Inside the Mysterious World of Tech CEO Succession Planning

At SAP’s 2009 Sapphire Show, Leo Apotheker gave no ordinary keynote presentation. In Apotheker’s first opportunity to speak to the masses as SAP’s sole CEO, he officially took the ceremonial CEO reins from retiring Henning Kagermann, his long-time friend and his co-CEO for the past year.

Apotheker’s 75-minute opening address on SAP’s newest BI app BusinessObjects Explorer also represented the culmination of a carefully orchestrated, years-long succession-planning process that the German ERP software giant follows.

[[ For more on succession planning, see Nothing Succeeds Like Succession Planning at UPS. For more on enterprise software, see the Enterprise Software Unplugged blog. ]]

The process first came together when Dietmar Hopp handed the reins to Hasso Plattner, who eventually passed them to Kagermann and now on to Apotheker. It’s a process “not formalized in a way that someone ever wrote it down,” says Herbert Heitmann, chief communications officer and head of SAP global communications. But somewhere along the way during the past 37 years of SAP’s existence, Heitmann says, the CEO succession plan became inherent in SAP’s “corporate DNA.”

SAP’s highly visible and lengthy CEO transitions serve several purposes, Heitmann says: To familiarize partners, analysts, investors, the media and its own employees with SAP’s “management bench”; to acclimate the up-and-coming talent to life in the executive suite and, presumably, to see who sinks and who swims; and lastly, he says, to show that “this company is not dependent on any one individual in any capacity.”

SAP’s methodical and transparent process for its top spot stands in stark contrast to that of its chief competitor Oracle. For decades, Oracle has been reluctant to even hint at a potential successor for legendary CEO Larry Ellison, and heirs apparent have been reticent to talk about their futures, lest they become too much of a superstar for the ego-driven Ellison’s liking and find themselves shown to the door.

By comparison, Microsoft’s Bill Gates-to-Steve Ballmer transition closely mirrored SAP’s strategy, while Steve Jobs’ absence at Apple’s helm (due to health issues) has created turmoil and unwanted media attention. Of course, each company keeps chugging along amid a global recession, churning out new products and making money. Life has gone on without Gates in Redmond, just as it has without Jobs giving keynotes.

This raises a prickly question, though: How much do these companies’ grooming strategies or lack thereof really matter today?

Cult of Personality

Silicon Valley’s story is laden with heavily-romanticized chronicles of tech-entrepreneur-cum-industry-luminary—where, in essence, the charismatic CEO is uniquely intertwined with the high-tech company and, sometimes, even the product. For better or worse, the head honcho is the brand. (See: Ellison, Lawrence J.; Jobs, Steven P.)

“Succession planning has not been a forte of high-tech,” says Vinnie Mirchandani, a former Gartner analyst and founder of software-buying consultancy Deal Architect.

The quixotic notions of yesteryear have, however, run into modern-day, big-business realities—public companies with high-fallutin’ boards of directors, interested shareholders, probing financial analysts and an always-on media universe living in a post-Enron world.

Not surprisingly, then, the first CEO transition in many high-tech companies is from adorable but befuddled entrepreneur to respectable business person (a.k.a. the grown up), “who is savvy in terms of communication, marketing and really being able to navigate ahead of the issues,” says Ray Wang, VP and principal analyst at Forrester Research. “Customers worry about financial viability and stability first and then, of course, what the performance, functionality of the product on day to day basis.”

So while succession planning may not be as sexy as, say, innovation, social media or green technologies right now, it does indeed matter. Just look at the undesired attention and financial duress that Apple has endured since Jobs’ health issues surfaced: a roller-coaster stock market ride for Apple tied to every Jobs’ announcement and unsubstantiated rumor. In that case, an argument can be made that Jobs’ persona as “The Pirate of Silicon Valley” is having a negative effect on Jobs’ role as “The CEO of Apple” and the company itself.

“Tech is still a young and entrepreneurial industry that most boards will not proactively push to say, ‘Where is the succession plan?'” says Mirchandani. “And Wall Street almost does not want to hear that there is succession because so much is built around the personality of the entrepreneur.”

Why CIOs Care About Vendor CEOs

But over the long haul of software generations, how much does the CEO of a business software vendor, like SAP or Oracle or Microsoft, actually matter?

A June article in the Atlantic Online examined the importance of CEOs and found that “many of the most prominent and widely cited business-school professors and other experts believe that the American obsession with who sits at the top of the organizational chart has gone much too far.” In the article, James March, a Stanford management professor, states that inside any well-run company that pays attention to grooming its managers, “candidates for the top job are so similar in their education, skills and psychology as to be virtually interchangeable,” notes the article. “All that matters is that someone be in charge.”

IT customers such as Ron Bonig, the recently retired CIO of The George Washington University, say that the answer to the question of high-tech CEO importance is “it depends.” With smaller tech vendors, the focus is more on the product rather than the leader, Bonig says, since there’s “a high likelihood that one of the giants will swallow them up.”

But with an SAP, Oracle or Microsoft, Bonig says, “those are the companies that CIOs watch more closely,” he says. Why? First, because they have products that are critical to CIOs’ enterprises, and second, those vendors are so closely held by or identified with a charismatic founder or cofounder CEO that the CEO can have an overriding influence on the direction of the company, Bonig contends.

As an example, Bonig says that if Microsoft’s Ballmer decides tomorrow that he wants Microsoft out of the server software business—”and he could probably make it happen,” he says—that would throw the industry into a scramble. “There would be alternatives, but losing that corporate direction that CIOs count on would make CIOs very nervous,” Bonig says. “Reading the tea leaves and trying to predict what’s viable down the road, and which technology horses have the legs to go the distance, is one of the traits of a successful CIO, and any factors which make that future foggy make us nervous.”

Current and near-term future leaders at enterprise software companies such as SAP, Oracle and Microsoft face an astonishingly difficult environment: this includes a global contraction of business on top of a massive Internet-driven upheaval in how companies purchase, implement and consume business software. Thus it’s reasonable to think that the CEO setting strategy and the future roadmap is key. “When someone sets the tone and says this is where we’re going to be in these next five years, these are the things we are going to conquer, achieve and do for you,” says Wang, “and if the CEO can set those things with such authority and momentum, that’s where the difference comes.”

Yvonne Genovese, a VP and distinguished analyst at Gartner, says that the leaders at SAP and Oracle, in particular, face enormous pressures and vexing hurdles. “Neither vendor has a strong all encompassing vision for next generation computing—each are dabbling in many areas but pretty much most things are the same,” Genovese says, via e-mail. “Given that both companies can’t really sacrifice maintenance from a large installed base in favor of dramatic changes to their products, it may leave room for future leaders of software to emerge.”

Shai Agassi Throws SAP Curve Ball

Leo Apotheker’s promotion to SAP’s CEO role wasn’t always a sure thing. Those familiar with enterprise software and SAP will remember the name Shai Agassi: His outsider status at SAP, next-generation appeal and formidable charisma led to a meteoric rise within SAP’s ranks, eventually holding the title of president of SAP’s product and technology group.

Apotheker and Agassi were both in the running to become Kagermann’s co-CEO and eventually succeed him. But in early 2007, when SAP’s supervisory board extended Kagermann’s contract for another year (as they did again in 2008), Agassi left SAP to launch an idea he had been thinking about for some time: Better Place, a company developing a transportation system for fleets of electric cars and charging stations to power the vehicles. (For more, see “From SAP ERP Software to Saving the World: Catching Up with Shai Agassi.”)

Agassi’s abrupt departure was not part of the plan. “Shai surprised us, because he was the youngest among the next apparents here,” says Heitmann. “That was unforeseeable and unplanned and a disruptive event, but that was nothing that I would put into the basket of a managed CEO transition.” Agassi’s lack of total commitment to SAP also didn’t sit well with Hasso Plattner, chairman of the supervisory board, Heitmann recalls.

It may not have been part of the plan, but it certainly made the new CEO choice easier for SAP’s supervisory board. And the window of opportunity for Apotheker to transition into the role, with a year as Kagermann’s co-CEO, was just right, says Heitmann. During the past year, Apotheker’s final grooming kicked into high gear: he gradually became more visible at SAP media events, key partner and customer meetings, and on quarterly conference calls. This is all part of the plan to ensure that relevant stakeholders get to know the next CEO, says Heitmann. “I think the investors and customers value this degree of predictability and continuity.”

SAP’s scripted and transparent change of control is important to customers, says Forrester’s Wang. “They are the market leader,” he says, “and people are looking for stability and visibility into where SAP is heading and in which direction.”

Life After Larry Sails into the Sunset

Lawrence J. Ellison has served as CEO of Oracle since he cofounded the company in 1977. Ellison embodies all that is Oracle. As his brief bio states, he “also races sailboats, flies planes, and plays tennis and guitar.” Those first two passions as well as his age (Ellison turns 65 in August) have caused many shareholders to angst over life at Oracle after Larry.

Speculation has focused on co-presidents Safra Catz and Charles Phillips, though neither has been publicly anointed nor openly campaigned for the job. In fact, both execs seem to have learned from past Oracle executives’ transgressions.

“I don’t know who would take over if something happened to Larry. I don’t want the job,” Catz told Forbes in 2006. Phillips added, in the article: “Larry will be here forever. We don’t discuss succession. That’s not my job.” Not much has been heard from them on that topic during the course of the past three years.

Oracle’s board members are equally as unrepentant: “There is no successor to Larry, no heir apparent,” board Chairman Jeffrey Henley, told Forbes. “We discuss the subject, but there is no perfect plan. Larry still wants total control.” And Ellison has said that he doesn’t believe in grooming a successor. (Of course, it’s also likely that Oracle has a succession plan in place and company officials choose not to share that plan with the outside world. Oracle executives declined to be interviewed for this story.)

Analysts note that Ellison’s eventual successor will come down to a question of whether Oracle’s board wants a CEO with “make the numbers” acumen (Catz or Phillips, though Phillips is much more outgoing than Catz) or an applications and customer guru (for instance, Thomas Kurian, the SVP of product development).

Genovese, for one, has noticed that Ellison has allowed Phillips to make many of the current decisions. “So while there is no formal succession planning document or process, there is something happening at Oracle that impacts leadership,” she notes. “Who knows—Phillips could be the next CEO.”

SAP’s Next King Already in Training

Apotheker, who has come out of the sales side and not applications and development, has his work cut out for him during the next five years of his contract, as SAP fights through a global recession, deals with customers’ increasing unhappiness over maintenance fees, and new sources of competition from all angles.

“For many customers, the relationship with SAP was neutral to good—a heritage of Henning’s focus,” Genovese says. “For many customers today, the relationship is more tenuous and strained—they are not sure what to expect. One of the important things to note is that it was not only the CEO that changed to a sales-focused leadership but also the entire board has seemingly moved to sales leadership.”

Heitmann says Apotheker was promoted to the top spot because he is the best person for the job. “At the end of the day, it’s not so relevant how many academic degrees you have or how many lines of code you have developed,” he says. “With Leo, we have found the best manager and it is irrelevant what kind of background he has.”

Even though Apotheker just started, analysts say that inside SAP there is plenty of jockeying going on. Leading contenders for the next CEO slot include: Bill McDermott, Jim Hagemann Snabe and John Schwarz, according to analysts.

When asked about plans for Apotheker’s successor, just days before Apotheker’s Sapphire keynote, Heitmann said that SAP has some “lead time” on announcing the next CEO, but plans will soon be in the works. “Because the process is understood—and several times we’ve proven it works—no investor is ever questioning or concerned whether SAP will have the right leadership here in the future,” he says. “They can take this as a given here.”

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