thing is small businesses. Ladies and gentlemen, two-thirds of the jobs that get created in the United States of America are small businesses. And if you listen to the voice of the customer -- in this case, the entrepreneur or the small-business person -- 1 of 10 of them is thinking about starting a company, but they say, I can't get through the regulatory environment; it's too complex. There's 17 different steps to start a new business without taking you through all that. They say, I can't access capital easily. It's getting better maybe, but 1 out of 3 can't get the capital. And then the ones that do start businesses are worried about whether they can make payroll and be successful.

I think we have to turn on the engine of the entrepreneurial spirit and get these folks trained up, invest in them, get them started, take some risks, free up the capital, get the country going again by creating the small-business jobs, because once you get the engine, the entrepreneurs turned on in America, the jobs roll and things happen.

But I think it has to be a more coordinated and more structured initiative around the things that matter to the global economy, and that's -- you know, that's a form of leadership and process and putting a plan together, but it is doable.

COOK: Go ahead.

QUESTIONER: Thank you. I'm Charlie Skuba from Georgetown University, McDonough School of Business. You've said you're moving pretty aggressively in the emerging markets for growth rates. Are you experiencing new local competition in the emerging markets and new innovative ideas? Are you also experiencing -- or how are you dealing with government policies, like in China with indigenous innovation and enforcement environments that might not be very aggressive?

MCDERMOTT: That's a great question, Charlie. Thank you very much for the question.

First of all, let's go to China. You know, indigenous innovation, meaning if it's not done here, you know, we're going to fight you on it -- we innovate in China for China. So you want to break into China, you got to innovate in China for China. So we basically took 5,000 people and said we're going to develop a product. We moved the product from Israel to China, and they did a fantastic job engineering the product -- beautiful. And it's one of the real gems -- real, real jewel in the crown -- this particular product that got innovated in China.

We also got into the state-owned enterprises and helped them run better. And if you look at some of the governing agencies and how they inspect the state-owned enterprises, they want to look in real time to see how these folks are performing. And believe me, they have tough standards for performance, and they hold them accountable.

So we kind of went at it from innovate in China for China, get with the state-owned enterprises, and now we're moving out into the provinces and expanding our footprint. That's our strategy. Many others go in with joint ventures and other things where they become partners. We have also formed technology coalitions with China Telecom as an example, so we'd become a partner and have something to give back.

And I think it's a multipronged strategy, but you have to be realistic about it. You have to be involved, and you have to be part of the community and part of the problem-solving process.

The other thing you have to do is you have to get into universities there. You look at the millions of graduates coming out of there and how you can get them productive and create jobs. So we've created all these coalitions in the education space, which you know better than anybody is critical to the future of not only our company but any company trying to compete there.

If you look at the emerging markets, in any given quarter, they grow at around three times -- two and a half to three times faster than the more mature ones. So you know, you have to be there to capture that growth.

If you look at the jobs and the jobs that we're creating, they disproportionately go into those markets. But I'm -- I also argue that the large, more mature markets could never be successful if you didn't innovate. So what we're doing now is adding all kinds of jobs in the areas that are new. So we keep the jobs that we had, where we were sustaining a good growth rate and we'd layer on more jobs in the areas that are growing. And that's how you get the plus-up in the big markets and then also you expand into the emerging ones.

COOK: Sir.

QUESTIONER: Thank you. David Apgar, GoalScreen LLC. What's -- what are the risks to your customers, and maybe even to SAP and Oracle, of misuse of big data business analytics and business intelligence? And specifically, I'm thinking of confusion about which comes first, ideas or the data. You know, businesses have had 15 years of experience seeing how data can test ideas, how it can control processes, strengthen communications. But increasingly, it seems that business leaders are looking to some of these business analytics applications for the ideas. And the worry has to be that if everyone starts looking at the same widely measured indicators, strategies are going to flatten. And while you folks may be moving from innovative triumph to innovative triumph, you know, your customer industries might actually slow down just for -- just because they're putting data before the ideas.

MCDERMOTT: Yeah. I think that, David, that's a very good point, absolutely good point. I do not believe that we have the luxury to think like that. And that's why we have a vision to make the world run better and improve people's lives.

Let's use Apple as an example -- six hundred billion (dollar) market cap. They must know something about what they're doing. They built the business from the customer end. And here's what I see today. The whole world will evolve around the Internet of things, and it will revolve around the usability of technology. And the usability of technology is where all the business benefit is.

I'll give you an example. I'm working with Burberry's, as an example, and they have a very forward-thinking CEO. And she doesn't really start with how do I measure data. She starts with how do I have an iPad in every Burberry store so when my consumers comes in, my representative at the retail counter has the iPad; they can punch in, you know, Bill McDermott; pops up instantaneously the payment history, the likes, the don't likes, the size, so forth, so you have an intelligent conversation about what you're likely to want. If you bought the trenchcoat, you might need the umbrella.

This is where it's at, how you create the total customer experience or the usability experience. That's what Apple did. People loved Apple because it was not only designed beautifully, but moreover, it was easy to use. If you can get the user productive with the technology and then the data feeds that technology in a thoughtful way to improve the nth degree of that customer experience, now you've solved a major problem.

When we did our strategy, as an example, we didn't focus on us -- how can we get bigger, how can we make more money -- we focused on all the things we weren't in touch with. We weren't mobile enough. We weren't cloud-centric enough. We weren't big-data-oriented enough. And when we looked at all the market research, we got the voice of the customer. We did the focus groups. Regardless of what industry you were in or what geography you were in, they all said, we want a better experience, and we want all these things to converge; don't sell it separate; make the whole end-to-end process and the experience beautiful.

So I think that if we got anything right, it will be that we focused on the usability and the customer experience. And I could not agree with you more that you shouldn't start with the data; you should start with that ultimate nth customer. And that will lead you do enormously important places.

You know, for example, if you care about that customer experience, you certainly have to think about the multichannel strategy of the Web or direct or retail or wholesale. You certainly have to think about automating the logistics systems of the company. You certainly have to think about having a supply chain that works for you, not against you. You certainly have to manage inventory levels. And frankly, I don't think you need warehouses; if you play your cards right, you could start wiping out warehouses. And now you could become a really lean machine because you rethought the way you run, the end-to-end value chain based on the consumer.

QUESTIONER: Thank you.

COOK: Ma'am, you had a question there, in the middle?

QUESTIONER: Hi there, thank you. My name's Laura Hochla. I'm from the Office of Russian Affairs at the State Department. Question for you about protecting your intellectual property in some of these emerging markets: What are the challenges you face, and what are you doing to mitigate that risk?

MCDERMOTT: Yeah, I mean, we all know that IP is a usually important topic, as is security and so forth. What we do is not quite as simple as putting a disk in an operating system. So some of the IP issues that other companies deal with have not been an issue for SAP because of who we are and what we do.

Having said that, if you were to put a solution in a cloud, you might consider the IP in a black box. So you put a lot of fences and protective security systems around that black box even though you might be provisioning something as a service in the cloud. So that's one concept that is clearly important to us.

The other is how you architect the system. We have a system that has some very sophisticated security built into it, and I think that's come from, you know, us, obviously, and the way we designed an integrated system, but also in innovating with, you know, the United States Army, the Navy, the Department of Defense, the Defense Logistics Agency, the United States Army Medical Materiel Agency. People that know a lot about security have worked with us now for 40 years in building fences around these systems.

And you know, this is one of those races without a finish line. You know, you're never done because as good as you get, somebody else is getting even better, and you got to always stay one step ahead of them. So it's a combination of co-innovation, it's a combination of black-boxing high-risk things that might be put in the cloud, and it's a combination of the way you architect and engineer the very IP itself.

QUESTIONER: Good morning.

COOK: Hi. (Inaudible) -- Cameron right there.

QUESTIONER: Cameron -- Thanks. Good morning. I'm Cameron Kerry, the general counsel at the U.S. Commerce Department. We're -- I've been involved in the administration's efforts to develop some rules for the digital economy you've described that preserve innovation and trust and also international interoperability -- a lot of pickup on the question of international data flows. And I've met with some of your peers or competitors or wrestling partners. And one of the concerns that they've expressed is the European Commission's proposed legislation on data privacy and the impact on that -- on the ability to -- of their customers to, as you've described, digitize everything or move the data anywhere in the world.

So I wonder how, you know, SAP, as a company that is global but has roots in Germany, looks on that and, you know, how you're responding.

MCDERMOTT: Yeah. We -- first of all, we believe in global commerce. We believe in the sharing of data and information. That helps governments run better and helps businesses run better.

One such example of this is an acquisition that we did in a company called Crossgate. This company actually connects the data and the business processes on a government-to-government or a business-to-business level. Any argument that we would wage is about openness; it's about trust; it's about a sharing of insight and information that helps the world run better. And anything that's an impediment to helping the world run better, move faster, do things for constituents in a more thoughtful way, we would vote against.

So I would encourage our team to perhaps work with you. And Robert Crisante (ph) is -- he's shaking his head in the back. He's getting the -- he got the -- he just got the email -- (laughter) -- to share with you and also work with you. And maybe even at a policy level, we can do some good work together.

We just -- we just want everything to move faster and better. And we're not stuck in any paradigms, believe me.

COOK: Where does privacy rank in terms of challenges for you?

MCDERMOTT: Well, I think it ranks high, you know, for everybody because you know, you want to take advantage of these technologies, but you certainly don't want to impose upon the privacy rights of people. A lot of these technologies -- you know, maybe people don't know this -- you can scratch out the individual invasion associated with technology yet still leverage the technology and, you know, essentially delete the username from the data and the -- and the process and still help things move forward.

And that perhaps is the next frontier. It's like, how do we protect the person, which is absolutely essential -- I believe in that a hundred percent -- how do we have the technology move in a -- in an agnostic way to the person but still help the process and the outcome and the goodness in the world get better. And technologies like HANA, as an example, have that capability.

So I think we have to, you know, never go against the freedom of people and the privacy of people because that will just be totally chaos. But at the same time, there's so many inefficiencies and so many things broken in the system that we have to advantage the system to help the people more without imposing on them.

COOK: Got time maybe for one or two more.

In the back, over here.

QUESTIONER: Good morning. My name is Shariq Zephar (ph). I'm with the National Security Council at the White House. I had a question about your corporate diversity. Is diversity a strength? Is it something nice? Does it actually help you get into these hundred-plus markets or get your folks to enter into these new emerging markets? And what specifically have you done to sort of -- to build a diversity strategy at SAP?

MCDERMOTT: That is a great question. You know, on diversity, in our industry, the industry at large, not just SAP, needs to do better.

For example, we put out all kinds of diversity tasks to hit certain targets, like many folks do. We have to increase the female population in our company. We have to have more women represented in boardrooms and higher jobs in the company, which we're doing at a regular pace.

But we also have to, at the university level, bring in more people into this industry. This industry just has, you know, too many majority males and not enough persons of color and not enough gender diversity. And it's something we really need to work on. In fact, I would work with you on this if you could help me because, you know, at the university level, in just about any geography I could think of, but certainly in the United States, at the policy level, if we had a way to somehow get young ones trained and up to speed on these new technologies and these new opportunities, it would just be fantastic to bring people in early, have, like, boot camps to get them started and bring them into the workforce. It's our -- it's, like, the toughest thing in this -- in this industry. And we should break through together. And maybe you have ideas that we could really benefit from. I really mean that.

So all in all, I think if you look at us in terms of diversity and what we believe in, we believe that the more -- the more we can go into an emerging market as an example with best business practice from a large market and jumpstart them with people that have done it somewhere else, but also at the same time build that business with people that are indigenous to the geography, that's better.

But what we learned is you can't just tell people to do things without showing them how to do things. That's a waste of time. (Chuckles.) So it's interesting. And then how do you move people, once you have them trained and successful in one part of the world, to another part of the world so we can have diversity and a more expansive company? These are all issues that we're working really hard on.

COOK: I think I'm getting the indication here that we should probably wrap things up -- promised to get you out of here at 9:30. Lots of good questions, undoubtedly lots more good questions.

Bill, thank you very much for the time.

MCDERMOTT: Thank you very much for your -- thank you.

COOK: Thanks to the council for hosting us here, the corporate program. And again, appreciate all of you all coming. (Applause.) And if you have more questions for bill, maybe he's around for a little bit longer.

Thanks a lot. Good to see you. Thank you.

MCDERMOTT: Peter -- thank you very much, Peter.







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