By Justin Fox

(FORTUNE, June 12) -- It is a spring day in southwestern Germany, and on the outskirts of the town of Walldorf it's looking an awful lot like Palo Alto. The sun is shining, it's about 80 degrees, and the people walking around software giant SAP's sprawling, shiny headquarters are in jeans, T-shirts, even cutoffs. There are, to be sure, a couple of sights you won't see in California, such as smokers inside the buildings and wurst on the cafeteria menu. But it's only when you start talking to people at SAP that you get a real measure of how far you are from Silicon Valley. Take Hasso Plattner, SAP's 56-year-old co-CEO and the only one of the company's five founders still on the full-time payroll. Plattner is sporting a loud casual shirt, a tan, and some impressive stubble (he shaved before letting FORTUNE take his picture). But get him going on the Internet boom, and he sounds like anything but a new-economy guy.

"There is the myth that every dollar not spent on Internet activities could put a company at risk," he gripes. The big global corporations that are SAP's traditional customers are falling all over themselves to find quick, simple ways to start doing business with other businesses on the Internet. And Plattner doesn't like it. Because in that mad dash for business-to-business nirvana, SAP's cardinal virtue--its meticulous, precise software engineering--only gets in the way. "It's a great time for [being] fast to market," Plattner says. "These days, just getting software to market is more important than doing so with any technical elegance or security or integration into the landscape."

SAP does indeed write technically elegant software. Its ubiquitous enterprise resource planning (ERP) programs link accounting, sales, purchasing, manufacturing, human resources, and other corporate functions in one seamless internal network. Despite their complexity (some companies spent billions to install them), SAP's products help mastermind operations at all 20 of the world's largest pharmaceuticals companies, 18 of the largest chemical companies, and at every major carmaker but Suzuki. But the feeling is widespread that SAP has missed its chance to lead in B2B software as it did in ERP. Instead, two fast-moving American upstarts, Ariba and Commerce One, command most of the buzz. What may be more threatening to SAP in the long run--and certainly more personally annoying to Plattner--is that even archrival Oracle is considered more B2B-savvy. "SAP should have been Commerce One," sighs Victor Basta, London-based managing director for the tech-investment bank Broadview. "But they missed the boat."

That kind of talk drives Plattner crazy. The view from Walldorf is that while the Internet is real, much of the activity surrounding it today is froth. And SAP doesn't do froth. The SAP stance can be summed up like this: It takes time to craft worthwhile products, engineering is more important than marketing, and the skills learned in three decades of designing software for big business still have value today. Michael Fix, the Danish-born CEO of i2i, a Boston-based B2B marketplace backed by SAP, explains the mindset: "In Europe, engineers will typically lock themselves in a garage for five years and won't tell anyone anything until they're done. Here in the States you send out a press release, then go back and figure out how to do it."

Well, yes. At the moment, B2B is still in that press-release phase. And while there's much to admire about SAP's engineering purism, it hasn't landed the company much B2B business, especially not in the U.S., the all-important heartland of e-commerce. Plattner is aware of that, and knows that he needs to reposition SAP as an agile, aggressive, innovative player in the networked economy. He also has to know that he has a long way to go.

For an example of pure Internet mojo, Plattner need look no further than his own upstart competition. Commerce One, for instance, went public only last summer, collected a mere $34 million in 1999 revenues, and posted $63 million in losses. That compares rather unfavorably with 28-year-old SAP's $5 billion in sales and $600 million in profit. Yet until this year's spring meltdown of Internet stocks, Commerce One's market capitalization approached SAP's, currently around $50 billion. One reason, surely, is that Commerce One is growing extremely fast. (Revenues are projected to quadruple this year.) It started with simple stuff, like enabling online purchases of paper clips and other office supplies; now it's signing up big businesses in old-line industries like cars and oil to create purchasing marketplaces in which companies haggle with their suppliers over the Net.

Concessions to the Internet era

Besides, Commerce One is not the only startup humbling SAP. In all the hot new areas of business software--customer-relationship management (dominated by Siebel Systems), supply-chain management (Manugistics and i2), e-commerce (BroadVision), and the auction marketplaces led by Ariba and Commerce One--some relative newcomer leads the way. "SAP isn't the thought leader it was back in '95," says David Boulanger, the SAP expert at business-software research firm AMR. "When you talk to a CIO now, he brings up Manugistics, i2, BroadVision, Commerce One, Ariba."

Plattner--a billionaire several times over--has made a number of concessions to the Internet era. While co-CEO Henning Kagermann runs SAP day to day, Plattner is head-ing up a new subsidiary, called SAPMarkets, that will be based in Palo Alto (where he spends about a third of his time) and that will focus on software for Internet marketplaces and other collaborative endeavors between companies. He spearheaded the development of mySAP.com, which allows corporate employees to make purchases over the Web, just like Ariba and Commerce One. (The difference, SAP engineers proudly point out, is that their site connects seamlessly with customers' underlying enterprise software and classifies users into 300 categories so that they can see only the information--and buy only the goods--intended for them.) SAP has also been building Internet marketplaces--most notably for chemical companies BASF, Henkel, Degussa-Huls, and Metallgesellschaft, and for food giants Nestle and Danone. And in January Plattner and the two other SAP founders who together control 60 percent of the company's voting shares agreed to the company's first employee stock-option plan.

Besides, Plattner has no problem with startup companies breaking new ground as long as it's at the margins of the business software market. "This is a good thing with the Internet," he says. "There are thousands of small companies developing things that hadn't been there before." However, Plattner is confident that most of these Wunderkinder will fall by the wayside long before they grow big enough to challenge SAP. He says that's why Ariba ultimately is "irrelevant." (Plattner would say the same about Commerce One, presumably, except that SAP was discussing a partnership with that company as the time.) "The real players," he says, "are Oracle, IBM, Microsoft, and SAP."

"I agree with Hasso," says Oracle CEO Larry Ellison. "Hasso's problem is not Ariba or Commerce One or Siebel. Hasso's problem is us."

Indeed, Oracle haunts Plattner's thoughts. It is the company he just can't get away from. For one thing, there's its irritating CEO, currently the richest man on earth. "There are more interesting people in the world," Plattner grumbles. "I think the U.S. is making a big mistake to bash Bill Gates and praise Larry Ellison."

Then there is the yachting rivalry. Plattner, like Ellison, is a serious sailor, but he has a terrible record against Ellison. He's never beat him, and three times when racing Ellison, Plattner's boat lost its mast. After one of those dismastings, in 1996, Plattner says the motorboat tending Ellison's yacht refused to stop and help, even though a member of Plattner's crew had been hurt. In protest, Plattner dropped his trousers and mooned the crew of the motorboat.

Ellison says he knows nothing of that incident, but does recall getting an eyeful of Plattner's cheekiness the next year. In that episode, Ellison claims, Plattner was upset when Ellison refused to compete on the final day of a seven-day series because he had already clinched victory. Plattner brought his boat near the dock and dropped his trousers, mooning Ellison and his crew to protest what he saw as their bad sportsmanship. In either case, what's not in dispute is that the co-CEO of the fourth-largest software company in the world exposed his backside in the direction of the CEO of the second-largest software company in the world. Which is just not something you come across every day in intercorporate relations.

'So far ahead of Oracle'

In the nonyachting arena, the competition between the two companies goes back to the early 1990s, when SAP made its first big push into the U.S., and Oracle--which until then had just been in the database business--developed its first software for accounting and other business tasks. A couple of years ago, SAP appeared to have a comfortable lead. "We have passed Oracle," Plattner told German newsmagazine Der Spiegel in 1997. "And today we are so far ahead of Oracle that they can't see our taillights."

By one measure, that's still true. In 1999, SAP dominated the market for "enterprise suite software," according to research firm IDC, with $3 billion in sales to $1 billion for second-place Oracle. Look at the bottom line, though, and it's clear that Oracle is doing much better than SAP these days--its profits were up 58 percent in fiscal 1999, compared with 14 percent for SAP. That's mainly because everybody who sets up an e-commerce Web site needs to start by buying database software, and Oracle is No. 1 in that market--SAP doesn't sell databases. But it's also true that Oracle has a head start on SAP in selling a whole array of new e-commerce and marketplace applications to business. Just ask Commerce One's CEO Mark Hoffman, who says Oracle is currently his toughest competitor and adds, "We are seeing very little of SAP."

That comment is especially galling to Plattner because, in his view, Oracle is behind SAP in actually producing e-commerce and marketplace software. The crux of his argument is that while mySAP.com has been out since October, the Net-ready version of Oracle's enterprise software has only recently been shipped. "It could be that SAP's marketing and PR campaigns didn't work as well as Oracle's," Plattner says. "But from a product point of view, we beat Oracle by every measure that matters."

Is that so? "Probably technically Hasso is correct," says Bob Parker, vice president of e-commerce research at AMR. "But what counts in the end is how many contracts have been signed." And Oracle has clearly signed up more high-profile marketplace clients. "It's highly illustrative of the difference between Oracle and SAP: SAP worked to the technical definition of 'Internet ready,' while Oracle worked to the marketing definition of 'Internet ready.' " In other words, Oracle started helping customers on Net-related projects long before its final products were ready. SAP did that to a certain extent in Europe but, as Plattner readily admits, has failed to do so in the U.S.

It's not that SAP isn't selling any of its new Internet software. More than 500 companies have bought the mySAP.com package, which accounted for 22 percent of SAP's revenues in the first quarter. Says Plattner: "Actually, we should run our ads to say, 'We are by far the leader in Internet business systems.' " But SAP's advertisements don't say that. Instead, they feature a woman in an airport who uses mySAP.com to switch flights and golfer Gary Player's caddie, who uses the software to replace a lost golf club. The tag line: "You can. It does." Meanwhile, the competition's ads read: "Oracle Software Powers the Internet." A bit clearer, no?

Clarity and simplicity, though, have never been among SAP's strengths. The company was started in 1972 by Plattner and four other software engineers at IBM's office in Mannheim (not far from Walldorf). They called it Systemanalyse und Programmentwicklung (System Analysis and Program Development), and in the beginning, according to German journalist Gerd Meissner's history, SAP: Inside the Secret Software Power, their receptionist actually said the full name every time she answered the phone. The five used a borrowed IBM mainframe at an ICI chemical plant to do their programming--the company didn't have a computer of its own until 1980. Claus Wellenreuther, who left the company because of illness in 1980, and Dietmar Hopp, who retired as SAP's CEO in 1998 and is still chairman of the board, were the bosses. Plattner was the programming genius. In 1973 the company released its first product, a financial software program called RF. The "R" stood for "real time," which was SAP's big innovation--calculations were made as data were entered into the computer, rather than hours afterward, as was the case in all previous business software.

The company grew slowly but steadily. In 1982 it released the second iteration of its software, R/2. In 1989 it went public. And in 1992 it came out with R/3, an ambitious software suite that combined manufacturing, human resources, finance, planning, and other functions into a package that could give companies a remarkable real-time grip on their businesses. It was SAP's first software designed to run on networked PCs instead of mainframes. It wasn't easy to install; in many cases companies had to completely reorganize in order to make it work. And it has never been what you would call beloved; techies have been griping about SAP software's complexity and rigidity since the early days in Germany. But big corporations the world over, greedy for the efficiency gains that SAP promised and sometimes delivered, snapped the stuff up.

Missing the B2B wave?

By the mid-1990s SAP was on its way to becoming a global powerhouse. Revenue went from $500 million in 1992 to $1.9 billion in 1995 to $4.8 billion in 1998--the year the company first listed on the New York Stock Exchange. Estimates were that for every dollar spent on its software, another five or ten were spent on consultants and other installation costs. SAP's annual SAPphire conferences in the U.S. and Europe attract 10,000-plus members of the SAP "community" every year. (For more on SAP's heyday, see The E-Ware War, December 7, 1998, and The Best Software Business Bill Gates Doesn't Own, December 29, 1997.) No wonder some besotted Wall Street analysts were predicting that SAP would overtake Microsoft before long.

That hasn't quite happened. And while SAP's revenues are still growing in the rest of the world, the company's first-quarter sales were down in its most important market, the U.S. That could just be, as Plattner argues, the result of some management- and employee-retention problems in the U.S., which the new option program could help fix. Or it could also be an early indication that SAP has missed the B2B wave.

"These technology transitions are like the Tertiary-Cretaceous boundary," says Oracle's Ellison. "They are extinction-level events." To illustrate, he points to the business of writing accounting software for big companies. In the 1980s the leaders in the U.S. market were McCormack & Dodge and MSA. Then client-server computing replaced mainframes, and McCormack & Dodge and MSA were no more. Of course, as even Ellison has to admit, one accounting software company did make the transition from mainframes to PCs. It was SAP. "When you look at Microsoft, Oracle, and SAP, we're basically the same age," says Plattner. "We're all still pretty agile."

SAP's ability to continue thriving is a question that concerns more than just SAP's employees and investors--and the companies that spent billions of dollars installing its software in the 1990s. It's an important matter for an entire continent. This is something that can be forgotten amid the Old World's current boom in venture capital, stock markets, and startup activity: SAP is the only European tech startup to hit the big time. It is the only European computer or software company that has ever been powerful enough to set rules for the rest of the world. And it has done this not by aping American-style capitalism, but by going about its business in a distinctly European way.

Plattner, for all the time he spends in California, doesn't want to change SAP's culture. "There's a completely different mindset in the U.S., that the short-term gain is everything," he says. "People here in Germany are perhaps free of that pressure, so they criticize more and move more slowly. Because you criticize more, you want to create a more perfect solution."

That perfectionism clearly hasn't meshed well with the fashions of the B2B land grab so far, but who knows? As B2B matures into a real-world business in which products must be delivered and software must work, there's always a chance that Plattner's troops can engineer an elegant and comprehensive software package that will win not on hype but on its merits. As Michael Fix of i2i puts it: "Ultimately, being first doesn't matter. What matters is being right."